As filed with the Securities and Exchange Commission on January 10, 2005
                                                  Commission File No. 333-103061
--------------------------------------------------------------------------------


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                         POST-EFFECTIVE AMENDMENT NO. 1
                                       to
                                    FORM SB-2
                             REGISTRATION STATEMENT
                                      UNDER
                           THE SECURITIES ACT OF 1933

                        PARADIGM MEDICAL INDUSTRIES, INC.
                 (Name of small business issuer in its charter)


                                                                 
         Delaware                            3841                    87-0459536
 (State or jurisdiction of            (Primary Standard          (I.R.S. Employer
incorporation or organization)    Classification Code Number)   Identification Number)


                              2355 South 1070 West
                           Salt Lake City, Utah 84119
                                 (801) 977-8970
    (Address and telephone number of registrant's principal executive offices
                        and principal place of business)

              John Y. Yoon, President and Chief Executive Officer,
                              2355 South 1070 West
                           Salt Lake City, Utah 84119
                                 (801) 977-8970
            (Name, address and telephone number of agent for service)
                             ----------------------

                                   Copies to:

                             Randall A. Mackey, Esq.
                         Mackey Price Thompson & Ostler
                              350 American Plaza II
                                57 West 200 South
                         Salt Lake City, Utah 84101-3663
                            Telephone: (801) 575-5000

                Approximate date of proposed sale to the public:
                 As soon as practicable after this Registration
                          Statement becomes effective.


         If any of the  securities  being  registered  on this  Form  are  being
offered  on a  delayed  or  continuous  basis  pursuant  to Rule 415  under  the
Securities Act of 1933 (the "Securities Act"), check the following box. |X|

         If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement for the same offering. [ ]

         If this  Form is a  post-effective  amendment  filed  pursuant  to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act  registration   statement  number  of  the  earlier  effective  registration
statement for the same offering. [ ]

      If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

                           ---------------------------





                         CALCULATION OF REGISTRATION FEE


                         Title of each                                            Proposed         Proposed
                           class of                                 Amount         maximum          maximum        Amount of
                       securities to be                             to be      offering price      aggregate     registration
                          registered                              registered      per Share     offering price        fee
-------------------------------------------------------------------------------------------------------------------------------

                                                                                                                
Resale of Common Stock issuable upon exercise of Class A Warrants   1,000,000         $   7.50       $7,500,000             (1)
Resale of Common Stock issuable upon exercise of Kenneth Jerome
    Warrants...................................................       100,000            8.125          812,500             (1)
Resale of Common Stock issuable upon exercise of Kenneth Jerome
      Warrants.................................................       100,000             7.50          750,000             (1)
Resale of Common Stock issuable upon exercise of Cyndel Warrants      225,000             4.00          900,000             (1)
Resale of Common Stock issuable upon exercise of Cyndel Warrants      250,000             3.00          750,000             (1)
Resale of Common Stock issuable upon exercise of Limberg Warrants     200,000             4.00          800,000             (1)
Resale of Common Stock issuable upon exercise of Limberg Warrants      50,000             4.75          237,500             (1)
Resale of Common Stock issuable upon exercise of Limberg Warrants      50,000             6.75          337,500             (1)
Resale of Common Stock issuable upon exercise of Hemmer Warrants       75,000             7.50          562,500             (1)
Resale of Common Stock issuable upon exercise of Kohn and
       Sucoff Warrants.........................................       100,000             4.00          400,000             (1)
Resale of Common Stock issuable upon exercise of  Series E
        Preferred Warrants.....................................       241,095             4.00          964,380             (1)
Resale of Common Stock issuable upon exercise of  Series F
        Preferred Warrants.....................................       230,589             4.00          922,356             (1)
Resale of Common Stock issuable upon exercise of Options.......       600,000             4.00        2,400,000             (1)
Resale of Common Stock issuable upon exercise of Options.......        73,103             5.00          365,515             (1)
Resale of Common Stock issuable upon exercise of Options.......       150,000             6.00          900,000             (1)
Resale of Common Stock issuable upon exercise of Options.......       786,000             2.75        2,161,500             (1)
Resale of Common Stock by certain holders of Common Stock......       425,000             4.00        1,700,000             (1)
Resale of Common Stock by certain holders of Common Stock......     1,307,484            2.125        2,778,404             (1)
Resale of Common Stock by certain holders of Common Stock......       425,580             2.14          910,741             (1)
Resale of Common Stock by certain holders of Common Stock......     1,968,509             1.16        2,283,470             (1)
Resale of Common Stock issuable upon exercise of Rodman &
       Renshaw Warrants........................................        35,000             2.00           70,000             (1)
Resale of Common Stock issuable upon exercise of Warrants......       788,750              .25          197,188             (1)
Resale of Common Stock by certain holders of common stock......       365,327              .25           91,332             (1)
                                                                    ---------                                     -------------
      Total....................................................     9,546,437                                     $           0
                                                                                                                  =============
===============================================================  ============  ===============  =============== ===============


(1)      No   registration   fee  is  required  as  securities  were  previously
         registered  by  Form  SB-2  Registration  Statement,   No.  333-  2496,
         effective as of July 10, 1996;  Form SB-2  Registration  Statement  No.
         333-57711,  effective as of September 14, 1998; Form SB-2  Registration
         Statement  No.  333-68471,  effective as of January 4, 1999;  Form SB-2
         Registration Statement No. 333-77267, effective as of May 7, 1999; Form
         S-3 Registration  Statement No.  333-93725,  effective as of January 6,
         2000; Form S-3 Registration  Statement No.  333-44154,  effective as of
         September  1, 2000;  Form S-3  Registration  Statement  No.  333-50846,
         effective as of December 8, 2000; Form S-3  Registration  Statement No.
         333- 66742,  effective  as of August 22,  2001;  Form S-3  Registration
         Statement  No.  333-75912,  effective  as of June  21,  2002;  Form S-3
         Registration  Statement  No.  333-97837,  effective as of September 26,
         2002; and From S-3 Registration  Statement No. 33-103061,  effective as
         of  February  14,  2003.  Pursuant  to Rule  429,  this  is a  combined
         registration  statement  which  relates  to the  securities  previously
         registered by the earlier  registration  statements  and the securities
         being  registered  by  this  registration  statement.   The  number  of
         securities being carried forward,  which were previously  registered by
         the earlier  registration  statements,  is 14,479,693  shares of common
         stock,  and the total amount of the previously paid  registration  fees
         associated  with such  securities  that were  previously  registered is
         $22,703.74.  The number of shares being registered by this registration
         statement is 9,546,437 shares.

         The Registrant hereby amends this  Registration  Statement on such date
or dates as may be necessary to delay its  effective  date until the  Registrant
shall file a further amendment which specifically  states that this registration
statement shall  thereafter  become effective in accordance with Section 8(a) of
the Securities Act or until the Registration Statement shall become effective on
such date as the Commission acting pursuant to said Section 8(a) may determine.


                                        2



PROSPECTUS
----------


                        9,546,437 Shares of Common Stock




                        PARADIGM MEDICAL INDUSTRIES, INC.


         Paradigm Medical Industries,  Inc. is registering for resale a total of
9,546,437  shares of common  stock.  Our COMMON  STOCK AND Class A warrants  are
quoted on the  Over-the-Counter  Bulletin  Board under the  symbols  PMED.OB and
PMEDW.OB.  On January 6, 2005 the last  reported sale price for our common stock
was $.10 per share and the last reported sale price for our Class A warrants was
$.02 per warrant.

         We are registering the resale of common stock for certain  shareholders
and will only  receive  proceeds  to the extent  that  outstanding  warrants  or
options are exercised.  The exercise price for all of the  outstanding  warrants
and options  exceeds the current  trading  price for our common  stock and, as a
result,  the  outstanding  warrants  and options are not likely to be  exercised
unless the trading price increases substantially. All other shares of our common
stock being registered are either  outstanding or will be issued upon conversion
of  outstanding  preferred  stock,  and we will  derive  no  proceeds  from  the
conversions or subsequent resales of such shares.

         Investing in the common stock  involves risks that are described in the
"Risk Factors" section beginning on page 6 of this prospectus.

         Neither the Securities and Exchange Commission nor any state securities
commission  has approved or disapproved  these  securities or determined if this
prospectus  is truthful or  complete.  Any  representation  to the contrary is a
criminal offense.


                The date of this prospectus is January __, 2005.

                                        3



                               PROSPECTUS SUMMARY

         This summary  highlights some information from this prospectus.  It may
not contain all of the information  that is important to you. To understand this
offering fully, you should read the entire prospectus  carefully,  including the
risk factors and the financial statements.

The Company

         We develop,  manufacture,  source,  market and sell ophthalmic surgical
and diagnostic  instrumentation and related  accessories,  including  disposable
products.  Our surgical  equipment is designed for minimally  invasive  cataract
treatment.  A  cataract  is a  condition,  which  largely  affects  the  elderly
population,  in which the natural  lens of the eye  hardens and becomes  cloudy,
thereby reducing visual acuity. Treatment consists of removal of the cloudy lens
and  replacement  with a synthetic lens implant,  which restores  visual acuity.
Cataract surgery is the single largest volume and revenue  producing  outpatient
surgical  procedure  for  ophthalmologists  worldwide.  The Health Care  Finance
Administration  reports  that in the United  States  approximately  two  million
cataract  removal  procedures  are performed  annually,  making this the largest
outpatient  procedure  reimbursed  by Medicare.  Most  cataract  procedures  are
performed using a method called  phacoemulsification or "phaco", which employs a
high frequency (40 kHz to 60 kHz) ultrasonic probe needle device to fragment the
cataract  while  still in the eye and remove it in pieces by  suction  through a
small incision.

         We sell our  equipment  and related  products in all  countries  of the
world in which we are permitted to do so. The nature of the regulatory  approval
processes in those  countries vary by country but, in general terms,  follow the
approach of the regulatory approval processes of the United States Food and Drug
Administration,  or FDA,  and the  approval  processes  of the  countries in the
European Union. The status of specific approvals is detailed in the table in the
Business section of this prospectus.

         We market two cataract  surgery  systems with related  accessories  and
disposable  products.  Our cataract removal system, the Photon(TM) laser system,
is a laser cataract  surgery system  marketed as the next generation of cataract
removal.  The  Photon(TM)  product  has yet to be  approved by the Food and Drug
Administration.  Except for the Photon(TM) laser system,  which can only be sold
in  countries  outside of the United  States,  our  products  can be sold in the
United States and in foreign  countries  including but not limited to Argentina,
Australia,  Bangladesh,  Borneo, Brazil, Canada, China,  Czechoslovakia,  Egypt,
France, Germany,  Greece, Hong Kong, India, Israel, Italy, Japan, Jordan, Korea,
Malaysia,  Mexico, New Zealand,  Pakistan,  Peru,  Poland,  Puerto Rico, Russia,
Saudi Arabia,  Spain, Sri Lanka, Taiwan,  Thailand,  Turkey, United Kingdom, and
United Arab Emirates . Both the Photon(TM) and the  Precisionist  ThirtyThousand
(TM) are manufactured as an Ocular Surgery Workstation(TM).  At present, because
the  Photon(TM) has not received FDA approval,  it does not provide  significant
revenue to us. We are in the process of completing the clinical  trials in order
to file  for FDA  approval.  However,  due to the  uncertainty  surrounding  the
timetable for obtaining  FDA approval and the lack of  significant  revenue from
other  surgical  products,  we have  recorded an inventory  reserve  against the
majority of inventory  associated  with the Photon(TM) and  Precisionist  Thirty
Thousand(TM).

         Our  diagnostic  products  include  a P55  pachmetric  analyzer,  a P37
Ultrasonic A/B Scan, a P40 UBM Ultrasound Biomicroscope,  a perimeter, a corneal
topographer  and  the  Blood  flow  Analyzer  (TM).  The  diagnostic  ultrasonic
products,  including the P55 pachymetric  analyzer,  the P37 Ultrasonic A/B Scan
and the P40 UBM Ultrasound  Biomicroscope were acquired from Humphrey Systems, a
division of Carl Zeiss,  Inc. in 1998.  We developed and offered for sale in the
fall of 2000 the P45, which combines the A/B scope and the P40 UBM Biomicroscope
in one machine.  The  perimeter and the corneal  topographer  were added when we
acquired the outstanding shares of the stock of Vismed, Inc. d/b/a/ Dicon(TM) in
June 2000. We acquired Ocular Blood Flow, Ltd. in June of 2000,  whose principal
product  is the Blood  Flow  Analyzer(TM).  This  product  is  designed  for the
measurement of intraocular  pressure and pulsatile  ocular blood flow volume for
detection  and  treatment of glaucoma.  We are  currently  attempting to develop
additional applications for all of our diagnostic products.

         We rely upon several  products for revenues.  For the nine months ended
September  30,  2004,  32% of our  revenues  were  derived  from  the  Dicon(TM)
diagnostic  products  sales (the  perimeter  and  corneal  topographer),  21% of
revenues from Blood Flow  Analyzer(TM)  sales,  29% of revenues from P40 and P45
UBM  Ultrasound  Biomicroscope  sales,  9% of  revenues  from  Humphrey  Systems
diagnostic  product sales (the P55  pachymetric  analyzer and the P37 Ultrasonic
A/B Scan),  and 9% of revenues from services,  disposables and other sales.  For
the fiscal year ended  December 31, 2003,  36% of our revenues were derived from
the  Dicon  (TM)   diagnostic   products   sales  (the   perimeter  and  corneal
topographer),  16% of  revenues  from  Blood  Flow  Analyzer(TM)  sales,  20% of
revenues from P40 and P45 UBM  Ultrasound  Biomicroscope  sales,  9% of revenues
from Humphrey Systems  diagnostic  product sales (the P55 pachymetric  analyzer,
the P20 A-Scan and the P37 A/B Scan),  11% of  revenues  from  cataract  removal
surgery  sales,  including the sale of our SIStem(TM)  and  Odyssey(TM)  product
lines, and 8% of revenues from services, disposables and other sales.

         For the fiscal year ended  December 31, 2002,  28% of our revenues were
derived from the  Dicon(TM)  diagnostic  products  sales (the  perimeter and the
corneal topographer),  9% of revenues from Blood Flow Analyzer(TM) sales, 24% of
revenues  from  the  P40  and P45 UBM  Ultrasound  Biomicroscope  sales,  11% of
revenues from Humphrey  systems  diagnostic  products sales (the P55 pachymetric
analyzer,  the P20 A-Scan and the P37 A/B Scan),  5% of revenues  from  cataract
removal surgery sales, and 23% of revenues from services,  disposables and other
sales. Our principal executive offices are located at 2355 South 1070 West, Salt
Lake City, Utah 84119 and our telephone number is (801) 977-8970.



                                        4




         Audited  revenues  for the fiscal  year ended  December  31,  2003 were
$3,059,000 as compared to $5,368,000 for the comparable  period for fiscal 2002.
Unaudited  revenues for the nine months ended September 30, 2004 were $2,288,000
as compared to $2,225,000 for the comparable period of 2003.

         On March 18,  2004,  our board of directors  appointed  John Y. Yoon as
President  and Chief  Executive  Officer of the  company,  replacing  Jeffrey F.
Poore,  who served in those positions from March 19, 2003 to March 18, 2004. Our
board of directors terminated Mr. Poore's employment for cause as defined in the
employment  agreement.  On March 22, 2004, our board of directors appointed Aziz
A. Mohabbat as Vice President of Operations and Chief  Operating  Officer of the
company,  replacing David I. Cullumber who resigned as Chief  Operating  Officer
and  Chief  Technical  Officer  on  March  22,  2004 to  pursue  other  business
opportunities.  Mr. Mohabbat had previously served as Chief Operating Officer of
the Company from August 2002 to March 2003,  and as Vice President of Operations
from 2001 to March 2003.

         On June 23, 2003, our board of directors appointed Gregory Hill as Vice
President  of Finance,  Treasurer  and Chief  Financial  Officer of the Company,
replacing Heber C. Maughan, who resigned as Vice President of Finance, Treasurer
and  Chief  Financial   Officer  on  May  31,  2003  to  pursue  other  business
opportunities.  Mr.  Hill  resigned  from his  positions  on December 5, 2003 to
pursue other business opportunities.

         The board of  directors  has not yet  appointed  a new Chief  Financial
Officer  since  Gregory  Hill  resigned in an effort to conserve  our  financial
resources.  Moreover, since Mr. Hill's resignation, we have endeavored to reduce
our operating  expenditures,  which has resulted in a reduction in the number of
our employees.  Luis A.  Mostacero,  our Controller,  is currently  handling the
responsibilities  previously  assumed  by Mr.  Hill  when he served as our Chief
Financial Officer.  It is our intention to appoint a new Chief Financial Officer
in the future when we have adequate funds to do so.


The Offering

Securities Offered ..............   The  resale  of 9,546,437  shares of  common
                                    stock, consisting of the following:

                                         o     The  resale of  1,000,000  shares
                                               issuable upon exercise of Class A
                                               warrants  with an exercise  price
                                               of $7.50 per share.

                                         o     The  resale  of  200,000   shares
                                               issuable    upon    exercise   of
                                               warrants by Kenneth  Jerome & Co.
                                               with exercise prices ranging from
                                               $7.50 to $8.l25 per share.

                                         o     The  resale  of  475,000   shares
                                               issuable    upon    exercise   of
                                               warrants  by  Cyndel & Co.,  Inc.
                                               with exercise prices ranging from
                                               $3.00 to $4.00 per share.

                                         o     The  resale  of  300,000   shares
                                               issuable    upon    exercise   of
                                               warrants   by  Dr.   Michael   B.
                                               Limberg  with   exercise   prices
                                               ranging  from  $4.00 to $6.75 per
                                               share.

                                         o     The   resale  of  75,000   shares
                                               issuable  upon  the  exercise  of
                                               warrants  by John W.  Hemmer with
                                               exercise   price  of  $7.50   per
                                               share.

                                         o     The   resale  of  50,000   shares
                                               issuable    upon    exercise   of
                                               warrants  by Helen  Cohn  with an
                                               exercise   price  of  $4.00   per
                                               share.

                                         o     The   resale  of  50,000   shares
                                               issuable  upon  the  exercise  of
                                               warrants by Ronit  Sucoff with an
                                               exercise   price  of  $4.00   per
                                               share.

                                         o     The   resale  of  35,000   shares
                                               issuable  upon  the  exercise  of
                                               warrants  by  Rodman  &  Renshaw,
                                               Inc.  with an  exercise  price of
                                               $2.00 per share.

                                         o     The  resale  of  241,095   shares
                                               issuable  upon  the  exercise  of
                                               warrants  by  Series E  preferred
                                               holders with an exercise price of
                                               $4.00 per share.

                                         o     The  resale  of  230,589   shares
                                               issuable    upon    exercise   of
                                               warrants  by  Series F  preferred
                                               holders with an exercise price of
                                               $4.00 per share.



                                        5


                                         o     The  resale  of  788,750   shares
                                               issuable    upon    exercise   of
                                               warrants  by Paul L.  Archambeau,
                                               M.D., John H. Banzhaf,  Daniel S.
                                               Lipson, Douglas A. MacLeod, M.D.,
                                               Douglas A. MacLeod,  M.D.  Profit
                                               Sharing  Trust,  St.  Mark's  Eye
                                               Institute,  Milan Holdings, Ltd.,
                                               Frank G.  Mauro  and  Delbert  D.
                                               Reichardt  with an exercise price
                                               of $.25 per share.

                                         o     The  resale  of  150,000   shares
                                               issuable upon exercise of options
                                               by executive officers,  employees
                                               and  directors  with an  exercise
                                               price of $6.00 per share.

                                         o     The   resale  of  73,103   shares
                                               issuable upon exercise of options
                                               by executive officers,  employees
                                               and  directors  with an  exercise
                                               price of $5.00 per share.

                                         o     The  resale  of  600,000   shares
                                               issuable upon exercise of options
                                               by executive officers,  employees
                                               and  directors  with an  exercise
                                               price of $4.00 per share.

                                         o     The  resale  of  786,000   shares
                                               issuable upon exercise of options
                                               by executive officers,  employees
                                               and  directors  with an  exercise
                                               price of $2.75 per share.

                                         o     The  resale  of 4,491,900  shares
                                               held by certain stockholders with
                                               registration rights.

Common stock outstanding
prior to the offering(1) .........  25,764,868 shares.

Common stock outstanding
after the offering(1).............  35,311,305 shares.

Use of proceeds..................   All funds  received by  us upon the exercise
                                    of the warrants and options will be used for
                                    general  corporate  purposes.   We  will not
                                    receive any  proceeds from the conversion of
                                    the  shares of Series E  preferred  stock or
                                    Series F preferred stock.

Risk Factors/Dilution............   The offering involves a high degree of risk.

OTC Bulletin Board symbols
      Common stock................  PMED.OB
      Class warrants..............  PMEDW.OB

 ---------------------------

(1)      Does not include 6,753 shares of common stock issuable upon  conversion
         of 5,627 shares of Series A preferred  stock,  10,783  shares of common
         stock  issuable  upon  conversion of 8,986 shares of Series B preferred
         stock,  8,750 shares of common stock issuable upon  conversion of 5,000
         shares of  Series D  preferred  stock,  53,333  shares of common  stock
         issuable upon  conversion of 1,000 shares of Series E preferred  stock,
         245,217  shares of common stock  issuable  upon  conversion of 4,598.75
         shares of Series F preferred stock,  1,726,560 shares of stock issuable
         upon  conversion  of  1,726,560  shares  of Series G  preferred  stock,
         options  to  purchase  a total of  3,781,262  shares  of  common  stock
         issuable upon the exercise of stock options at prices ranging from $.16
         to $6.00 per share, and warrants to purchase 4,584,182 shares of common
         stock  issuable  upon the  exercise of warrants at prices  ranging from
         $.15 to $8.125  per  share.  Also does not  include  475,574  shares of
         common stock issuable to the holders of Series G preferred stock. Under
         the terms of the private offering of Series G preferred  shares, we are
         required  to file a  registration  statement  with the  Securities  and
         Exchange  Commission  to  register  the common  shares  issuable to the
         Series G  preferred  stockholders  upon  conversion  of their  Series G
         preferred  shares and exercise of their warrants.  If the  registration
         statement  has not  been  declared  effective  within  120  days of the
         initial closing of such offering on August 29, 2003, there is a penalty
         of 2% per month  payable  to the  Series G  preferred  stockholders  in
         common   shares  (or  39,631   common   shares  per  month)  until  the
         registration statement is declared effective.


                                        6


                          Summary Financial Information




                                                For the year ended           For the nine months ended
                                                  December 31,                    September 30,

 Statement of Operations Data:                    2002            2003            2003            2004
 -----------------------------                    ----            ----            ----            ----
                                                                                         
 Net Sales..............................       $5,368,000      $3,059,000     $2,225,000       $2,288,000
 Net cost of sales.......................       4,210,000       2,086,000      1,237,000          859,000
 Operating expenses......................      12,277,000       4,549,000      3,526,000        1,793,000
 Operating loss..........................     (11,119,000)     (3,576,000)    (2,538,000)        (364,000)
 Other income (expense)..................         (36,000)        415,000       (233,000)         552,000
 Net income (loss).......................     (11,155,000)     (3,161,000)    (2,305,000)         188,000
 Net income (loss) applicable to common
      shareholders.......................     (11,155,000)     (3,431,000)    (2,305,000)         145,000
 Net income (loss) per common share......           $(.63)          $(.14)         $(.10)            $.01
 Shares used in computing net loss per share   17,736,000      24,058,000     22,795,000       25,373,000





                                                            As of                  As of               As of
 Balance Sheet Data:                                  December 31, 2002    December 31, 2003   September 30,2004
 ------------------                                   -----------------    -----------------   -----------------
                                                                                                  
 Current assets....................................          $3,868,000          $1,984,000          $1,772,000
 Current liabilities...............................           2,362,000           2,181,000           1,739,000
 Working capital (deficit).........................           1,506,000            (197,000)             33,000
 Total assets......................................           5,289,000           2,922,000           2,586,000
 Accumulated deficit...............................         (53,656,000)        (56,817,000)        (56,629,000)
 Stockholder's equity .............................           2,847,000             680,000             825,000



                                  RISK FACTORS

         Before you invest in our common stock, you should be aware of the risks
described  below which  constitute  material risks to potential  investors.  You
should  consider  carefully  these risk factors  together  with all of the other
information  included  in this  prospectus  before  you  decide to invest in our
common  stock.  If any of the following  risks  actually  occurs,  our business,
financial  condition and results of operations  could suffer,  in which case the
trading price of our common stock could decline. No investment should be made by
any person who is not in a position to lose the entire amount of his investment.

                Special Note Regarding Forward-Looking Statements

         Some of the information in this prospectus may contain  forward-looking
statements.  Such  statements  can be identified  by the use of  forward-looking
terminology  such  as  "may,"  "will,"   "expect,"   "anticipate,"   "estimate,"
"continue" or other similar words. These statements discuss future expectations,
contain  projections of results of operations or of financial condition or state
other  "forward-looking"  information.  When  considering  such  forward-looking
statements,  you  should  keep in mind the risk  factors  and  other  cautionary
statements in this Prospectus.  The risk factors noted in this section and other
factors  noted   throughout  this  prospectus,   including   certain  risks  and
uncertainties,  could cause our actual results to differ  materially  from those
contained in any forward-looking statement.

Our auditors have expressed substantial doubt about our ability to continue as a
going concern.

         Due to our significant  recurring  losses and our inability to generate
sufficient  cash flows from  operations to satisfy our  liabilities  and sustain
operations,  our auditors have expressed  substantial doubt about our ability to
continue as a going  concern.  Although  we have had success in raising  working
capital  from the  sale of our  common  stock in the  past,  the  going  concern
language in our auditors'  report could  negatively  affect our ability to raise
such funds in the future.  Some investors are unwilling to invest with companies
that have going  concern  language  in the  auditors'  report and others  demand
substantial  discounts  from  the  market  price.  Unless  we are  able to raise
additional  working capital through the sale of our common stock, we will not be
able to continue the  development of our products nor will we be able to pay our
existing current liabilities,  which could result in protection under bankruptcy
laws.  Under certain  conditions,  including but not limited to having judgments
rendered  against us in a court of law, a group of creditors could force us into
bankruptcy  due to our  inability  to pay the  liabilities  arising  out of such
judgments.  At this time, we are unable to assess the  likelihood  that we would
seek bankruptcy protection in the near future. There can be no assurance that we
will be successful in raising working capital from the sale of our common stock.

We have limited working capital, have accumulated significant losses, and expect
our losses to continue.

         As  of  December  31,  2003,  we  had  a  deficit  working  capital  of
$(197,000).  As of September  30,  2004,  our working  capital was $33,000.  Our
accumulated  deficit was $56,817,000 as of December 31,2003,  and $56,629,000 as
of September  30,  2004.  We had a net loss of  $11,155,000  for the fiscal year
ended  December 31, 2002 and  $3,161,000  for the fiscal year ended December 31,
2003, but a net profit of $188,000 for the nine months ended September 30, 2004.
Our losses have resulted  principally  from costs  incurred in  connection  with
research  and  development,  including  clinical  trials,  of the laser  surgery


                                        7



system.  We did not sell medical products until late 1992. Our ability to become
profitable largely depends on successfully  developing clinical applications and
obtain  regulatory  approvals  for our laser  surgery  products,  including  the
Photon(TM) laser system, and to effectively  market such products.  The problems
and  expenses  frequently   encountered  in  developing  new  products  and  the
competitive  industry in which we operate will impact whether we are successful.
We may never achieve  profitability.  Furthermore,  we may encounter substantial
delays and unexpected  expenses  related to research,  development,  production,
marketing, regulatory matters or other unforeseen difficulties.

Because our  securities  trade on the OTC Bulletin  Board,  your ability to sell
your shares in the secondary market may be limited.

         Since June 26, 2003, our shares have traded on the OTC Bulletin  Board.
As a  result,  it may be  more  difficult  for an  investor  to  dispose  of our
securities, or to obtain accurate quotations on their market value. Furthermore,
the prices for our securities may be lower than might otherwise be obtained.  On
October 8, 2002, we received a notice from Nasdaq's Listing Qualifications staff
that for the previous 30 consecutive trading days, the price of our common stock
closed below the minimum $1.00 per share requirement for continued  inclusion on
Nasdaq. The notice further provided that if at anytime before April 7, 2003, the
bid  price of our  common  stock  closed  at $1.00 or more for a  minimum  of 10
consecutive  trading days, we would be notified by the staff that we comply with
such rule.

         On April 15, 2003, we received  notice of a  determination  by Nasdaq's
Listing Qualifications staff that we failed to comply with the minimum bid price
rules for  continued  listing set forth in  Nasdaq's  rules.  Specifically,  the
notice  stated  that we have not  regained  compliance  with the  minimum  $1.00
closing bid price per share requirement  (noting that pursuant to the October 8,
2002, notice from the Nasdaq Listing  Qualifications staff, we were provided 180
calendar  days,  or  until  April  7,  2003,  to  regain  compliance  with  this
requirement)  and we do not qualify  with the  $5,000,000  shareholders  equity,
$50,000,000  market  value of listed  securities  or  $750,000  net income  from
continuing operations  requirement for an additional 180 calendar day compliance
period to comply with Nasdaq's rules. The April 15, 2003,  notice further stated
that as of December 31, 2002, we reported stockholders' equity of $2,847,000 and
net losses from continuing  operations of approximately  $11,155,000,  and as of
April 14,  2003,  the market  value of our  listed  securities  was  $4,208,108.
Accordingly,  our common stock would be delisted from the Nasdaq SmallCap Market
at the opening of business on April 24,  2003.  Separately,  Nasdaq  informed us
that listing fees of $22,500 and $18,000 under Rule  4310(c)(13) are owed to the
Nasdaq SmallCap Market.

         We  requested an oral hearing  before a Nasdaq  Listing  Qualifications
Panel to review the staff's determination.  The request automatically stayed the
delisting of our common stock. On April 23, 2003, we received formal notice from
Nasdaq that a hearing to consider our appeal  would be held on May 29, 2003.  On
May 29, 2003, Dr.  Jeffrey F. Poore,  our former  President and Chief  Executive
Officer;  Randall A. Mackey, our Chairman of the Board; and Dr. David M. Silver,
a director of the  company,  attended an oral  hearing  before a Nasdaq  Listing
Qualifications  Panel in Washington,  D.C. At the hearing Dr. Poore presented to
the panel a definitive  plan both for regaining  compliance  with the particular
deficiencies  cited in the  April  15,  2003,  letter  from the  Nasdaq  Listing
Qualifications  staff  and  sustaining  long-term  compliance  with  the  Nasdaq
Marketplace Rules,  including all applicable  maintenance  criteria. On June 24,
2003 we received notification from the Nasdaq Listing  Qualifications Panel that
we were to be delisted from the Nasdaq Stock Market effective June 26, 2003. Our
securities trade on the OTC Bulletin Board effective June 26, 2003.  Because our
securities are delisted from the Nasdaq SmallCap Market and now trade on the OTC
Bulletin Board,  additional sales requirements on broker-dealers  will adversely
affect the ability of purchasers to sell our securities and the trading price of
our securities could decline.

         Moreover,  because our securities  currently  trade on the OTC Bulletin
Board, they are subject to the rules  promulgated under the Securities  Exchange
Act of 1934, as amended,  which impose additional sales practice requirements on
broker-  dealers that sell  securities  governed by these rules to persons other
than established customers and "accredited  investors"  (generally,  individuals
with a net worth in excess of $1,000,000 or annual  individual  income exceeding
$200,000 or $300,000  jointly with their spouses).  For such  transactions,  the
broker-dealer must determine whether persons that are not established  customers
or accredited  investors  qualify under the rule for purchasing  such securities
and must receive that person's written consent to the transaction prior to sale.
Consequently, these rules may adversely affect the ability of purchasers to sell
our securities and otherwise affect the trading market in our securities.

Because our shares may be deemed "penny stocks," you may have difficulty selling
them in the secondary trading market.

         The Commission has adopted  regulations which generally define a "penny
stock" to be any non-Nasdaq  equity security that has a market price (as therein
defined) less than $5.00 per share or with an exercise  price of less than $5.00
per share, subject to certain exceptions. For any transactions by broker-dealers
involving a penny stock (unless exempt),  rules promulgated under the Securities
Exchange Act of 1934 require delivery,  prior to a transaction in a penny stock,
of a risk disclosure document relating to the penny stock market.  Disclosure is
also required to be made about  compensation  payable to both the  broker-dealer
and the registered  representative  and current  quotations for the  securities.
Furthermore,  monthly statements are required to be sent disclosing recent price
information for the penny stocks.


                                        8



If the litigants in the class action lawsuits succeed on any of their claims and
we are  denied  coverage  for the  lawsuits  under our  Directors  and  Officers
Liability  and  Company  Insurance  Policy,  we  would  be  unable  to pay  such
liability, and we would be forced to seek bankruptcy protection.

         On May 14, 2003, a complaint  was filed in the United  States  District
Court, District of Utah, captioned Richard Meyer,  individually and on behalf of
all others similarly suited v. Paradigm Medical Industries, Inc., Thomas Motter,
Mark  Miehle and John  Hemmer,  Case No.  2:03  CV00448TC.  The  complaint  also
indicates  that it is a  "Class  Action  Complaint  for  Violations  of  Federal
Securities  Law and  Plaintiffs  Demand a Trial by Jury." We have retained legal
counsel to review the  complaint,  which  appears to be focused on alleged false
and  misleading  statements  pertaining  to  the  Blood  Flow  Analyzer(TM)  and
concerning a purchase order from Valdespino Associates  Enterprises and Westland
Financial Corporation. More specifically,  the complaint alleges that we falsely
stated in our Securities and Exchange Commission filings and press releases that
we had received  authorization to use an insurance  reimbursement  CPT code from
the  CPT  Code  Research  and  Development  Division  of  the  American  Medical
Association  for  reimbursement  to  doctors in  connection  with the Blood Flow
Analyzer(TM),  adding that the CPT code provides for a reimbursement  to doctors
of $57.00 per patient for use of the Blood Flow  Analyzer(TM).  According to the
complaint,  the CPT code was critical.  Without a reimbursement code, physicians
would not  purchase the Blood Flow  Analyzer(TM)  because they could not receive
compensation for performance of medical procedures using the medical device. The
complaint further contends that we never received the CPT code from the American
Medical Association at any time.  Nevertheless,  it is alleged that we continued
to  misrepresent  in our SEC filings and press releases that we had received the
CPT  code.  It is  also  alleged  that  we have  never  made a full,  corrective
disclosure with respect to this alleged misstatement.

         The  complaint  also alleges  that on July 11, 2002,  we issued a press
release falsely announcing that we had received a purchase order from Valdespino
Associates  Enterprises and Westland  Financial  Corporation for 200 sets of our
entire portfolio of products, with $70 million in systems to be delivered over a
two-year period, then another $35 million of orders to be completed in the third
year. The complaint  further  alleges that we had never received a true purchase
order  for our  products.  As a  result  of  these  alleged  misstatements,  the
complaint contends that the price of our shares of common stock was artificially
inflated  during the period from April 25, 2001  through May 14,  2003,  and the
persons who purchased or retained our common shares during that period  suffered
substantial  damages.  The complaint requests judgment for unspecified  damages,
together with interest and attorney's fees.

         We dispute having issued false and misleading statements concerning the
Blood Flow Analyzer(TM) and a purchase order from Westland Financial Corporation
and  Valdespino  Associates  Enterprises.  On April 25, 2001,  we issued a press
release  that  stated we had  received  authorization  to use  common  procedure
terminology or CPT code number 92120 for our Blood Flow Analyzer(TM). This press
release was based on a letter we received  from the CPT  Editorial  Research and
Development Department of the American Medical Association stating that CPT code
number 92120 was the appropriate common procedure terminology or CPT code number
for doctors to use when reporting  certain  procedures  performed with our Blood
Flow Analyzer(TM).

         Currently,  there is reimbursement by insurance payors to doctors using
the Blood Flow Analyzer(TM) in 22 states and partial reimbursement in four other
states. The amount of reimbursement to doctors using the Blood Flow Analyzer(TM)
generally ranges from $56.00 to $76.00 per patient, depending upon the insurance
payor. Insurance payors providing  reimbursement for the Blood Flow Analyzer(TM)
have the  discretion to increase or reduce the amount of  reimbursement.  We are
endeavoring to obtain  reimbursement  by insurance  payors in other states where
there is currently no reimbursement  being made. We believe we have continued to
correctly  represent in our Securities and Exchange  Commission filings that the
CPT  Editorial  Research and  Development  Department  of the  American  Medical
Association  has advised us that CPT code number  92120 is the  appropriate  CPT
code for our Blood Flow  Analyzer(TM),  for  reimbursement  purposes for doctors
using the device.

         On July 11, 2002,  we issued a press  release that stated we received a
purchase order from Westland  Financial  Corporation  and Valdespino  Associates
Enterprises for 200 complete sets of our entire product  portfolio of diagnostic
and surgical equipment for Mexican ophthalmic practitioners, to be followed by a
second order of 100 sets of equipment. The press release was based on a purchase
order  dated  July  10,  2002  that we  entered  into  with  Westland  Financial
Corporation  for the sale of 200 complete  sets of our  surgical and  diagnostic
equipment to Mexican  ophthalmic  practitioners.  The press  release also stated
that the initial  order was for $70 million of our equipment to be filled over a
two-year  period  followed by the second order of $35 million in equipment to be
completed in the third year.  The press  release  further  stated that  delivery
would be made in traunches of 25 complete sets of our equipment, beginning in 30
days from the date of the purchase order.

         On September  13, 2002,  the board of directors  issued a press release
regarding   the  status  of  our  product   sales  to  the  Mexican   ophthalmic
practitioners.  In that  press  release  the  board  stated  that we had been in
discussions for the prior nine months with Westland Financial Corporation, aimed
at  supplying  our  medical  device  products  to  the  Mexican   market.   Upon
investigation,  the board of directors had  determined  that the purchase  order
referenced  in the July 11, 2002 press release was not of such a nature as to be
enforceable for the purpose of sales or revenue recognition. In addition, we had
not sent any shipment of medical  products to Mexican  ophthalmic  practitioners
nor  received  payment for those  products  pursuant to those  discussions.  The
September 13, 2002 press release also stated that  discussions  were  continuing
with Westland Financial Corporation regarding sales and marketing activities for
our medical device products in Mexico, but we could not, at the time, predict or
provide any assurance that any transactions would result.


                                        9



         On June 2, 2003, a complaint  was filed in the United  States  District
Court,  captioned Michael Marrone v. Paradigm Medical  Industries,  Inc., Thomas
Motter,  Mark Miehle and John  Hemmer,  Case No. 2:03  CV00513  PGC. On July 11,
2003, a complaint was filed in the same United States District Court,  captioned
Lidia Milian v. Paradigm Medical  Industries,  Inc., Thomas Motter,  Mark Miehle
and John Hemmer,  Case No. 2:03  CV00617PGC.  Both  complaints seek class action
status.  These  cases are  substantially  similar  in nature to the Meyer  case,
including  the  contention  that  as a  result  of  allegedly  false  statements
regarding  the Blood Flow  Analyzer(TM)  and the  purchase  order from  Westland
Financial  Corporation and Valdespino Associates  Enterprises,  the price of our
common stock was artificially  inflated and the persons who purchased our common
shares during the class period suffered  substantial damages. In a press release
dated July 11, 2003,  captioned  "Milberg Weiss  announces the filing of a class
action suit against Paradigm Medical  Industries,  Inc. on behalf of investors,"
the law firm of Milberg  Weiss  Bershad  Hynen & Levach  LLP,  which  represents
purchasers  of our  securities  in the class action suit filed on July 11, 2003,
stated that our alleged  misrepresentations caused the market price of the stock
to be artificially  inflated during the class period. As a result, it is alleged
that  investors  suffered  millions  of  dollars  in  damages  from our  alleged
misstatements.

         The cases  request  judgment for  unspecified  damages,  together  with
interest and attorney's  fees. These cases have now been  consolidated  with the
Meyer case into a single action,  captioned In re: Paradigm  Medical  Industries
Securities  Litigation,  Case No.  03-CV-448TC.  The law firm of  Milberg  Weiss
Bershad & Schulman  LLP is  representing  purchasers  of our  securities  in the
consolidated class action. On June 28, 2004, a consolidated amended class action
complaint was filed on behalf of purchasers of our securities.  The consolidated
complaint  is similar to the three class action  complaints  and alleges that we
made  false   representations   regarding  the  CPT  code  for  the  Blood  Flow
Analyzer(TM),  but it includes additional allegations that we failed to disclose
in a timely manner that doctors were being denied  reimbursement  for procedures
performed  with the Blood Flow  Analyzer(TM).  The  consolidated  complaint also
alleges that we made false statements regarding the purchase order from Westland
Financial  Corporation  and Valdespino  Associates  Enterprises.  We believe the
consolidated  complaint  is without  merit and intend to  vigorously  defend and
protect our interests in the case.

         We  were  issued  a  Directors  and  Officers   Liability  and  Company
Reimbursement Policy by United States Fire Insurance Company for the period from
July 10, 2002 to July 10, 2003 that  contains a $5,000,000  limit of  liability,
which is excess of a $250,000 retention. The officers and directors named in the
consolidated  cases have  requested  coverage  under the  policy.  U.S.  Fire is
currently  investigating  whether it may have a right to deny  coverage  for the
consolidated  cases based upon policy  terms,  conditions  and  exclusions or to
rescind the policy based upon  misrepresentations  contained in our  application
for insurance.

         We have paid $30,000 to U.S. Fire toward  satisfaction  of the $250,000
retention  that is applicable to the  consolidated  cases.  We have advised U.S.
Fire that we cannot pay the  $250,000  retention  due to our  current  financial
circumstances.  As a  consequence,  on  January  8,  2004,  we  entered  into  a
non-waiver  agreement  with  U.S.  Fire in which  U.S.  Fire  agreed to fund and
advance our retention  obligation in  consideration  for which we have agreed to
reimburse  U.S. Fire the sum of $5,000 a month for a period of six months,  with
the first of such payments due on February 15, 2004.  Thereafter,  commencing on
August 15, 2004,  we are required to reimburse  U.S. Fire the sum of $10,000 per
month until the entire  amount of $250,000 has been paid to U.S.  Fire.  We have
made payments to U.S. Fire in the aggregate amount of $30,000, of which our last
payment of $10,000 was made on October 11,  2004.  These  payments  were for the
$5,000  monthly  payments due during the six month  period from  February 15, to
July  15,  2004,  leaving  a  remaining  retention  obligation  to U.S.  Fire of
$220,000.

         In the event U.S. Fire  determines  that we or our former  officers and
directors named in the consolidated cases are not entitled to coverage under the
policy,  or that it is entitled to rescind the policy,  or should we be declared
in default under the non-waiver  agreement,  for not making the monthly payments
in a timely manner that are owed to U.S.  Fire,  then we agree to pay U.S. Fire,
on demand,  the full amount of all costs advanced by U.S. Fire, except for those
amounts  that we may  have  reimbursed  to U.S.  Fire  pursuant  to the  monthly
payments  due under the  non-waiver  agreement.  Moreover,  if U.S.  Fire denies
coverage  for  the  consolidated  cases  under  the  policy,  we  would  owe our
litigation  counsel in the class action  lawsuits for any legal fees not paid by
U.S.  Fire.  However,  U.S.  Fire has  currently  agreed to pay the  legal  fees
relating to the class action lawsuits.

         We will be in default under the non-waiver agreement if we fail to make
any payment due to U.S. Fire  thereunder  when such payment is due, or institute
proceedings to be adjudicated as bankrupt or insolvent.  U.S. Fire's  obligation
to advance  defense costs under the agreement  will  terminate in the event that
the  $5,000,000  policy  limit of liability is  exhausted.  If U.S.  Fire denies
coverage for the  consolidated  cases under the policy and we are not successful
in defending and protecting our interests in the cases,  resulting in a judgment
against us for  substantial  damages,  we would be unable to pay such  liability
and, as a result, would be forced to seek bankruptcy protection.

         On July 10, 2003, a complaint was filed in the United  States  District
Court,  District of Utah captioned  Innovative Optics,  Inc. and Barton Dietrich
Investments,  L.P. v. Paradigm Medical  Industries,  Inc.,  Thomas Motter,  Mark
Miehle and John  Hemmer,  Case No. 2:03 CV 00582DB.  The  complaint  claims that
Innovative  and  Barton  entered  into an asset  purchase  agreement  with us on
January 31, 2002, in which we agreed to purchase all the assets of Innovative in
consideration for the issuance of 1,310,000 shares of the Company's common stock
to Innovative.  The complaint  claims we breached the asset purchase  agreement.
The complaint also claims that we allegedly made false and misleading statements
pertaining to the Blood Flow  Analyzer(TM)  and concerning a purchase order from
Valdespino  Associates  Enterprises  and  Westland  Financial  Corporation.  The
purpose  of  these  statements,  according  to  the  complaint,  was  to  induce


                                       10



Innovative  to sell its assets and  purchase  the shares of our common  stock at
artificially  inflated  prices while  simultaneously  deceiving  Innovative  and
Barton  into  believing  that the  Company's  shares  were  worth more than they
actually were.  The complaint  contends that had Innovative and Barton known the
truth they would not have sold  Innovative  to us, would not have  purchased our
stock for the assets of Innovative, or would not have purchased the stock at the
inflated prices that they allegedly paid. The complaint further contends that as
a result of the  allegedly  false  statements,  Innovative  and Barton  suffered
substantial damages in an amount to be proven at trial.

         The  complaint  also claims that  491,250 of the shares to be issued to
Innovative in the asset purchase  transaction  were not issued on a timely basis
and we also did not  file a  registration  statement  with  the  Securities  and
Exchange Commission within five months of the closing date of the asset purchase
transaction.  As a result, the complaint alleges that the value of the shares of
our  common  stock  issued  to  Innovative  in  the  transaction  declined,  and
Innovative and Barton suffered damages in an unspecified  amount to be proven at
trial. We filed an answer to the complaint and also filed counterclaims  against
Innovative  and Barton for breach of  contract.  We  believe  the  complaint  is
without merit and intend to  vigorously  defend and protect our interests in the
action.  If we are not  successful in defending and  protecting our interests in
this action,  and a judgment for substantial  damages is entered against us, and
U.S.  Fire denies  coverage in the  litigation  under the Directors and Officers
Liability  and  Company  Reimbursement  Policy,  we would be  unable to pay such
liability and, as a result, would be forced to seek bankruptcy protection.

         On October 14, 2003, an action was filed in the Third Judicial District
Court,  Salt  Lake  County,  State of Utah,  captioned  Albert  Kinzinger,  Jr.,
individually and on behalf of all others similarly situated vs. Paradigm Medical
Industries,  Inc.,  Thomas  Motter,  Mark Miehle,  Randall A.  Mackey,  and John
Hemmer,  Case No.  030922608.  The complaint  also indicates that it is a "Class
Action Complaint for Violations of Utah Securities Laws and Plaintiffs  Demand a
Trial by Jury." We have retained  legal counsel to review the  complaint,  which
appears to be focused on alleged  false or misleading  statements  pertaining to
the Blood Flow Analyzer(TM).  More  specifically,  the complaint alleges that we
falsely stated in Securities and Exchange  Commission filings and press releases
that we had received  authorization to use an insurance  reimbursement  CPT code
from the CPT Code  Research and  Development  Division of the  American  Medical
Association in connection with the Blood Flow Analyzer(TM),  adding that the CPT
code provides for a reimbursement to doctors of $57.00 per patient for the Blood
Flow Analyzer(TM).

         The purpose of these  statements,  according to the  complaint,  was to
induce investors to purchase shares of our Series E preferred stock in a private
placement  transaction at artificially  inflated prices.  The complaint contends
that as a result of these statements, the investors that purchased shares of our
Series E preferred stock in the private offering suffered substantial damages to
be proven at trial.  The complaint  also alleges that we sold Series E preferred
shares  without  registering  the sale of such shares or  obtaining an exemption
from registration.  The complaint requests rescission,  compensatory damages and
treble damages,  including  interest and attorneys'  fees. We filed an answer to
the  complaint.  We  believe  the  complaint  is  without  merit  and  intend to
vigorously  defend our  interests  in the action.  If we are not  successful  in
defending and  protecting  our interests in the action,  resulting in a judgment
against  us for  substantial  damages,  and U.S.  Fire  denies  coverage  in the
litigation under the Directors and Officers Liability and Company  Reimbursement
Policy,  we would be unable to pay such  liability  and,  as a result,  would be
forced to seek bankruptcy protection.

         On December 8, 2004, we announced that verbal agreements have been made
to settle certain lawsuits brought against us and our former executive officers,
Thomas F.  Motter,  Mark R. Miehle and John W.  Hemmer.  The  following  are the
lawsuits that have been verbally settled:

         o    The class action  lawsuit filed on May 14, 2003 by Richard  Meyer,
              individually  and on  behalf  of all  others  similarly  situated,
              against us and  certain  former  executive  officers in the United
              States  District  Court  for  the  District  of  Utah,  which  was
              consolidated  into a single action on June 28, 2004 with two other
              class action lawsuits -- the class action lawsuit filed by Michael
              Marone on June 2, 2003 and the class action lawsuit filed by Lidia
              Milian  on July  21,  2003  against  us and our  former  executive
              officers in the same court. The  consolidated  action is captioned
              In re Paradigm Medical Industries Securities Litigation, with lead
              plaintiffs Rock Solid  Investments of Miami,  Inc.,  Brito & Brito
              Accounting, Inc. and Joseph Savanjo.

         o    The class  action  lawsuit  filed on  October  14,  2003 by Albert
              Kinzinger, Jr., individually and on behalf of all others similarly
              situated,  in the  Third  District  Court  for the  State  of Utah
              against us and certain former executive officers.

         o    The lawsuit  filed on July 10,  2003 by  Innovative  Optics,  Inc.
              against us and certain former executive officers.

         Under the  terms of the  settlement  agreements,  U.S.  Fire  Insurance
Company,   which  issued  a  Directors   and  Officers   Liability  and  Company
Reimbursement  Policy to us for the period from July 10, 2002 to July 10,  2003,
has agreed to pay $2,500,000 in cash to the classes in the class action lawsuits
and to Innovative Optics, Inc. in settlement of these lawsuits.  Under the terms
of  settlement,  we are to pay U.S. Fire the sum of $220,000,  representing  the
remaining  amount owing under a $250,000  retention  obligation in the insurance
policy,  and to execute a policy  release in favor of U.S.  Fire as to  coverage
under the insurance policy.  The remaining  retention  obligation of $220,000 is
payable in monthly  installments  of $10,000  until the entire  amount  owing is
paid.

                                       11



         The parties to the settlement and their respective legal counsel are in
the process of preparing written settlement  agreements to memorialize the terms
of the  verbal  agreements.  Settlement  of the  lawsuits  is subject to certain
conditions, which include but are not limited to the following:

         o    Each of the settlement  classes shall, in their respective actions
              and at their own expense, obtain preliminary approval of the terms
              of  settlement  by both the court in the  federal  action  and the
              court in the state action.

         o    After obtaining a court order granting preliminary approval of the
              terms of settlement in the respective actions, each of the classes
              are  required,  in  their  respective  actions  and at  their  own
              expense,  to  provide  notice to all  persons  that are  potential
              members of the federal  settlement  class and the state settlement
              class, respectively.

         o    The federal  settlement  class  members  and the state  settlement
              class  members  shall  have a period  of time from the date of the
              mailing  of such  notice  in which  to  "opt-out"  of the  federal
              settlement class and state settlement class, respectively.

         Under  the  terms  of the  settlement,  U.S.  Fire  has the  option  to
terminate the settlement agreements if the cumulative dollar value of the claims
held by individuals or entities that "opt-out" of the federal  settlement  class
or the state  settlement  class exceeds  $250,000.  However,  if such "opt-outs"
exceed  $250,000,  the  parties  in the  class  have a period of time to cure by
reducing the amount of "opt-outs" to less than $250,000.

         If  U.S.  Fire   exercises  its  option  to  terminate  the  settlement
agreements  in the event the  "opt-outs"  exceed  $250,000  and the  parties are
unable to reduce the amount of "opt-outs"  within an allowable time period,  the
terms and conditions of the settlement agreements will have no further force and
effect,  and all parties will be restored to their  respective  positions in the
various legal actions prior to such settlement.

If the litigants in other  lawsuits  succeed on any of their  claims,  we may be
unable  to pay  such  liability  and we  would  be  forced  to  seek  bankruptcy
protection.

         We have been  involved  in other  lawsuits  besides  the  class  action
lawsuits.  If the  litigants  in these  other  lawsuits  succeed on any of their
claims,  we may be unable to pay such  liability  and, as a result,  we could be
forced to seek  bankruptcy  protection.  These  other  lawsuits  include (i) the
complaint filed against us on June 20, 2003 by Citicorp  Vendor  Finance,  Inc.,
formerly known as Copelco Capital,  Inc., alleging that $49,626 plus interest is
due for the leasing of two copy machines; (ii) the complaint filed against us on
August 3, 2003, by Corinne Powell, a former employee,  alleging that at the time
we laid her off, she was owed $2,030 for business expenses,  $11,063 for accrued
vacation days, $12,818 for unpaid  commissions,  the fair market value of 50,000
stock options  exercisable  at $5.00 per share that she claims she was prevented
from  exercising,  plus attorney's fees and a wage penalty under Utah law; (iii)
the complaint filed against us on September 10, 2003 by Larry Hicks for payments
due under a  consulting  agreement  in the  aggregate  amount of $110,000  minus
whatever we have paid to him prior to such termination, plus attorney's fees and
a wage penalty under Utah law; and (iv) the complaint  brought  against us on or
about May 25, 2004 by Jeffrey F. Poore,  former  President  and Chief  Executive
Officer of the company,  alleging that we unlawfully  terminated  his employment
with  us  and,  as a  result,  he  demands  judgment  against  us for  $350,000,
representing  his annual salary for the two remaining years under the employment
agreement,  for money  judgment  based on the value of his  benefits for the two
remaining years under the employment agreement,  and for money judgment equal to
the value of the stock options granted to him under the employment agreement.

If we are unable to obtain additional capital, we would be required to eliminate
certain activities that would adversely effect our operations.

         We may  require  substantial  funds  for  various  purposes,  including
continuing research and development,  expanding clinical trials,  completing the
FDA approval  process for our products  (including the Photon(TM) laser system),
and  manufacturing  and  marketing our existing  products.  We will need to seek
additional capital,  possibly through public or private sales of our securities,
in order to fund our activities on a long-term basis.  Adequate funds may not be
available  when  needed or on terms  acceptable  to us.  Insufficient  funds may
require us to delay,  scale back or eliminate certain or all of our research and
development  programs or to license third parties to  commercialize  products or
technologies  that we would  otherwise  seek to  develop  ourselves,  which  may
materially adversely affect our continued operations.

Our research activities may not result in any commercially profitable products.

         The science and technology of medical  products,  including  lasers, is
rapidly evolving.  Our medical systems may require significant further research,
development,  testing and  regulatory  clearances.  They are also subject to the
risks of failure  inherent in the  development  of products  based on innovative
technologies.  These  risks  include  the  possibility  that  any  or all of the
proposed  products  will prove to be  ineffective  or unsafe;  that they fail to
receive  necessary  regulatory  clearances;   that  the  proposed  products  are
uneconomical;  that  others  hold  proprietary  rights  which  preclude  us from
marketing such products; or that others market better products.  Accordingly, we
are unable to predict  whether our  research  and  development  activities  will
result in any commercially  profitable  products.  Further,  due to the extended
testing and  regulatory  review process  required,  we may be unable to sell our



                                       12



current and proposed  products.  There is also no guarantee that we will be able
to develop and sell a glaucoma surgery system.

We are uncertain of obtaining FDA approval for our  Photon(TM)  laser system and
further  development of the Photon(TM) is on hold until our financial  situation
improves, and we may lose our rights to manufacture or sell the Photon(TM) laser
system if we are unable to agree on the correct  method of  calculating  royalty
payments under a license agreement.

         We  are  subject  to  substantial  regulation  by  the  Food  and  Drug
Administration  or FDA and other  federal  and state  regulatory  agencies.  FDA
regulations  require  us to obtain  either  510(k)  clearance  or  pre-marketing
approval prior to marketing a product in the United States.  We are also subject
to foreign  regulation and must receive  various types of approvals from foreign
government  agencies  prior to  selling  our  products  in some  countries.  The
clearance  and  approval  processes  for  both  the FDA and  foreign  regulatory
authorities  are costly,  time  consuming  and  uncertain.  In addition,  we are
required to obtain FDA approval before  exporting a device that has not received
FDA  marketing  clearance  or  approval.  We may never be able to  obtain  these
required government approvals.  Delays or failure to obtain such approvals would
materially and adversely  effect us, as would changes in existing  requirements.
We have  received  510(k)  clearance  from  the FDA for our  ultrasonic  surgery
systems  allowing  us to sell both  devices in the United  States.  We have also
received 510(k) clearance to market our Blood Flow Analyzer(TM).

         In May 1995, we were granted an  investigational  device  exemption for
our Photon(TM)  laser system allowing us to conduct  clinical studies in support
of our application with the FDA to obtain approval to market the system.  During
the clinical  trials,  we discovered  that the  Photon(TM)  laser system may not
effectively remove hard (dense or impacted) cataracts.  In May 1998, we received
FDA clearance to conduct  clinical tests on soft  cataracts.  We believe the FDA
will approve our 510(k)  predicate  device  application for the Photon(TM) laser
system  because in the United States most  cataracts  are removed  before tissue
hardens.   We  received  an  FDA  warning  letter  in  August  2000   concerning
deficiencies   in  the  Phase  I  clinical  trials  and,  after  making  several
submissions  to the FDA,  we  received a letter  from the FDA in  February  2001
stating that the  deficiencies  had been corrected and the clinical trials could
continue.

         We have completed the authorized clinical studies and, in October 2001,
made a supplemental  submission to the FDA regarding the 510(k) application.  We
received a  preliminary  review from the FDA of our  supplemental  submission in
December  2001  and  submitted  additional  clinical  information  to the FDA on
February 6, 2002. On May 7, 2002,  we received a letter from the FDA  requesting
further clinical information.  We have generated additional clinical information
in response to the letter and are  uncertain if we will make a submission to the
FDA with the additional  clinical  information.  Because of the "going  concern"
status of the  company,  management  has focused  efforts on those  products and
activities  that will,  in its  opinion,  achieve  the most  resource  efficient
short-term cash flow to the company.  As reflected in the results for the fiscal
year ended December 31, 2003,  diagnostic products are currently our major focus
and the Photon(TM) and other extensive  research and  development  projects have
been put on hold pending future evaluation when our financial position improves.
Our focus is not on any specific  diagnostic product or products,  but rather on
our entire group of diagnostic products.

         We have also  received  FDA  approval  to  manufacture  and  export the
Photon(TM)  laser  system  internationally.  However,  we have not yet  obtained
approval from some foreign  countries to market the laser product where approval
is necessary. We anticipate that many contemplated applications of our currently
existing and planned products will be subject to the lengthy regulatory approval
process, including preclinical studies, clinical trials and extensive regulatory
review.  This  process  could take many years and  require  the  expenditure  of
substantial resources.

         The Photon(TM)  laser system is protected  under a United States patent
issued  to Daniel M.  Eichenbaum,  M.D.  in 1987 and  subsequently  assigned  to
PhotoMed  International,  Inc. and a Japanese  patent issued to us in 1997.  The
United  States  patent  expired in  September  2004.  We secured  the  exclusive
worldwide  rights to this patent from  PhotoMed by means of a license  agreement
dated July 7, 1993. The license  agreement expires when the United States patent
rights  expire in September  2004.  PhotoMed and Dr.  Eichenbaum  brought  legal
action  against us on September 11, 2000  involving an amount of royalties  that
are  allegedly  due and owing to them from the sale of equipment by us under the
license agreement.

         We have paid  $14,736 to bring all royalty  payments up to date through
June 30, 2001. We have been working with  PhotoMed and Dr.  Eichenbaum to insure
that the royalty  calculations  have been correctly made. It is anticipated that
once the parties  agree on the correct  royalty  calculations,  the legal action
will be  dismissed.  However,  if the parties are unable to agree on a method of
calculating royalties,  there is risk that PhotoMed and Dr. Eichenbaum may amend
the  complaint  to  request   termination  of  the  license  agreement  and,  if
successful,  we would lose our rights to manufacture or sell the Photo(TM) laser
system.


                                       13



Purchasers  of our common  shares could  experience  dilution from our tendering
puts under a private equity line of credit agreement with Triton West.

         On June 30,  2000,  we  entered  into a private  equity  line of credit
agreement  with Triton West Group,  Inc.,  in which Triton  agreed to provide an
amount up to $20,000,000  to us in order to purchase put common shares  pursuant
to the terms and conditions of the agreement.  Under the agreement, we may elect
for a period of three  years from the  effective  date of  December 8, 2000 (the
date on which the  Securities  and  Exchange  Commission  declared  effective  a
registration  statement  registering  shares  to be  purchased  by Triton on put
transactions  with us) to  exercise  our right to tender a put notice to Triton.
The put notice  requires Triton to purchase shares of our common stock at 88% of
the market price on the trading day immediately  following the valuation period,
which is a period of five trading days beginning two days before the trading day
on which the put notice is deemed to be  delivered  and two  trading  days after
such date. Under certain  conditions,  the purchase price will be reduced to 85%
of the  market  price  of our  common  stock.  The  agreement  provides  certain
restrictions on the tendering of puts. The maximum amount of each put (which may
vary from $750,000 to  $2,000,000)  is to be determined  according to a schedule
based on the  trading  price  of our  common  stock at the time and the  average
30-day  volume of such  shares.  There  must be a minimum  of 15  business  days
between puts. Moreover, a registration  statement must be effective  registering
the shares of common stock covered by the put. There may be significant dilution
associated   with  tendering  put  notices  under  the   agreement.   Because  a
registration  statement is not effective  registering  the shares issuable under
the equity line of credit,  our equity line of credit is currently not available
as a source of equity.  The equity line of credit agreement expired by its terms
on December 8, 2003, but the Company is currently in the process of renewing the
agreement.

Purchasers of our Common shares will experience dilution if a threatened lawsuit
by Douglas A. MacLeod,  M.D. and related entities  succeeds on its claims and we
are required to issue additional common shares and warrants to them.

         We received demand letters dated July 18, 2003,  September 26, 2003 and
November 10, 2003 from counsel for Douglas A. MacLeod,  M.D., a  shareholder  of
the  company.  In the July 18, 2003  letter,  Dr.  MacLeod  demands  that he and
certain  entities  with which he is involved or controls,  namely the Douglas A.
MacLeod, M.D. Profit Sharing Trust, St. Marks' Eye Institute and Milan Holdings,
Ltd., be issued a total of 2,296,667  shares of our common stock and warrants to
purchase  1,192,500  shares of our common stock at an exercise price of $.25 per
share. Dr. MacLeod claims that these common shares and warrants are owing to him
and the related  entities  under the terms of a mutual release dated January 16,
2003,  which he and the  related  entities  entered  into with us.  Dr.  MacLeod
renewed his  request  for these  additional  common  shares and  warrants in the
September  26, 2003 and  November 10, 2003 demand  letters.  We believe that Dr.
MacLeod's  claims and  assertions  are without merit and that neither he nor the
related  entities are entitled to any  additional  shares of our common stock or
any additional  warrants under the terms of the mutual release.  However, if Dr.
MacLeod succeeds on his claims,  there would be dilution  associated with having
to issue additional common shares and warrants to him and the related entities.

Our products may become obsolete due to rapid technological change.

         Our market is subject to rapid  technological  change.  Development  by
others of new or  improved  products,  processes  or  technologies  may make our
products obsolete or less competitive.  Accordingly,  we must continue investing
in  research  and  development  on our  existing  products  and to  develop  new
products.  Despite  such  investment,  our current or proposed  products  may be
unsuccessful.

Our Photon(TM)  laser system could receive  competition from other laser systems
that are well financed with well- recognized trade names.

         Our Photon(TM) laser system will potentially  receive  competition from
other laser systems, such as excimer, holmium (Ho:YAG),  Erbium (Er:YAG), Nd:YLF
(Neodymium:Yttrium-Lithium-Fluoride)   or   lasers   of  other   wave   lengths.
Competition  may also  come  from  other  medical  devices  and  other  surgical
techniques.  Further,  the cataract  surgical  device industry is dominated by a
small number of large  competitors that are well established in the marketplace,
have experienced management,  are well financed and have a well recognized trade
name related to their product lines.  We may be unable to penetrate the existing
market and  acquire a  sufficient  market  share to be  profitable.  Significant
competitive factors that will affect future sales include regulatory  approvals,
performance,   pricing,  timely  product  shipment,  safety,  customer  support,
convenience of use and patient and general market acceptance.

Our new products may incur unexpected  production  problems,  which would impact
our sales and profits.

         New  ventures,  particularly  those  involved  in  a  highly  technical
industry such as the medical industry,  have substantial  inherent risks.  These
risks  are  in  three   general   areas:   technical,   mechanical   and  human.
Notwithstanding any pre-production  planning,  new products can incur unexpected
problems in full-scale production, which cannot always be foreseen or accurately
predicted.  Designs can become  unworkable,  for  unpredicted  reasons.  Quality
control and component  sourcing failures can also be expected from time to time.
Any business,  including ours, is substantially  dependent upon the capabilities
and performance of both management, engineering and sales personnel. Mistakes in
judgment or  performance  can be costly and,  in certain  instances,  disabling.
Therefore,  management  skill,  experience,  character  and  reliability  are of
significant importance.

                                       14



Mistakes may occur in the design and  manufacture  of our products,  which could
prevent or limit the sales of such products.

         The high-technology product line requires us to deal with suppliers and
subcontractors    supplying   highly   specialized   parts,   operating   highly
sophisticated  and narrow  tolerance  equipment and performing  highly technical
calculations.  Components must be custom designed and manufactured, which is not
only  complicated  and  expensive,  but can also  require  a number of months to
accomplish.  Slight  mistakes in either the design or manufacture  can result in
unsatisfactory parts that may not be correctable.  Because our business requires
the talents of various  professions,  mistakes  from very slight  oversights  or
miscommunications  can  occur,  resulting  not only in  costly  delays  and lost
orders,  but  also in  disagreements  regarding  liability  and,  in any  event,
extended delays in production.  Moreover,  we rely on suppliers that are related
to each other for parts and equipment.  When dealing with related  suppliers the
terms on which parts and  equipment  are  purchased  may not be as  favorable as
could be obtained from unrelated third-party suppliers.

We are dependent upon a limited number of key suppliers for components and parts
used in our products and the  interruption in the supply of these components and
parts could impede our ability to deliver our products to market.

         We currently purchase  components and parts used in our products from a
limited number of key suppliers. Although we maintain alternative suppliers, our
reliance on our  principal  suppliers  could  result in delays  associated  with
redesigning  a product  due to an  inability  to obtain  an  adequate  supply of
required  components and parts,  and reduced  control over pricing,  quality and
timely delivery.  The loss of any of these principal  suppliers or the inability
of  a  supplier  to  meet  performance  and  quality  specifications,  requested
quantities  or  delivery  schedules  could cause our  revenues  to  decline.  In
addition,  any  interruption  or  discontinuance  in the supply of components or
parts could have an adverse  effect on our  business,  results of operation  and
financial  condition.  Further,  a  significant  price  increase from any of our
principal  suppliers  could  cause our  profitability  to  decline  if we cannot
increase the prices of our products to our  customers.  Our principal  suppliers
include Capistrano Labs, U.S. Ultrasound and Anello.

No independent marketing studies have been made to confirm the commercial demand
for the Photon(TM) laser system and the Blood Flow Analyzer(TM).

         We  believe  that  there  is  substantial  commercial  demand  for  our
Photon(TM)  laser  system  and our  Blood  Flow  Analyzer(TM)  for the eyes at a
profitable  price.  However,  this  belief is solely  based on our  management's
experience and judgment.  At this time, there have been no independent marketing
studies by  independent  professional  marketing  firms to reliably  confirm the
extent of this demand, the price ranges within which it exists and the amount of
promotion necessary to exploit whatever demand does exist.

Our Photon(TM)  laser system may not be accepted in the  marketplace  because it
does not remove hard cataracts.

         Our products may not be accepted in the  marketplace.  Such  acceptance
will depend on a number of factors  including  receiving  regulatory  approvals,
demonstrating  the safety,  and advantages of our products over existing systems
and  techniques.  Our Photon(TM)  laser system may never gain market  acceptance
since the system does not effectively remove hard (dense or impacted) cataracts.
Further,  we may be unable to  successfully  market  our  products  even if they
perform    successfully    in   clinical    applications.    Our    Precisionist
ThirtyThousand(TM)  Workstation(TM) may not gain acceptance unless we can reduce
or eliminate  the vacuum surge and develop  additional,  complementary  surgical
devices for installation in that host system.  Vacuum surge is a phenomenon that
occurs when the tip of the  ultrasonic  needle is obstructed  by target  tissue,
allowing  pressure to build up and, if the pressure is not  released,  a rush of
fluid goes from the chamber of the eye into the needle to equalize the pressure.
The result can be  complications  to the eye such as posterior  capsule rupture,
iris capture and chamber collapse.  We believe this phenomenon affects all other
ultrasonic cataract removal systems currently on the market.

Our pending  patents may not be perfected and our present or future  patents may
infringe  upon the  patents of  others,  which  could  restrict  or prevent  the
manufacture and sale of our products.

         We depend on our  ability to  license  and  obtain  patents  and on the
adherence to confidentiality  agreements executed by employees,  consultants and
third-parties  to  maintain  the  proprietary  nature of our  technology  and to
operate without  infringing on the proprietary rights of others. A United States
patent issued in 1987 to Daniel M.  Eichenbaum,  M.D.  protects our laser probe.
These patent rights expire in September 2004.  Patents have also been granted to
the Blood Flow Analyzer(TM) in the United States and the United Kingdom,  to the
Dicon(TM)  Topographer in the United States,  and to the Dicon(TM)  Perimeter in
the United States,  the United  Kingdom,  Germany and  Switzerland.  The pending
patents may not be perfected.  Also, our present or future products may be found
to infringe upon the patents of others. If our products are found to infringe on
the patents,  or otherwise  impermissibly  utilize the intellectual  property of
others, our development, manufacture and sale of such products could be severely
restricted or prohibited.  We may be required to obtain licenses to utilize such
patents or proprietary rights of others and acceptable terms may be unavailable.
If we do not obtain  such  licenses,  the  development,  manufacture  or sale of
products  requiring such licenses  would be materially  adversely  affected.  In
addition,  we could  incur  substantial  costs in  defending  ourselves  against
challenges  to our patents or  infringement  claims made by third  parties or in
enforcing any patents we may obtain.

                                       15



Because  patents  only provide  limited  protection,  others  could  produce and
distribute  products  similar to the Photon(TM)  laser system and the Blood Flow
Analyzer(TM).

         We rely on the  protections  for our  products  that we hope to realize
under the United  States and  foreign  patent  laws.  However,  patents  provide
limited  protections.  We  have a  United  States  and  Japanese  patent  on the
hand-held probe design and  applications  for various foreign patents are either
pending or planned, and the patents for the Blood Flow Analyzer(TM) for the eyes
are  reported  by Ocular  Blood Flow,  Ltd. to have been  approved in the United
States and the United Kingdom. Similar devices,  however, could be designed that
do not  infringe on our patent  rights,  but that are similar  enough to compete
against our patented products.  Moreover,  it is possible that an unpatented but
prior  existing  device or design may exist that has never been made  public and
therefore is not known to us or the industry in general.  Such a device could be
introduced into the market without infringing on our current patent. If any such
competing  non-infringing  devices are  produced  and dis  tributed,  our profit
potential  would  be  seriously  limited,   which  would  seriously  impair  our
viability.

Some of our products may be denied  reimbursement by third-party payors, such as
government programs and private insurance plans.

         We anticipate  that our medical  devices will generally be purchased by
ophthalmologists  and hospitals that will then bill various  third-party payors,
such as government  programs and private  insurance  plans,  for the health care
services provided to their patients.  Government agencies generally reimburse at
a fixed rate based on the procedure performed.  Some of the potential procedures
for which our medical devices may be used, however,  may be denied reimbursement
as elective.  In addition,  third-party  payors may deny  reimbursement  if they
determine  that the use of our  products  was  unnecessary,  inappropriate,  not
cost-effective,  experimental  or used for a  non-approved  indication.  Certain
purchasers of our Blood Flow Analyzer,(TM),  for example, have had difficulty in
obtaining  reimbursement  from  insurance  carriers.  Even  if  we  receive  FDA
clearances  for  our  products,   third-party   payors  may  nevertheless   deny
reimbursement. Furthermore, third-party payors increasingly challenge the prices
charged for medical products and services. Reimbursement from third-party payors
may be  unavailable  or if  available,  that  reimbursement  may be limited when
compared with  reimbursement  for  competitive  procedures,  thereby  materially
adversely affecting our ability to profitably sell products.  The market for our
products  could also be adversely  affected by recent federal  legislation  that
reduces  reimbursements  under the capital cost pass-through  system utilized in
connection  with the Medicare  program.  Failure by hospitals and other users of
our  products  to obtain  reimbursement  from  third-party  payors or changes in
government and private  third-party  payors' policies toward  reimbursement  for
procedures employing our products would have a material adverse effect on us.

Congress  may  introduce  legislation  that  could  result in price  limits  and
utilization controls on our products.

         Members of Congress have  introduced  legislation  to change aspects of
the delivery and financing of health care services.  Such legislation to control
or reduce public (Medicare and Medicaid) and private spending on health care, to
reform the  methods of payment  for health  care goods and  services by both the
public and private sectors,  and to provide  universal access to health care may
be passed.  We cannot predict what form this  legislation may take or the effect
of such  legislation  on our  business.  It is  possible  that  the  legislation
ultimately enacted by Congress will contain provisions resulting in price limits
and utilization  controls which may reduce the rate of increase in the growth of
the ophthalmic laser market or otherwise  adversely  affect our business.  It is
also  possible  that future  legislation  could result in  modifications  to the
nation's  public and private  health  care  insurance  systems  that will affect
reimbursement  policies in a manner  adverse to us. We also cannot  predict what
other  legislation  relating to our business or the health care  industry may be
enacted,  including legislation relating to third-party  reimbursement,  or what
effect legislation may have on the results of our operations.

Our product  liability  insurance could be inadequate to cover liabilities if we
face significant product liability claims against us.

         The nature of our business  exposes it to risk from  product  liability
claims  and there can be no  assurance  that we can  avoid  significant  product
liability  exposure.  We maintain product liability insurance providing coverage
up to $2,000,000 per claim with an aggregate  policy limit of $2,000,000.  There
is  substantial  doubt that this amount of insurance  would be adequate to cover
liabilities should we face significant  claims. A successful  products liability
claim brought  against us could have a material  adverse effect on our business,
operating results and financial condition.  Further, product liability insurance
is becoming increasingly  expensive,  and there can be no assurance that we will
successfully  maintain adequate product liability insurance at acceptable rates,
or at all. Should we be unable to maintain adequate product liability insurance,
our ability to market our products would be significantly  impaired.  Any losses
that we may suffer from future  liability  claims or a voluntary or  involuntary
recall of our products and the damage that any product  liability  litigation or
voluntary or involuntary  recall may do to the reputation and  marketability  of
our products  would have a material  adverse  effect on our business,  operating
results and financial condition.


                                       16



Our future products sales in foreign countries could be adversely  affected by a
significant  increase  in value of the U.S.  dollar  against  local  currencies,
economic and political instability,  and changes in the regulatory processes and
other regulations.

         We anticipate  that a significant  portion of our future  product sales
will be in foreign  countries.  Because we quote  prices  for our  products  and
accept payment on sales principally in U.S. dollars, any significant increase in
the value of the U.S. dollar against local currencies may make our products less
competitive  with foreign  products.  The economic and political  instability of
some  foreign  countries  also may affect the  ability of  ophthalmologists  and
others to purchase our  products,  or the ability of potential  customers to pay
for the procedures for which our products are used. In addition,  other specific
risks in doing business in foreign  countries  include changes in the regulatory
processes affecting our products,  in controls governing foreign payments by our
customers, and in regulations, taxes and customs duties or requirements that may
be imposed on the  purchase of our  products.  The foreign  countries  where our
products  are  sold  include  but  are  not  limited  to  Argentina,  Australia,
Bangladesh,  Borneo,  Brazil,  Canada,  China,  Czechoslovakia,  Egypt,  France,
Germany,  Greece,  Hong  Kong,  India,  Israel,  Italy,  Japan,  Jordan,  Korea,
Malaysia,  Mexico, New Zealand,  Pakistan,  Peru,  Poland,  Puerto Rico, Russia,
Saudi Arabia,  Spain, Sri Lanka, Taiwan,  Thailand,  Turkey, United Kingdom, and
United Arab Emirates. Certain of countries may experience political, economic or
social instability, which could adversely affect our sales.

The market price of our securities could fluctuate significantly.

         Our  common  stock and Class A  warrants  were  delisted  on The Nasdaq
SmallCap Market  effective June 26, 2003 and currently trade on the OTC Bulletin
Board. Factors such as announcements by us of the regulatory status of products,
quarterly  variations  in our  financial  results,  the gain or loss of material
contracts, changes in management,  regulatory changes, trends in the industry or
stock market and announcements by competitors,  among other things,  could cause
the market price of such securities to fluctuate significantly.

We may issue  preferred  shares  with  preferences  in an equal or prior rank to
existing preferred shares.

         Our certificate of  incorporation  authorizes the issuance of shares of
"blank check" preferred  stock,  which will have such  designations,  rights and
preferences  as our  board  of  directors  may  determine  from  time  to  time.
Accordingly,  our Board of Directors is empowered,  without stockholder approval
(but  subject  to  applicable  government  regulatory  restrictions),  to  issue
preferred stock with dividend,  liquidation,  conversion, voting or other rights
that could  adversely  affect the voting power or other rights of the holders of
our common stock. Those terms and conditions may include preferences on an equal
or prior rank to existing  preferred  stock.  Those shares may be issued on such
terms and for such  consideration  as the board then deems  reasonable  and such
stock  shall  then  rank  equally  in  all  aspects  of  the  series  and on the
preferences and conditions so provided,  regardless of when issued. In the event
of  such  issuance,  the  preferred  stock  could  be  utilized,  under  certain
circumstances,  as a method of discouraging,  delaying or preventing a change in
control of our company.  As of December 31, 2004, the following preferred shares
were  issued  and  outstanding:   5,627  shares  of  Series  A  preferred  stock
convertible  into 6,753 common shares;  8,986 shares of Series B preferred stock
convertible  into 10,783 common shares;  no shares of Series C preferred  stock;
5,000 shares of Series D preferred stock  convertible  into 8,750 common shares;
1,000 shares of Series E preferred stock  convertible into 53,333 common shares;
4,598.75  shares of Series F preferred  stock  convertible  into 245,267  common
shares;  and  1,726,560  shares of Series G  preferred  stock  convertible  into
1,726,560 common shares.

Our preferred  shares have rights that amount to a preference over the shares of
this offering.

         Our preferred  shares have dividend and liquidation  rights that amount
to preferences over the shares of this offering.  We must pay any cash dividends
to our holders of preferred  shares before paying cash  dividends to the holders
of the shares of this offering.  The dividend rights of our preferred shares are
as follows: for Series A and Series B preferred shares, $.24 per share per annum
payable,  at our option, in cash from surplus  earnings;  for Series C preferred
shares,  12% non-cumulative  preferred shares payable,  at our option, in common
stock or cash from  surplus  earnings;  and for  Series D, E, F and G  preferred
shares, 8% non-cumulative  preferred dividends payable, at our option, in common
stock  or cash  from  surplus  earnings.  Upon  our  liquidation,  we  must  pay
preferential  distributions  to our  preferred  shareholders  before  paying any
distributions to holders of the shares of this offering.  The liquidation rights
of our preferred shares are as follows: for Series A preferred shares, $1.00 per
share, plus accrued and unpaid dividends;  for Series B preferred shares,  $4.00
per share, plus accrued and unpaid dividends; for Series C preferred shares, the
stated  value of $100.00 per share,  plus  declared  but unpaid  dividends;  for
Series D preferred  shares,  the stated value of $1.75 per share,  plus declared
but unpaid dividends;  for Series E, F, and G preferred  shares,  the greater of
(i) the amount of distributions  such shares would have received had the holders
converted  such  preferred  shares  into  common  stock   immediately  prior  to
liquidation,  or (ii) the stated value of $100.00 per share,  plus  declared but
unpaid dividends.

Exercise of outstanding  options and warrants will dilute existing  stockholders
and could decrease the market price of our common stock.


                                       17



         As of  December  31,  2004,  we had issued and  outstanding  25,764,868
shares of our common stock, shares of Series A, B, D, E, F and G preferred stock
convertible into 1,825,743  shares of common stock, and outstanding  options and
warrants to purchase 8,365,444  additional shares of common stock. The existence
of the outstanding  preferred shares,  options and warrants may adversely affect
the market  price of our common  stock and the terms under which we could obtain
additional  equity  capital.  Included in the  outstanding  options is 1,000,000
options issued to John Y. Yoon, our President and Chief Executive Officer, under
the terms of his employment  agreement with us. These options are exercisable at
$.13 per  share and vest in 36 equal  monthly  installments  of  27,778  shares,
beginning on April 30, 2004 until such shares are fully vested.

We do not expect to pay any cash dividends in the foreseeable future.

         We issued a stock dividend on our Series A preferred stock and Series B
preferred stock on January 8, 1996, to stockholders of record as of December 31,
1994. We have not paid any cash dividends on our common shares and do not expect
to declare or pay any cash or other dividends in the foreseeable  future so that
we may reinvest  earnings,  if any, into the  development  of the business.  The
holders of our Series A  preferred  stock,  Series B preferred  stock,  Series C
preferred stock,  Series D preferred stock,  Series E preferred stock,  Series F
preferred stock and Series G preferred stock are entitled to non-cumulative cash
dividends paid out of surplus earnings.

We may have  continuing  liability  following  our  rescission  offer in 1996 to
Series B preferred shareholders.

         We issued 493,000 shares of Series B preferred  stock in 1994 and 1995.
The Series B shares may not have been sold in compliance with certain aspects of
California  corporate law and federal and state  securities  laws.  Concurrently
with our July 1996 public offering, we provided the Series B shareholders with a
rescission  offer to  repurchase  all Series B  preferred  shares or  rescission
shares  owned by the  Series B  shareholders.  The  Series B  shareholders  were
offered the right to rescind  their  purchases and receive a refund of the price
paid by them of $4.00 per share plus an amount equal to the interest  thereon at
rates ranging from 6% to 12% per annum from the date the rescission  shares were
purchased  to July 25,  1996,  the  date our  public  offering  closed  and each
rescinding  shareholder was paid by us. The original purchasers of approximately
93% of the Series B shares  (460,250  shares)  rejected the rescission  offer by
responding  as  requested  in the  rescission  offer or by  failing  to return a
response  within 30 days of receiving the  rescission  offer.  Two  shareholders
owning a combined  total of 32,750  shares  accepted the  rescission  offer.  We
purchased the 32,750 shares from the two  shareholders  accepting the rescission
offer from the proceeds from our public offering.

         The  rescission  offer was  designed  to reduce any type of  contingent
liability  we may be subject to in  connection  with its  private  placement  of
Series B  preferred  stock.  However,  the  rescission  offer may not have fully
relieved  us from  exposure  to  contingent  liability  under  federal  or state
securities laws. Not every state statutorily  provides for voluntary  rescission
offers. In addition,  other states,  although authorizing  rescission offers, do
not completely limit the liability of the offeror.  Thus, we may have continuing
liability in certain  states  following  the  rescission  offer.  Other than the
payments in 1996 to the two shareholders accepting the rescission offer, we have
made no additional  payments  thereunto as no other shareholder has accepted the
rescission  offer.  Moreover,  there  has been no  litigation  by a  shareholder
involving  the private  offering of Series B preferred  stock or the  rescission
offer.  As of December 31, 2004, a total of 484,014 shares of Series B preferred
stock have been converted into 580,817 shares of common stock. There are a total
of 8,986 shares of Series B preferred  stock issued and  outstanding,  which are
convertible into 10,783 shares of common stock.

Because  we failed to hold an annual  shareholders  meeting  in fiscal  2003 and
fiscal 2004,  the Delaware  Court of Chancery may order an annual  meeting to be
held upon request by a shareholder.

         We did not hold an annual meeting of the  shareholders  for fiscal 2003
or fiscal 2004 in order to avoid the costs of such a meeting, including the cost
of  preparing  and mailing a proxy  statement  and annual  report to each of our
shareholders.  There  were no  actions  taken  in 2003 or 2004 by the  board  of
directors or our management that required shareholder  approval.  Under Delaware
law, we are required to hold an annual shareholders meeting each year. A failure
to hold an annual shareholders meeting does not affect otherwise valid corporate
acts or  work a  forfeiture  or  dissolution  of the  company.  Moreover,  under
Delaware law, directors continue to serve as directors despite lack of an annual
shareholders  meeting until the next annual shareholders meeting and until their
successors  have been  elected  and  qualified.  However,  if we fail to hold an
annual shareholders meeting for a period of 30 days after the date designated in
our bylaws for the annual  meeting,  the Delaware Court of Chancery may order an
annual meeting to be held upon the application of any of our shareholders. If an
annual  meeting is  ordered to be held by the court,  we would have to incur the
costs of holding the meeting,  including  the cost of preparing  and mailing the
proxy  statement  and annual report to each of our  shareholders.  We anticipate
holding an annual shareholders meeting in 2005.

We have indemnification  agreements with certain officers and directors that may
require us to indemnify them in a civil or criminal action.


                                       18



         Our certificate of  incorporation  eliminates in certain  circumstances
the  liability of directors for monetary  damages for breach of their  fiduciary
duty as directors. We have entered into indemnification  agreements with certain
directors and officers.  Each such  indemnification  agreement  provides that we
will indemnify the indemnitee against expenses,  including reasonable attorneys'
fees,  judgments,  penalties,  fines and amounts paid in settlement actually and
reasonably  incurred by him in connection  with any civil or criminal  action or
administrative  proceeding  arising  out of his  performance  of his duties as a
director or officer, other than an action instituted by the director or officer.
The indemnification  agreements will also require that we indemnify the director
or  other  party  thereto  in all  cases  to the  fullest  extent  permitted  by
applicable  law.  Each  indemnification  agreement  will permit the  director or
officer  that is party  thereto to bring suit to seek  recovery  of amounts  due
under the  indemnification  agreement and to recover the expenses of such a suit
if he or she is successful.

Our Board of Directors has the right to issue additional  shares of common stock
and to create a new  series of  preferred  stock that  could  dilute  holders of
common stock.

         Our board of directors has the inherent right under applicable Delaware
law, for whatever value the board deems  adequate,  to issue  additional  common
shares up to the limit of shares authorized by the certificate of incorporation,
and, upon such  issuance,  all holders of shares of common stock,  regardless of
when they are issued,  thereafter  generally rank equally in all aspects of that
class of stock,  regardless of when issued.  Our board of directors likewise has
the inherent  right,  limited only by applicable  Delaware law and provisions of
the Certificate of Incorporation to increase the number of preferred shares in a
series, to create a new series of preferred shares and to establish  preferences
and all other terms and conditions in regard to such  newly-created  series. Any
of those  actions  will dilute the holders of common  shares and also affect the
relative  position  of  the  holders  of  any  series  of  any  class.   Current
stockholders have no rights to prohibit such issuances nor inherent "preemptive"
rights to purchase any such stock when offered.

                                 USE OF PROCEEDS

         Holders of our  warrants  are not  obligated  to exercise  any of their
warrants  and holders of our options are not  obligated to exercise any of their
options.  The  closing  bid price of our common  shares on The  Nasdaq  SmallCap
Market was $.10 on January 6, 2005. Only 788,750 of our common shares underlying
the warrants and options are  exercisable for less than $2.00 per share and such
warrants  are  exerciseable  at $.25 per share.  As a  consequence,  most of the
outstanding  warrants  and  options  are not likely to be  exercised  unless the
trading  price  increases  substantially.  All other  shares of our common stock
being  registered are either  outstanding  or will be issued upon  conversion of
outstanding  preferred stock and we will derive no proceeds from the conversions
or subsequent resales of such shares.

         If there are any net proceeds from this offering, we will use these net
proceeds to fund working capital requirements.  In the event sufficient proceeds
are not  received,  our short term plan is to meet cash needs  through  external
financing  sources such as bank  financing,  a public offering of our securities
and  private  offerings  of debt  and/or  equity.  We expect  the cash flow from
operations to provide additional funds for us as operating revenues increase.

         The cost,  timing and the amount of funds  required for such uses by us
cannot be previously determined at this time and will be based upon, among other
things,   competitive  developments,   the  rate  of  our  progress  in  product
development,  and the  availability  of  alternative  methods of  financing.  In
addition,  our Board of Directors has broad  discretion in  determining  how the
proceeds of this offering will be allocated.

                                 DIVIDEND POLICY

         We have never paid any cash  dividends  on our common  stock and do not
anticipate  paying any cash  dividends  on our common  stock in the  foreseeable
future.  Dividends paid in cash pursuant to outstanding  shares of our Series A,
Series C, Series D,  Series E,  Series F and Series G  preferred  stock are only
payable  from our surplus  earnings and are  non-cumulative  and  therefore,  no
deficiencies  in dividend  payments from one year will be carried forward to the
next.  We  currently  intend  to retain  future  earnings,  if any,  to fund the
development and growth of our proposed  business and operations.  Any payment of
cash  dividends  in the future on the common  stock will be  dependent  upon our
financial  condition,  results  of  operations,  current  and  anticipated  cash
requirements,  plans  for  expansion,  restrictions,  if  any,  under  any  debt
obligations,  as well as  other  factors  that  our  board  of  directors  deems
relevant.



                                       19


                                 CAPITALIZATION

         The following table sets forth our capitalization on an actual basis as
of December 31, 2003 and September 30, 2004.




                                                                           December 31,          September 30,
                                                                                 2003               2004        
                                                                         ------------------      --------------
                                                                                                      
 Long-term obligations.................................................  $       61,000          $       22,000

 Stockholders' Equity:

     Series A Preferred Stock, $.001 par value per share;
     500,000 shares authorized, 5,627 issued and outstanding...........               -                       -

     Series B Preferred Stock, $.001 par value per share; 500,000
     shares authorized, 8,986 issued and outstanding...................               -                       -

     Series C Preferred Stock, $.001 par value per share;
      30,000 shares authorized, 0 issued and outstanding...............               -                       -

     Series D Preferred Stock, $.001 par value per share;
     1,140,000 shares authorized, 5,000 issued and outstanding.........               -                       -

     Series E Preferred Stock, $.001 par value per share;
     50,000 shares authorized, 1,000 issued and outstanding............               -                       -

     Series F Preferred Stock, $.001 par value per share; 50,000 shares
     authorized, 5,623.75 and 4,597 issued and
     outstanding, respectively.........................................               -                       -

     Series G Preferred Stock, $.001 par value per share;
     2,000,000 shares authorized, 1,981,560 issued and outstanding.....           2,000                   2,000

     Common Stock, $.001 par value per share; 80,000,000 shares authorized,
     24,991,432 and 25,509,868 issued and outstanding,
     respectively......................................................          25,000                  25,000

     Additional paid-in-capital, common stock..........................
                                                                             57,470,000              57,427,000
     Accumulated deficit...............................................
                                                                            (56,817,000)            (56,629,000)
 Total stockholders' equity ...........................................
                                                                                680,000                 825,000
 Total Capitalization..................................................
                                                                           $    741,000            $    847,000



            MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Our authorized  capital stock  consists of 80,000,000  shares of common
stock,  $.001par value per share, and 5,000,000 shares of preferred stock, $.001
par  value  per  share.  We have  created  seven  classes  of  preferred  stock,
designated  as Series A  preferred  stock,  Series B preferred  stock,  Series C
preferred stock , Series D preferred stock,  Series E preferred stock,  Series F
preferred stock and Series G preferred stock.

         Our common stock and Class A warrants  trade on the OTC Bulletin  Board
under the  respective  symbols of "PMED.OB"  and  "PMEDW.OB."  Prior to July 22,
1996,  there was no public  market for the common  stock.  From July 22, 1996 to
June 25, 2003,  our common stock and Class A warrants  were listed on the Nasdaq
SmallCap Market. Since June 25, 2003, our common stock and Class A warrants have
traded on the OTC Bulletin Board. As of January 6, 2005, the closing sale prices
of the  common  stock and  Class A  warrants  were  $0.10 per share and $.02 per
warrant,  respectively.  The  following are the high and low sale prices for the
common  stock and Class A warrants by quarter as reported by Nasdaq from January
1, 2000 to June 25, 2003 and by the OTC Bulletin Board since June 25, 2003.


                                       20







                                                            Common Stock          Class A Warrants
                                                             Price Range            Price Range   
          Period (Calendar Year)                          High         Low         High       Low
                                                          ----         ---         ----        ---
                                                                                    
 2000
    First Quarter..................................        14.50       6.88        6.50        2.63
    Second Quarter.................................        10.50       4.19        3.63        1.19
    Third Quarter..................................         6.19       3.38        2.00         .50
    Fourth Quarter.................................         4.94       1.31        1.25         .50
 
 2001
    First Quarter..................................         4.13       1.50        1.00         .19
    Second Quarter.................................         3.50       1.61         .74         .19
    Third Quarter..................................         2.75       1.86         .45         .16
    Fourth Quarter.................................         3.08       1.94         .39         .17

 2002
    First Quarter..................................         3.31       2.21         .38         .19
    Second Quarter.................................         1.91        .60         .32         .05
    Third Quarter..................................         1.50        .16         .20         .08
    Fourth Quarter.................................          .30        .13         .10         .01

 2003
    First Quarter..................................          .42        .14         .12         .01
    Second Quarter.................................          .74        .14         .44         .01
    Third Quarter..................................          .42        .18         .18         .01
    Fourth Quarter ................................          .24        .15         .10         .02

 2004
    First Quarter .................................          .21        .15         .05         .02
    Second Quarter ................................          .16        .07         .05         .03
    Third Quarter .................................          .12        .09         .03         .02
    Fourth Quarter ................................          .12        .08         .02         .02

 2005
    First Quarter (through January 6, 2004)........          .10        .08         .02         .02


         Our  Series A  preferred  stock,  Series B  preferred  stock,  Series C
preferred stock,  Series D preferred stock,  Series E preferred stock,  Series F
preferred  stock and Series G preferred  stock are not  publicly  traded.  As of
November 30, 2004,  there were 717 record  holders of common  stock,  six record
holders of Series A preferred  stock,  four record holders of Series B preferred
stock,  no record  holders of Series C  preferred  stock,  one record  holder of
Series D preferred  stock,  14 record  holders of Series E preferred  stock,  52
record holders of Series F preferred  stock,  and two record holders of Series G
preferred stock.

         We have never paid any cash  dividends on our common stock and does not
anticipate  paying any cash  dividends  on our common  stock in the  foreseeable
future. We must pay cash dividends to holders of our Series A preferred,  Series
B preferred,  Series C preferred,  Series D preferred stock, Series E preferred,
Series F preferred stock and Series G preferred stock before it can pay any cash
dividend  to holders of our common  stock.  Dividends  paid in cash  pursuant to
outstanding  shares of our Series A,  Series B,  Series C,  Series D,  Series E,
Series  F and  Series  G  preferred  stock  are only  payable  from our  surplus
earnings,  and are  non-cumulative  and therefore,  no  deficiencies in dividend
payments from one year will be carried forward to the next.

         We  currently  intend to retain  future  earnings,  if any, to fund the
development and growth of our proposed  business and operations.  Any payment of
cash  dividends  in the future on the common  stock will be  dependent  upon our
financial  condition,  results  of  operations,  current  and  anticipated  cash
requirements,  plans  for  expansion,  restrictions,  if  any,  under  any  debt
obligations,  as well as  other  factors  that  our  board  of  directors  deems
relevant.  We issued 6,764 shares of our Series A preferred  and 6,017 shares of
our Series B  preferred  on January 8, 1996 as a stock  dividend to Series A and
Series B preferred shareholders of record as of December 31, 1994.


                                       21



                             SELECTED FINANCIAL DATA

         The  following  table sets forth our  selected  financial  data for the
years ended December 31, 2002 and 2003, and the nine months ended  September 30,
2003  and  2004.  The  selected  financial  data as of and for the  years  ended
December 31, 2002 and 2003 are derived from our financial statements, which have
been audited by Tanner & Co. The selected  financial data as of and for the nine
months  ended  September  30,  2003  and  2004 are  derived  from our  unaudited
quarterly financial  statements.  The following financial  information should be
read in conjunction with the Financial Statements, and related notes thereto.




                                                 For the year ended          For the nine months ended
                                                   December 31,                   September 30,

 Statement of Operations Data:                   2002           2003            2003            2004
 -----------------------------                   ----           ----            ----            ----
                                                                                         
 Net Sales...............................      $5,368,000      $3,059,000     $2,225,000       $2,288,000
 Net cost of sales........................      4,210,000       2,086,000      1,237,000          859,000
 Operating expenses.......................     12,277,000       4,549,000      3,526,000        1,793,000
 Operating loss...........................    (11,119,000)     (3,576,000)    (2,538,000)        (364,000)
 Other income (expense)...................        (36,000)        415,000       (233,000)         552,000
 Net income (loss)........................    (11,155,000)     (3,161,000)    (2,305,000)         188,000
 Net income (loss) applicable to common        
     shareholders.........................    (11,155,000)     (3,431,000)    (2,305,000)         145,000
 Net income (loss) per common share.......          $(.63)          $(.14)         $(.10)            $.01
 Shares used in computing net loss per share   17,736,000      24,058,000     22,795,000       25,373,000
                                                    
                                               





                                                            As of                  As of               As of
 Balance Sheet Data:                                  December 31, 2002    December 31, 2003   September 30, 2004
 ------------------                                   -----------------    -----------------   --------------------
                                                                                              
                                                                                                    
 Current assets....................................           $3,868,000           $1,984,000          $1,772,000
 Current liabilities...............................            2,362,000            2,181,000           1,739,000
  Working capital (deficit).........................           1,506,000             (197,000)             33,000
 Total assets......................................            5,289,000            2,922,000           2,586,000
 Accumulated deficit...............................          (53,656,000)         (56,817,000)        (56,629,000)
 Stockholder's equity .............................            2,847,000              680,000             825,000



                           MANAGEMENT'S DISCUSSION AND
                          ANALYSIS OR PLAN OF OPERATION

         This  report  contains   forward-looking   statements  and  information
relating  to us that is based on beliefs of  management  as well as  assumptions
made by, and information  currently  available to management.  These  statements
reflect  its current  view  respecting  future  events and are subject to risks,
uncertainties  and  assumptions,  including  the risks and  uncertainties  noted
throughout  the  document.  Although we have  attempted  to  identify  important
factors that could cause the actual results to differ  materially,  there may be
other  factors  that cause the  forward-looking  statements  not to come true as
anticipated,  believed,  projected,  expected or intended. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect,  actual results may differ  materially from those described herein as
anticipated, believed, projected, estimated, expected or intended.

Critical Accounting Policies

         Revenue  Recognition.  We recognize  revenue in  compliance  with Staff
Accounting Bulletin 101, Revenue Recognition in Financial  Statements (SAB 101),
as revised by Staff Accounting  Bulletin No. 104, Revenue Recognition (SAB 104).
SAB 101 and SAB 104  detail  four  criteria  that must exist  before  revenue is
recognized:

         1. Persuasive  evidence of an arrangement  exits.  Prior to shipment of
product, we require a signed purchase order and, depending upon the customer,  a
down  payment  toward the final  invoiced  price or full payment in advance with
certain international product distributors.

         2. Delivery and  performance  have occurred.  Unless the purchase order
requires specific installation or customer acceptance, we recognize revenue when
the product  ships.  If the purchase  order requires  specific  installation  or
customer  acceptance,  we recognize revenue when such installation or acceptance
has occurred.  Title to the product passes to the customer upon  shipment.  This
revenue  recognition  policy does not differ among the various different product
lines. We guarantee the  functionality  of its product.  If our product does not


                                       22



function as marketed when received by the customer, we either make the necessary
repairs on site or have the product  shipped to us for the repair work. Once the
product has been  repaired and retested for  functionality,  it is re-shipped to
the customer.  We provide warranties that generally extend for one year from the
date of sale. Such warranties  cover the necessary parts and labor to repair the
product  as well as any  shipping  costs  that may be  required.  We  maintain a
reserve for estimated  warranty  costs based on its  historical  experience  and
management's current expectations.

         3.  The  sales  price  is fixed or  determinable.  The  purchase  order
received  from the customer  includes  the  agreed-upon  sales price.  We do not
accept customer orders, and therefore do not recognize revenue,  until the sales
price is fixed.

         4.  Collectibility is reasonably assured.  With limited exceptions,  we
require down  payments on product prior to shipment.  In some cases,  we require
payment  in full  prior  to  shipment.  We also  perform  credit  checks  on new
customers  and  ongoing  credit  checks on  existing  customers.  We maintain an
allowance for doubtful  accounts  receivable based on historical  experience and
management's current expectations.

         Recoverability  of Inventory.  Since our  inception,  we have purchased
several complete lines of inventory.  In some circumstances we have been able to
utilize certain items acquired and others remain unused.  On a quarterly  basis,
we attempt to identify inventory items that have shown relatively no movement or
very slow  movement.  Generally,  if an item has shown little or no movement for
over a year, it is determined not to be recoverable and a reserve is established
for that item. In addition,  if we identify  products that have become  obsolete
due to product  upgrades  or  enhancements,  a reserve is  established  for such
products.  We  intend  to make  efforts  to sell  these  items at  significantly
discounted  prices.  If items are sold,  the cash received  would be recorded as
revenue,  but there  would be no cost of sales on such items due to the  reserve
that has been recorded.  At the time of sale, the inventory would be reduced for
the item sold and the corresponding inventory reserve would also be reduced.

         Recoverability of Goodwill and Other Intangible  Assets. Our intangible
assets  consist of goodwill,  product and  technology  rights,  engineering  and
design costs, and patent costs. Intangibles with a determined life are amortized
on a  straight-line  basis  over  their  determined  useful  life  and are  also
evaluated for potential impairment if events or circumstances  indicate that the
carrying amount may not be  recoverable.  Intangibles  with an indefinite  life,
such as goodwill,  are not amortized but are tested for  impairment on an annual
basis or when events and circumstances  indicate that the asset may be impaired.
Impairment  tests include  comparing the fair value of a reporting unit with its
carrying net book value,  including goodwill.  To date, our determination of the
fair value of the  reporting  unit has been based on the  estimated  future cash
flows of that reporting unit.

         Allowance  for Doubtful  Accounts.  We record an allowance for doubtful
accounts to offset estimated uncollectible accounts receivable. Bad debt expense
associated with the increases in the allowance for doubtful accounts is recorded
as part of general and administrative  expense.  Our accounting policy generally
is to record an allowance for receivables  over 90 days past due unless there is
significant evidence to support that the receivable is collectible.

General

         The  following  Management's   Discussion  and  Analysis  of  Financial
Condition and Results of Operations,  contains forward-looking statements, which
involve risks and uncertainty.  Our actual results could differ  materially from
those  anticipated  in these  forward-looking  statements as a result of certain
factors  discussed  in this  section.  Our fiscal year is from January 1 through
December 31.

         We are engaged in the design, development, manufacture and sale of high
technology diagnostic and surgical eye care products.  Given the "going concern"
status of Paradigm Medical, management has focused efforts on those products and
activities  that will,  in its  opinion,  achieve  the most  resource  efficient
short-term  cash flow. As seen in the results for the fiscal year ended December
31, 2003 and the nine months ended September 30, 2004,  diagnostic products have
been the  major  focus  and the  Photon(TM)  and other  extensive  research  and
development  projects have been put on hold pending future  evaluation  when our
financial position improves. We do not focus on a specific diagnostic product or
products but,  instead,  on this entire  diagnostic  product  group.  During the
fiscal year ended December 31, 2003,  management made certain adjustments to the
financial  statements,  including  a decrease  in the  reserve  for  obsolete or
estimated  non-recoverable  inventory of $484,000,  consisting of an increase in
the reserve of $403,000  offset by a decrease of $887,000 due to the sale of the
SIStem(TM) and Odyssey(TM)  product lines,  which were fully  reserved.  We also
recorded a net increase in the  allowance  for doubtful  accounts  receivable of
$123,000,  impairment of intangibles  of $150,000,  and increases in accruals to
settle  outstanding  disputes  in the amount of  $443,000.  Although  management
believes  these  adjustments  are  sufficient,  it will  continue to monitor and
evaluate our financial position and the recoverability of our assets.


                                       23



         Our ultrasound  diagnostic products include a P55 pachymetric analyzer,
a P37 Ultrasound A/B Scan, a P40 UBM Ultrasound Biomicroscope and a P45 Plus UBM
Biomicroscope,  the technology  for which was acquired from Humphrey  Systems in
1998. We  introduced  the P45 Plus in the fall of 2000,  which  combines the A/B
Scan, and the Biomicroscope into one machine.  In addition,  we market our Blood
Flow  Analyzer(TM)  acquired in the  purchase of Ocular  Blood Flow Ltd. in June
2000. Other diagnostic  products are the Dicon(TM) LD 400 Auto Perimeter and the
Dicon (TM) CT 200 Corneal Topographer, which were acquired in the acquisition of
Vismed  d/b/a  Dicon in June  2000.  We  purchased  the  inventory,  design  and
production  rights of the  SIStem(TM) , the  Odyssey(TM)  and the Surgetrol from
Mentor  Corporation  in October 1999,  which were designed to perform  minimally
invasive  cataract  surgery.  In November 1999, we entered into a Mutual Release
and   Settlement   Agreement   with  the   manufacturer   of  the   Precisionist
ThirtyThousand(TM)  in which we purchased the raw  materials and finished  goods
inventory to bring the manufacturing of this product in-house. During the fourth
quarter of 2003, we sold all inventory and rights associated with the SIStem(TM)
and the Odyssey(TM) for $125,000. This transaction resulted in sales of $125,000
with $0 cost of sales because a reserve for obsolete inventory had been recorded
on all SIStem(TM) and Odyssey(TM) inventory.

         Because of the "going  concern"  status of the company,  management has
focused  efforts on those  products and  activities  that will,  in its opinion,
achieve the most  resource  efficient  short-term  cash flow to the company.  As
reflected  in the results for the fiscal  year ended  December  31, 2003 and the
nine months ended  September  30, 2004,  diagnostic  products are  currently our
major focus and the  Photon(TM)  and other  extensive  research and  development
projects  have been put on hold pending  future  evaluation  when the  financial
position of the company improves. Due to the lack of current evidence to support
recoverability,  we have  recorded an inventory  reserve to offset the inventory
associated with the Photon(TM) and the Precisionist  Thirty Thousand(TM) as well
as certain other inventory items that are estimated to be non-recoverable due to
the lack of  significant  turnover  of such items in recent  periods.  We do not
focus on a specific  diagnostic product or products but, instead, on this entire
product group.

         We have shown improvement in our manufacturing efficiencies, as well as
the timeliness and the quality of our services to our customers.  For example, a
great deal of the improvement is  attributable  to reforms in operations,  which
enabled dramatically  improved availability of product and decreased lead times.
Additional  reorganization of services enabled  substantially reduced wait times
and reserve  requirements.  Specifically,  during the second quarter of 2004, we
were able to record an  increase  in  income of  approximately  $300,000  from a
reduction in warranty  reserves.  This reduction was a result of a comprehensive
analysis by management  regarding  historical warranty costs.  Historically,  we
have recorded a monthly  warranty  expense and related  increase to the warranty
accrual;  however,  in recent  periods  the usage of the  warranty  accrual  has
continued to decline.  After reviewing the recent historical data, we determined
that the warranty accrual should be reduced by approximately  $300,000.  We will
continue to closely monitor the warranty accrual usage to ensure that the proper
amount has been accrued.

         Activities  for the twelve months ended  December 31, 2003 and 2002 and
the nine months ended  September  30, 2004,  included  sales of our products and
related accessories and disposable products.  In March 2003, the Company named a
new  president  and chief  executive  officer,  Jeffrey F. Poore.  Mr. Poore was
subsequently  replaced by John Y. Yoon as President and Chief Executive  Officer
on March  18,  2004.  The  Company  named a new  vice  president  of  sales  and
marketing,  Ray  Cannefax,  during  the first  quarter  of 2003,  and a new vice
president of finance and chief financial  officer,  Gregory C. Hill,  during the
second quarter of 2003. Mr. Hill resigned as vice president of finance and chief
financial officer on December 5, 2003.

         On May 7, 2002,  we received a letter from the FDA  requesting  further
clinical  information  regarding  the  Photon(TM).  We  are in  the  process  of
generating the  additional  clinical  information in response to the letter.  We
cannot market or sell the  Photon(TM) in the United States until FDA approval is
granted. On November 4, 2002, we received FDA approval for expanded  indications
of use of the Blood Flow  Analyzer(TM) for pulsatile  ocular blood flow,  volume
and  pulsatility  equivalence  index.  Also,  we are  continuing  our efforts to
educate the payers of Medicare  claims  throughout  the country  about the Blood
Flow  Analyzer(TM),  its purposes and the  significance  of our  performance  in
patient care in order to achieve reimbursements to the providers.  These efforts
should lead to a more positive effect on sales.

         In April 2001, we received written authorization from the CPT Editorial
Research and Development Department of the American Medical Association to use a
common  procedure  terminology  or CPT code  number  92120  for our  Blood  Flow
Analyzer(TM),  for reimbursement purposes for doctors using the device. However,
certain  insurance payers have elected not to reimburse  doctors using the Blood
Flow Analyzer(TM). We believe the reasons why insurance payors initially elected
not to reimburse  doctors using the CPT code were the relatively  high volume of
claims that began to be submitted  under CPT code number  92120  compared to the
limited  volume of claims  previously  submitted  under this code,  and the time
consumed  by the Blood  Flow  Analyzer(TM)  test,  which  some  payors  may have
believed was less than what is allowed under CPT code number  92120.  This trend
began shortly after insurance payors were presented with reimbursement  requests
under this code,  and we believe these reasons were the basis for the initiation
of non-payment.

         The  impact  of  this  nonpayment  by  certain  payors  on  our  future
operations  is a lower  volume  of sales,  particularly  in those  states  where
reimbursement  is  not  yet  approved  or  is  delayed.   Currently,   there  is
reimbursement by insurance payors in 22 states and partial reimbursement in four
other  states.  As  insurance  payors  have the  prerogative  whether to provide


                                       24



reimbursement to doctors using the Blood Flow Analyzer(TM), we are continuing to
work with insurance  payors in states where there is no reimbursement to doctors
using the CPT code to demonstrate  the value of the  instrument.  However,  some
insurance  payors are currently not providing  reimbursement  to doctors where a
regional or state  administrator of Medicare has elected not to provide Medicare
coverage for the Blood Flow  Analyzer(TM).  We are  continuing  to work with the
regional and state  administrators of Medicare who have denied Medicare coverage
for the Blood Flow Analyzer(TM) to demonstrate the value of the instrument.

         There were a number of factors  that  contributed  to the  decrease  in
sales of the Blood Flow  Analyzer (TM) and other  products.  September 11, 2001,
the ensuing Afghanistan  conflict,  and the Iraq war had a significant impact on
our international sales. The U.S.  recessionary  economic trend has impacted our
domestic sales.  Additionally,  we restructured our sales organization and sales
channels by decreasing  our direct sales force who are full-time  employees from
10 direct  domestic  sales  representatives  on January 1, 2003,  to five direct
sales  employees  on December 31, 2003.  As of September  30, 2004,  we had four
direct  domestic sales  representatives.  The dependent  sales force was reduced
because we do not have  sufficient  revenues to justify the larger  direct sales
force.  One of the  challenges  for fiscal  2004 and 2005 will be the  judicious
reconstruction  of the sales force in  anticipation  of increased  sales. We are
projecting an increase in revenues in 2004;  however,  there can be no assurance
that such increase will occur. We are anticipating increased sales through three
key  activities.  First,  we plan to  increase  the number of our  direct  sales
contacts.  In our second quarter one full-time direct sales  representative  was
added in Seattle,  Washington to serve the Pacific Northwest market. Late in the
second quarter we added another direct sales representative in Atlanta, Georgia.

         Second,  we will resume  marketing  campaigns  with the  development of
advertising  in the third  quarter for  placement in key industry  publications.
Additionally  we will begin  marketing via direct mail and telephone for feature
enhancements and service contracts.

         Third, we plan to release new products and services.  Specifically,  at
the end of the second quarter,  an improved  version of the  auto-perimeter  was
introduced as well as revenue-generating  software upgrades to the existing base
of  auto-perimeter  customers.  Additional new products and  partnerships are in
development.

         As  of  September  30,  2004,  we  had  four  direct   domestic   sales
representatives  in the United States, two of whom have been recently hired, and
28 ophthalmic and medical  product  distributors  outside the United States.  We
hope to benefit  from these two  recently  hired  sales  representatives  in the
United States as they gain  familiarity,  through  training,  of our  diagnostic
products.  Due to concerns over the budget and the effectiveness of trade shows,
we  exhibited  at only three trade shows  during 2003 and one trade show through
September 30, 2004. We monitor trade show  attendance to determine the extent to
which we will exhibit at future trade shows.

         In April 2002,  we announced  the closure of our San Diego  facility in
anticipation of the  termination of the lease for that location.  The operations
were  transferred  to the Salt Lake City  facility.  We incurred a reduction  of
force of 28 San Diego personnel.  The  consolidation  was intended to save costs
and to eliminate  duplicities in functions and facilities that occurred with the
acquisition of Dicon. The cost of the consolidation was approximately $80,000.

         In January 2002, we purchased  certain assets and lease  obligations of
Innovative  Optics,  Inc. by issuing an  aggregate  of  1,272,825  shares of our
common stock (636,412  shares are held in escrow pending the result of a project
to reduce the cost of the disposable razor blades utilized by the microkeratome,
which was acquired in the  transaction),  warrants to purchase 250,000 shares of
our common  stock at $5.00 per share,  exercisable  over a period of three years
from the closing date, and $100,000 in cash. The  transaction  was accounted for
as a purchase in accordance with Statement of Financial Accounting Standards No.
141.

         We acquired from Innovative  Optics the raw materials,  work-in-process
and finished goods inventories.  Additionally, it acquired the patents and trade
name  associated  with the product,  the  furniture  and equipment of Innovative
Optics used in the manufacturing  process of the  microkeratome  console and the
inspection  and  packaging of the  disposable  blades.  We  subsequently  issued
477,039  shares of common stock that were held in escrow at a value of $630,000,
based on the market  price of such shares on the date of  issuance.  This amount
was charged to in-process  research and development because the issuance of such
shares related to the continuing  research and development of the  microkeratome
blades.

         We were  unsuccessful  in  reducing  the costs of the blade  production
process and were unable to supply  blades to the user base.  We  terminated  our
marketing and sales efforts for the microkeratome, but we continue to search for
an  alternative  source  of  blades.  Because  we  determined  that we could not
manufacture  the blades to support our customer base at an  economical  cost, in
accordance with Statement of Financial  Accounting Standards No. 142, due to the
lack of  projected  future  cash flows,  during  2002 we recorded an  impairment
expense of $2,082,000 for the remaining book value of property and equipment and
intangible assets purchased from Innovative Optics. In addition,  we recorded an
inventory reserve for the remaining  inventory  purchased from Innovative Optics
of approximately $160,000.

                                       25



         On September 19, 2002, we completed a  transaction  with  International
Bio-Immune Systems, Inc., a Delaware corporation, in which we acquired 2,663,254
of its shares,  or 19.9% of its  outstanding  shares,  and  warrants to purchase
1,200,000  shares  of its  common  stock at $2.50  per share for a period of two
years,  through the exchange and issuance of 736,945 shares of our common stock,
the  lending  of  300,000  shares of our common  stock to the  company,  and the
payment of certain of its  expenses  through  the  issuance of an  aggregate  of
94,000  shares of our common stock to the company and its counsel.  The issuance
of 736,945  shares were valued  based on the market price of our common stock on
the date of the  transaction  and  resulted in an  investment  in  International
Bio-Immune  Systems,  when  combined  with a cash  investment of $65,000 made in
2000,  of $879,000.  The 300,000  shares were also valued at the market price on
the date of issuance and were  recorded as a stock  subscription  receivable  of
$294,000 because such shares will either be paid for or returned in the future.

         International  Bio-Immune  Systems is a  privately  held  biotechnology
based, cancer diagnostic and immunotherapy  company,  located in Great Neck, New
York, with potential clinically effective products for the diagnosis,  treatment
and imaging of  patients  with major tumor  types  (e.g.  colon,  lung,  cervix,
pancreas  and  breast).   International  Bio-Immune  Systems  does  not  produce
significant revenues as its products have not received FDA approval.  Due to the
uncertainty  of future cash flows and the fact that the FDA has not approved the
products, we were unable to support the value of the investment by substantiated
methods and  determined  that the  likelihood of recovery of our  investment was
remote.  Therefore, in accordance with generally accepted accounting principles,
the investment of $879,000 was charged to impairment expense in 2002.

         On August 3, 2004, we sold our investment in  International  Bio-Immune
Systems,  Inc. for $533,000 pursuant to a stock purchase and sale agreement with
William Ungar, a current  director and shareholder of  International  Bio-Immune
Systems.  The securities sold to Mr. Ungar consisted of 2,663,254  common shares
of International  Bio-Immune  Systems and warrants to purchase  1,200,000 common
shares of International Bio-Immune Systems at $2.50 per share. Because, for book
purposes,  our investment in International  Bio-Immune Systems, had been reduced
to  $0,  the  full  amount  of  the  $533,000  received  from  the  sale  of the
International  Bio-Immune Systems common shares and warrants will be reported as
a gain in the quarter ended September 30, 2004.

         The tragic events of September 11, 2001, the  Afghanistan  conflict and
the Iraq war  combined  with a  recessionary  trend  in the  economy  have had a
negative  effect on our  sales.  International  attendance  at the  trade  shows
following  September 11, 2001, and through 2003 were down markedly.  The absence
of these  professionals  eliminates many opportunities for us to demonstrate and
sell our products to this sector. It is difficult to quantify how much an effect
that these  events  have had on us, but we believe  that we have  suffered  some
negative  impact due to September 11, 2001, the Afghanistan  conflict,  the Iraq
war and the  downturn  in the  economy in  general,  which may  continue  for an
indefinite period of time.

Results of Operations

         Nine Months Ended  September  30,  2004,  Compared to Nine Months Ended
September 30, 2003

         Net sales  increased  by  $63,000,  or 3%, to  $2,288,000  for the nine
months ended September 30, 2004,  from  $2,225,000 for the comparable  period in
2003.  Our  diagnostic  products  sales  increased  by  $336,000,   or  19%,  to
$2,085,000,  or 91% of revenues,  during the first nine months of 2004  compared
with $1,750,000, or 79% of total revenues, for the comparable period of 2003.

         In the  first  nine  months  of  2004,  sales  of our  P40  and P45 UBM
Ultrasound  Biomicroscopes were $639,000, or 28% of total revenues,  compared to
$421,000,  or 19% of total revenues,  in the same period of 2003. Sales from the
Blood Flow  Analyzer(TM)  increased  by  $178,000 to  $475,000,  or 21% of total
revenues,  during the first two quarters of 2004 compared with $297,000,  or 13%
of total revenues, in the same period of last year.

         During the first nine  months of 2004,  sales from P37 A/B Scan  Ocular
Ultrasound Diagnostic increased to $229,000,  or 10% of total revenue,  slightly
up from the $222,000,  or 10% of total  revenues,  in the same period last year.
Sales  of the  LD  400  and  TKS  5000  Autoperimeters  and  the CT 200  Corneal
Topographer  were slightly  lower in the second  quarter,  with total revenue of
$741,000, or 32% of total revenues, in the first three quarters of 2004 compared
with $808,000, or 36% of total revenues, during the same period of 2003.

         Sales of surgical products are at a standstill  pending FDA approval of
the Photon(TM)  laser system.  In the nine month period ended September 30 2004,
we  realized  a  loss  of  $3,000  in  the  surgical  line   consisting  of  the
Precissionist  Thirty  Thousand  (TM)  and the  Photon(TM)  laser  system.  This
compared to $94,000, for the comparable period of 2003.

         Gross profit for the nine months ended  September 30, 2004 increased by
18% to 62% of total revenues,  compared to 44% of total  revenues,  for the same
period in 2003.  The  increase  was mainly due to an increase in the reserve for
inventory  obsolescence of $382,000 in the nine months ended September 30, 2003.
There was a decrease of $226,000  in the  reserve  during the nine months  ended

                                       26



September  30,  2004;  however  this  decrease  was the result of a write-off of
inventory  directly  against the  reserve.  The  $382,000  increase in inventory
reserve in 2003  resulted in an increase to cost of sales  whereas the  $226,000
reduction in 2004 resulted in a corresponding reduction to inventory and did not
have any effect on the statement of operations.

         Marketing  and  selling  expenses  decreased  by  $164,000,  or 30%, to
$547,000 for the nine months ended  September  30, 2004,  from  $711,000 for the
comparable  period in 2003.  This  reduction was due primarily to more effective
use  of  marketing  programs.   During  this  period  two  additional  full-time
salespersons were added, a print advertising campaign initiated,  and plans were
made to support a major trade show in the fourth quarter of 2004.

         General and administrative expenses decreased by $1,164,000, or 62%, to
$703,000 for the nine months ended  September 30, 2004,  from $1,867,000 for the
same period in 2003.  The  favorable  reduction  in general  and  administrative
expense in 2004 also  reflected the ongoing  results of the Company's new budget
management and cost  reduction  programs.  In addition,  during the period ended
September  30,  2004,  we  recorded  a  reduction  in the  warranty  accrual  of
approximately  $308,000. This reduction was a result of a comprehensive analysis
by management regarding historical warranty costs. Historically we have recorded
a monthly warranty expense and related increase to the warranty accrual, however
in recent  periods the usage of the warranty  accrual has  continued to decline.
After  reviewing the recent  historical  data,  management  determined  that the
warranty  accrual should be reduced by approximately  $308,000.  Management will
continue to closely monitor the warranty accrual usage to ensure that the proper
amount has been accrued. The general and administrative expenses during the nine
months ended  September  30, 2003 also  included  $443,000 in accruals to settle
outstanding  disputes and $83,000 for additional allowance for doubtful accounts
receivable.

         Research,  development and service expenses  decreased by $246,000,  or
45%, to $543,000 for the nine months ended September 30, 2004, from $789,000 for
the same  period  in 2003.  Expenses  associated  with  the  development  of new
products  during the first nine  months of 2004  decreased  compared to the same
period in 2003, as a result of our cost reduction program.

         There was no impairment  of assets for the nine months ended  September
30,  2004,  compared to $159,000 in  impairment  of assets  recorded in the same
period of 2003.

         Other income  mainly  consists of a gain  recorded from the sale of our
investment in International  Bioimmune  Systems,  Inc. In July 2004, we sold our
investment in  International  Bioimmune  Systems,  Inc. (IBS) for $532,000 cash.
Because, for book purposes, our investment in IBS had previously been reduced to
$0, the full amount of  $532,000  was  recorded  as a gain in the quarter  ended
September 30, 2004.

         Fiscal  Year Ended  December  31,  2003,  Compared to Fiscal Year Ended
December 31, 2002

         Net sales decreased by $2,309,000, or 43%, to $3,059,000 for the twelve
months ended December 31, 2003,  from  $5,368,000  for the comparable  period in
2002. Sales of our diagnostic  products and related accessories were $2,484,000,
or 81% of total  revenues,  during  the  twelve  months  of 2003  compared  with
$4,015,000,  or 75% of total revenues,  for the comparable period of 2002. Sales
of surgical products and related accessories  totaled $324,000,  or 11% of total
revenues, for the twelve months of the current year in comparison with $556,000,
or 10%, of total revenues in the  comparable  period of 2002.  Surgical  product
sales for 2003 include the sale of the SIStem(TM) and Odyssey(TM)  product lines
for  $125,000  in  cash.  In  2003,  sales  of the P40  and  P45 UBM  Ultrasound
Biomicroscope and related  accessories were $615,000,  or 20% of total revenues,
compared to $1,303,000,  or 24% of total  revenues,  in the same period of 2002.
Sales from the Blood Flow  Analyzer(TM)  and related  accessories  decreased  by
$121,000 to $499,000,  or 16% of total revenues,  during the year ended December
31, 2003 compared with $620,000, or 12% of total revenues, in the same period of
last  year.  During  the twelve  months of 2003,  sales  from  other  ultrasound
products and related  accessories  totaled  $270,000,  or 9% of total  revenues,
compared with $606,000,  or 11% of total revenues, in the same period last year.
Sales of the perimeter and corneal topographer and related accessories generated
$1,100,000,  or 36% of total revenues, in 2003 compared with $1,487,000,  or 28%
of total revenues, during the same period of 2002.

         There  were a  number  of  material  reasons  that  contributed  to the
decrease in sales during the twelve months ended December 31, 2003,  compared to
the same period of 2002.  Along with generally  weak economic  conditions in the
United States, we initiated the restructuring of our management  structure,  our
sales  organization  and the development of new sales channels during the twelve
months  ended  December  31,  2003.  During the first three  months of 2003,  we
reduced our direct sales force from 10 representatives to five  representatives,
and  during  the   remainder  of  2003,   there  were  only  five  direct  sales
representatives   compared  to  10  direct  sales  representatives   during  the
comparable period of 2002.  International sales were impacted by weakness in the
economies of the large  industrial  countries and by the residual  impact of the
Afghanistan situation,  which had a negative impact on sales to the Middle East,
Pakistan, India and other countries in that region.


                                       27



         The decrease in sales of the P40 and P45 Plus Ultrasound  Biomicroscope
as well as other  products  was the direct  result of the  restructuring  of the
sales and marketing  organization.  With respect to the decrease in sales of the
Biomicroscope,  there has not been an  increase  in price,  competition  remains
similar  to what it has been  previously,  and  there  are no  other  particular
factors of which we are aware. This restructuring has significantly  reduced the
sales expenses and funds dedicated to marketing. In addition, the sales channels
have been altered to include  distributor and independent  sale  representatives
instead of relying  more on a direct sales  force.  Domestic  and  international
sales have also decreased as a result of the global  financial  markets declines
beginning in 2000 and the adverse impact of the events of September 11, 2001.

         Other  reasons  for  the  decrease  in  sales  were  the  uncertainties
resulting from our efforts to reduce costs and  constraints on  availability  of
funds that  reduced our ability to upgrade and enhance its  products  and pursue
further  regulatory  approvals for its  products.  Our objective is to focus our
sales  efforts on the products  with the highest  potential for sales and strong
margins.

         Gross  profit for the year  ended  December  31,  2003 was 32% of total
revenues,  compared to 22% for the same  period in 2002.  Cost of goods sold for
the year ended  December 31, 2003 was  $2,086,000 as compared to $4,210,000  for
the same period in 2002, a reduction of  $2,124,000.  Cost of goods sold for the
year ended December 31, 2003 included an increase in the reserve for obsolete or
estimated  non-recoverable  inventory of  $403,000.  Cost of goods sold for 2002
included an increase in the reserve for  obsolete or  estimated  non-recoverable
inventory of $1,755,000. Since its inception, we have purchased several complete
lines of inventory.  While our initial  intention was to utilize the substantial
majority of  inventory  acquired in the  manufacture  of our  products,  in some
circumstances we have been unable to utilize certain items acquired.

         On a quarterly basis, we attempt to identify  inventory items that have
shown  relatively no movement or very slow movement.  Generally,  if an item has
shown  little  or no  movement  for  over a  year,  it is  determined  not to be
recoverable  and a reserve is  established  for that item.  In  addition,  if we
identify  products  that  have  become  obsolete  due  to  product  upgrades  or
enhancements, a reserve is established for such products. Such analysis resulted
in material  increases in the reserve for obsolete or estimated  non-recoverable
inventory in 2003 and 2002.  There can be no assurance that we will not identify
further  obsolete  inventory  due to  significant  declines  in sales of certain
products or technological  advances of products in the future. We intend to make
efforts to sell these items at  significantly  discounted  prices.  If items are
sold, the cash received would be recorded as revenue, but there would be no cost
of sales on such items due to the reserve that has been recorded. At the time of
sale,  the  inventory  would be reduced for the item sold and the  corresponding
inventory  reserve  would also be  reduced.  We do not expect the sales of these
items to be  significant  in the future.  During  2003,  we sold all  inventory,
rights,  and  technology  related to the SIStem and  Odyssey  product  lines for
$125,000.  All of the inventory sold in this  transaction  had  previously  been
fully reserved.  Therefore,  upon the sale, we reduced inventory by $887,000 for
the original book value of the inventory,  reduced the reserve for $887,000, and
recorded revenue for the cash received of $125,000.

         Marketing  and selling  expenses  decreased by  $1,875,000,  or 67%, to
$920,000 in 2003, from $2,795,000 in 2002 due primarily to the lower  headcounts
of sales persons and travel related and associated sales expenses.

         General and administrative expenses decreased by $1,256,000, or 34%, to
$2,446,000  in 2003,  from  $3,702,000  in 2002,  reflecting  the results of our
efforts to reduce costs,  specifically  costs  associated  with  maintaining two
manufacturing facilities and consulting costs. As noted above, in April 2002, we
announced  the  closure  of  our  San  Diego  facility  in  anticipation  of the
termination of the lease for that location.  All operations  associated with the
San Diego facility were transferred to the Salt Lake City facility.  We incurred
a reduction of force of 28 San Diego personnel.  The  consolidation was intended
to save costs and to eliminate  duplicities  in functions  and  facilities  that
occurred  with the  acquisition  of  Dicon.  The cost of the  consolidation  was
approximately $80,000. We believe that the annual cost savings of the closure of
the San Diego facility are approximately $2 million. Administrative salaries and
wages decreased from approximately $786,000 in 2002 to approximately $321,000 in
2003.  Depreciation and  amortization  expense,  which includes  amortization of
leasehold improvements, decreased by approximately $305,000, or 49%, to $319,000
in 2003  compared  to the same period of last year.  General and  administrative
expenses for 2003 included  $123,000 for additions to the allowance for doubtful
accounts and increases in accruals of $443,000 to settle outstanding disputes.

         In addition,  general and administrative  expense for the twelve months
ended December 31, 2003,  included $259,000 for 1,562,000 shares of common stock
issued to settle potential litigation.  We issued 1,262,000 common shares to six
investors due to a dispute arising from a private offering that was completed on
January 22, 2003. We agreed to issue the shares to the investors in the offering
at $.25 per share rather than $.50 per share, the original offering price (or an
additional  1,262,000 shares) to resolve a dispute with the investors concerning
certain  statements made by a former officer in connection with the sale of said
shares.  The  additional  300,000  shares were  issued to settle an  outstanding
dispute with a consultant regarding services performed by such consultant.

         Research,  development and service expenses decreased by $1,786,000, or
63%, to $1,033,000 in 2003,  from  $2,819,000 in 2002.  This decrease was mainly
due to the issuance of common stock to Innovative  Optics in the fourth  quarter
of 2002,  which was valued at $630,000 and expensed as  in-process  research and

                                       28



development  costs.  Expenses  associated  with the  development of new products
during the twelve months of 2003  decreased  compared to the same period in 2002
as a  consequence  of our efforts to reduce costs and focus on products that are
fully developed and have the highest potential for sales and strong margins.

         Impairment  of assets was $150,000 in 2003,  compared to  $2,961,000 in
2002.  The  impairment  expense for 2003 was due to a reduction  in the value of
certain  intangible  assets based on their currently  estimated fair value.  The
impairment  expense for 2002 was due to an  evaluation  by us of our  intangible
assets,  namely  goodwill  and patents,  rights,  and trade name  acquired  from
Innovative  Optics,  resulting in a charge of  $1,949,000 as a write down of the
goodwill and other  intangibles.  The remaining  impairment charge of $1,012,000
was a result of the  write-off  of the  investment  in IBS of $879,000 and other
assets of $133,000.

         Due to our ongoing cash flow difficulties, during 2003 most vendors and
suppliers  were  contacted  with  attempts to  negotiate  reduced  payments  and
settlement  of  outstanding  accounts  payable.  While some  vendors  refused to
negotiate and demanded  payment in full, some vendors were willing to settle for
a reduced  amount.  The  accounts  payable  forgiven  by vendors  and  suppliers
resulted in a gain of $436,000.

         Other  income and  (expense)  increased  by  $15,000 to net  expense of
$21,000 in 2003,  from expense of $(36,000) for the same period in 2002.  During
2003,  interest  income was $3,000  compared with $10,000  during 2002. We had a
$22,000  reduction in interest  expense to $(24,000) in 2003,  from $(46,000) in
2002 due to a decrease in interest expense related to capital leases.

Liquidity and Capital Resources

         We used $440,000 cash in operating activities for the nine months ended
September 30, 2004, compared to $712,000 for the nine months ended September 30,
2003.  The  decrease in cash used by  operating  activities  for the nine months
ended September 30, 2004 was primarily  attributable to significant reduction in
net loss and a decrease in inventory,  partially offset by a decrease in accrued
expenses  and  deposits.  Our efforts to  substantially  reduce costs and manage
current  assets and current  liabilities  continued  to  minimize  cash used for
operating activities.  Net cash used in financing activities was $42,000 for the
nine months ended  September  30, 2004,  versus cash provided of $726,000 in the
same period in 2003. During the nine months ended September 30, 2004, we did not
sell any  shares of common  or  preferred  stock.  In the past,  we have  relied
heavily upon sales of our common and preferred stock to fund  operations.  There
can be no  assurance  that  such  equity  funding  will be  available  on  terms
acceptable to us in the future.

         We had working  capital of $33,000 as of  September  30,  2004.  In the
past,  we have relied  heavily upon sales of our common and  preferred  stock to
fund  operations.  There can be no  assurance  that such equity  funding will be
available  on terms  acceptable  to us in the future.  We will  continue to seek
funding  to  meet  our  working  capital  requirements   through   collaborative
arrangements and strategic  alliances,  additional  public offerings and private
placements of our  securities;  and bank  borrowings.  In July 2004, we sold our
investment in International  Bio-Immune Systems,  Inc. for $532,000 cash. We are
uncertain  whether or not the  combination of the cash received from the sale of
International  Bio-Immune Systems, Inc. stock and the benefits from sales of our
products will be sufficient to assure our operations  through March 31, 2005. We
will continue to seek funding through the sale of common and preferred stock.

         As of September  30, 2004,  we had net  operating  loss  carry-forwards
(NOLs) of  approximately  $36 million.  These  carry-forwards  are  available to
offset  future  taxable  income,  if any,  and have  begun to expire in 2001 and
extend for twenty  years.  Our ability to use net operating  loss  carryforwards
(NOLs) to offset future income is dependant upon certain limitations as a result
of the pooling transaction with Vismed and the tax laws in effect at the time of
the NOLs can be utilized.  The Tax Reform Act of 1986  significantly  limits the
annual  amount that can be  utilized  for  certain of these  carryforwards  as a
result of change of ownership.

         As of September  30,  2004,  we had  accounts  payable of  $653,000,  a
significant portion of which is over 90 days past due. We have contacted many of
the vendors or companies that have  significant  amounts of payables past due in
an  effort  to delay  payment,  renegotiate  a reduced  settlement  payment,  or
establish a longer-term  payment plan. While some companies have been willing to
renegotiate the outstanding amounts, others have demanded payment in full. Under
certain  conditions,  including but not limited to judgments rendered against us
in a court of law, a group of creditors  could force us into  bankruptcy  due to
our inability to pay the liabilities arising out of such judgments at that time.
In addition to the accounts  payable  noted above,  we also have  non-cancelable
capital lease  obligations  and  operating  lease  obligations  that require the
payment of approximately $172,000 in 2005, and $14,000 in 2006.

         We have taken  numerous  steps to reduce costs and  increase  operating
efficiencies. These steps consist of the following:


                                       29



         1.  We  closed  our  San  Diego   facility.   In  so  doing,   numerous
manufacturing,  accounting and management responsibilities were consolidated. In
addition,  such closure resulted in significant  headcount reductions as well as
savings in rent and other overhead costs.

         2. We have  significantly  reduced  the use of  consultants,  which has
resulted in a large decrease to these expenses.

         3. We have  reduced  our direct  sales  force to five  representatives,
which has resulted in less payroll, travel and other selling expenses.

         Because we have significantly fewer sales representatives,  our ability
to generate sales has been reduced.

         We have taken measures to reduce the amount of  uncollectible  accounts
receivable  such  as more  thorough  and  stringent  credit  approval,  improved
training and instruction by sales personnel,  and frequent direct  communication
with the  customer  subsequent  to  delivery of the system.  The  allowance  for
doubtful accounts was 37% of total  outstanding  receivables as of September 30,
2004 and 40% as of December 31, 2003.  The allowance  for doubtful  accounts has
decreased  from $470,000 at December 31, 2003 to $424,000 at September 30, 2004.
The downturn in the economy  worldwide  has resulted in increased  difficulty in
collecting certain accounts. Certain international dealers have some aged unpaid
invoices that have not been resolved.  We have  addressed our credit  procedures
and collection efforts and have instituted changes that require more payments at
the time of sale through letters of credit and not on a credit term basis.

         We intend to continue our efforts to reduce the  allowance for doubtful
accounts as a percentage  of accounts  receivable.  We have  ongoing  efforts to
collect a significant  portion of the sales price in advance of the sale or in a
timely manner after delivery.  The majority of the  receivables  included in the
allowance for doubtful  accounts are a result of sales before we implemented the
various changes to improve the  collectibility  of our  receivables.  During the
nine months  ended  September  30, 2004,  we had a net  recovery of  receivables
previously  allowed for of $46,000 and during the twelve  months ended  December
31, 2003, we added a net of $123,000 to the allowance for doubtful accounts.  We
believe that by requiring a large portion of payment  prior to shipment,  it has
greatly improved the collectibility of our receivables.

         We carried an  allowance  for  obsolete  or  estimated  non-recoverable
inventory of $1,416,000 at September  30, 2004,  or  approximately  65% of total
inventory, respectively. This inventory reserve was decreased by $226,000 during
the nine months ended September 30, 2004 due to  management's  evaluation of the
recoverability   of  certain   inventory  items.  Our  means  of  expansion  and
development of product has been largely from acquisition of businesses,  product
lines,  existing  inventory,  and the rights to specific products.  Through such
acquisitions, we have acquired substantial inventory, some of which the eventual
use and recoverability was uncertain.  In addition, we have a significant amount
of inventory  relating to the Photon(TM)  laser system,  which does not yet have
FDA approval in order to sell the product domestically. Therefore, the allowance
for inventory was established to reserve for these potential eventualities.

         On a quarterly basis, we attempt to identify  inventory items that have
shown  relatively no movement or very slow movement.  Generally,  if an item has
shown  little  or no  movement  for  over a  year,  it is  determined  not to be
recoverable  and a reserve is  established  for that item.  In  addition,  if we
identify  products  that  have  become  obsolete  due  to  product  upgrades  or
enhancements,  a reserve is  established  for such  products.  We intend to make
efforts to sell these items at  significantly  discounted  prices.  If items are
sold, the cash received would be recorded as revenue, but there would be no cost
of sales on such items due to the reserve that has been recorded. At the time of
sale,  the  inventory  would be reduced for the item sold and the  corresponding
inventory  reserve would also be reduced.  During the fourth quarter of 2003, we
sold  all  inventory  and  rights  associated  with  the  Phaco  SIStem(TM)  and
Odyssey(TM)  for $125,000.  Because the full amount of inventory  related to the
SIStem(TM)  and  Odyssey(TM)  had been  fully  reserved,  no cost of sales  were
recorded in connection  with this sale,  thus resulting in gross profit equal to
the sales price of $125,000.  We do not expect the sales of these items, if any,
to be significant in the future.

         At this time, our Photon(TM) Laser Ocular Surgery Workstation  requires
regulatory FDA approval in order to be sold in the United  States.  Any possible
future  efforts to complete the clinical  trials on the  Photon(TM)  in order to
file for FDA  approval  would  depend  on our  obtaining  adequate  funding.  We
estimate  that the funds  needed to  complete  the  clinical  trials in order to
obtain the necessary  regulatory  approval on the Photon(TM) to be approximately
$225,000.

Effect of Inflation and Foreign Currency Exchange

         We have not realized a reduction  in the selling  price of our products
as a result of domestic  inflation.  Nor have we experienced  unfavorable profit
reductions due to currency  exchange  fluctuations or inflation with our foreign
customers. All sales transactions to date have been denominated in U.S. Dollars.

Impact of New Accounting Pronouncements


                                       30



         In  November  2003,  the EITF  reached a consensus  on Issue  No.00-21,
Revenue Arrangements with Multiple  Deliverables.  EITF Issue No. 00-21 provides
guidance on how to account for certain arrangements that involve the delivery or
performance  of multiple  products,  services  and/or rights to use assets.  The
provisions  of EITF Issue No. 00-21 will apply to revenue  arrangements  entered
into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue
No. 00-21 did not have a material  impact on our operating  results or financial
condition.

         In December  2003,  the FASB issued  Interpretation  No. 46 ("FIN 46R")
(revised  December  2003),  Consolidation  of  Variable  Interest  Entities,  an
Interpretation  of  Accounting  Research  Bulletin  No.  51  ("ARB  51"),  which
addresses how a business enterprise should evaluate whether it has a controlling
interest in an entity  though  means other than  voting  rights and  accordingly
should consolidate the entity. FIN 46R replaces FASB  Interpretation No. 46 (FIN
46), which was issued in January 2003.  Before concluding that it is appropriate
to apply ARB 51 voting interest  consolidation model to an entity, an enterprise
must first determine that the entity is not a variable interest entity (VIE). As
of the effective  date of FIN 46R, an enterprise  must evaluate its  involvement
with all  entities or legal  structures  created  before  February  1, 2003,  to
determine whether consolidation requirements of FIN 46R apply to those entities.
There is no  grandfathering  of existing  entities.  Public companies must apply
either FIN 46 or FIN 46R immediately to entities  created after January 31, 2003
and no later than the end of the first  reporting  period  that ends after March
15,  2005.  The adoption of FIN 46 had no effect on our  consolidated  financial
position, results of operations or cash flows.

         In April 2003, FASB issued SFAS No. 149,  Amendment of Statement 133 on
Derivative  Instruments  and Hedging  Activities.  SFAS 149 amends and clarifies
accounting for derivative instruments,  including certain derivative instruments
embedded  in  other  contracts  and  for  hedging  activities  under  SFAS  133,
Accounting  for  Derivatives  and  Hedging  Activities.  SFAS  149 is  generally
effective for derivative instruments,  including derivative instruments embedded
in certain contracts, entered into or modified after June 30, 2003. The adoption
of SFAS 149 did not have a material impact on our operating results or financial
condition.

         In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments  with  Characteristics  of Both  Liabilities  and  Equity.  SFAS 150
clarifies the accounting for certain financial  instruments with characteristics
of both liabilities and equity and requires that those instruments be classified
as liabilities in statements of financial  position.  Previously,  many of those
financial  instruments  were  classified  as equity.  SFAS 150 is effective  for
financial  instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period  beginning  after June
15,  2003.  On November 7, 2003,  FASB Staff  Position  150-3 was issued,  which
indefinitely  deferred  the  effective  date of SFAS 150 for  certain  mandatory
redeemable  non-controlling  interests. As we do not have any of these financial
instruments,  the adoption of SFAS 150 did not have any impact on our  financial
statements.

         In December 2003, the Securities and Exchange  Commission  (SEC) issued
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104 revises or
rescinds  portions  of the  interpretive  guidance  included  in Topic 13 of the
codification of staff  accounting  bulletins in order to make this  interpretive
guidance consistent with current authoritative  accounting and auditing guidance
and SEC rules and  regulations.  The adoption of SAB 104 did not have a material
effect on our results of operations or financial position.

                                    BUSINESS

General

         We develop,  manufacture,  source,  market and sell ophthalmic surgical
and diagnostic  instrumentation and related  accessories,  including  disposable
products.  Our surgical  equipment is designed for minimally  invasive  cataract
treatment.  We market two cataract surgery systems with related  accessories and
disposable  products.  Our cataract removal system, the Photon(TM) laser system,
is a laser cataract  surgery system  marketed as the next generation of cataract
removal.  Because of the "going concern"  status of the company,  management has
focused  efforts on those  products and  activities  that will,  in its opinion,
achieve the most  resource  efficient  short-term  cash flow to the company.  As
reflected in the results for the fiscal year ended December 31, 2003, diagnostic
products are currently our major focus and the  Photon(TM)  and other  extensive
research  and  development  projects  have  been  put  on  hold  pending  future
evaluation when the financial position of the company improves.  Due to the lack
of FDA approval and the lack of current evidence to support  recoverability,  we
have  recorded an  inventory  reserve to offset the  majority  of the  inventory
associated with the Photon(TM).  In addition, most inventory associated with the
Precisionist Thirty Thousand(TM) has been reserved for due to the estimated lack
of  recoverability.  Our  focus is not on any  specific  diagnostic  product  or
products,  but rather on our entire group of diagnostic products. The Photon(TM)
can be sold in markets outside of the United States. Both the Photon(TM) and the
Precisionist   ThirtyThousand(TM)   are   manufactured   as  an  Ocular  Surgery
Workstation(TM).  We are  considering  marketing the Photon(TM) and other lasers
for use in eye care.

         Our  diagnostic  products  include a  pachymeter,  the P55  Pachymetric
Analyzer, the P37 A/B Scan Ocular Ultrasound Diagnostic,  the P40 UBM Ultrasound
Biomicroscope,   the  P45  Plus  UBM   Biomicroscope,   the   Dicon(TM)  LD  400
Autoperimeter, the Dicon(TM) TKS 500 Autoperimeter, the Dicon(TM) CT 200 Corneal


                                       31



Topographer and the Blood Flow Analyzer(TM).  The diagnostic ultrasound products
including the P55 pachymeter,  the P37 A/B Scan, the P40  biomicroscope  and the
P45 Plus  biomicroscope  were acquired from Humphrey Systems, a division of Carl
Zeiss in 1998.  We  developed  and offered for sale in the fall of 2000 the P45,
which combines the P37 A/B Scan and the UBM biomicroscope into one machine.  The
perimeter  and  the  corneal   topographer  were  added  when  we  acquired  the
outstanding  shares of the stock of Vismed,  Inc. d/b/a/ Dicon(TM) in June 2000.
We purchased  Ocular Blood Flow, Ltd. in June 2000,  whose principal  product is
the Blood Flow  Analyzer(TM).  This product is designed for the  measurement  of
intraocular  pressure and  pulsatile  ocular blood flow volume for detection and
treatment of glaucoma. We are currently developing  additional  applications for
all of our diagnostic products.

         A cataract is a condition that largely affects the elderly  population,
in which  the  natural  lens of the eye  hardens  and  becomes  cloudy,  thereby
reducing  visual  acuity.  Treatment  consists of removal of the cloudy lens and
replacement  with a  synthetic  lens  implant,  which  restores  visual  acuity.
Cataract surgery is the single largest volume and revenue  producing  outpatient
surgical  procedure  for  ophthalmologists  worldwide.  The Health Care  Finance
Administration  reports  that in the United  States  approximately  two  million
cataract  removal  procedures  are performed  annually,  making this the largest
outpatient  procedure  reimbursed  by Medicare.  Most  cataract  procedures  are
performed using a method called  phacoemulsification or "phaco", which employs a
high frequency (40 kHz to 60 kHz) ultrasonic probe needle device to fragment the
cataract  while  still in the eye and remove it in pieces by  suction  through a
small incision.
  
         In June  1997,  we  received  FDA  clearance  to market  the Blood Flow
Analyzer(TM) for measurement of intraocular  pressure and pulsatile ocular blood
flow for the  detection of glaucoma and other retina  related  diseases.  Ocular
blood flow is  critical,  the  reduction  of which may cause nerve fiber  bundle
death through oxygen deprivation, thus resulting in visual field loss associated
with glaucoma.  Our Blood Flow  Analyzer(TM) is a portable  automated  in-office
system that presents an affordable  method for ocular blood flow testing for the
ophthalmic and optometric practitioner. In June 2000, we purchased Occular Blood
Flow,  Ltd.,  the  manufacturer  of the Blood Flow  Analyzer(TM).  The terms and
conditions of the sale were $100,000 in cash and 100,000 shares of common stock.
In April 2001, we received  authorization to use a common procedure  terminology
or CPT code from the American Medical Association for procedures  performed with
the Blood Flow Analyzer(TM) , for  reimbursement  purposes for doctors using the
device. However,  certain payers have elected not to reimburse doctors using the
Blood Flow Analyzer(TM).

         On July 23, 1998, we entered into an agreement for purchase and sale of
assets with the  Humphrey  Systems  Division of Carl Zeiss,  Inc. to acquire the
ownership and  manufacturing  rights to certain assets of Humphrey  Systems that
are   used   in   the    manufacturing    and   marketing   of   an   ultrasonic
microprocessor-based  line of ophthalmic diagnostic  instruments,  including the
Ultrasonic  Biometer  Model 820, the A/B Scan System  Model 837, the  Ultrasound
Pachymeter  Model 855,  and the  Ultrasound  Biomicroscope  Model  840,  and all
accessories, packaging and end-user collateral materials for each of the product
lines for the sum of  $500,000,  payable in the form of 78,947  shares of common
stock which were issued to Humphrey  Systems and 26,316  shares of common  stock
which were issued to business broker Douglas Adams. If the net proceeds received
by Humphrey Systems from the sale of the shares issued pursuant to the Agreement
was less than $375,000,  after payment of commissions,  transfer taxes and other
expenses  relating  to the sale of such  shares,  we would be  required to issue
additional  shares of common stock, or pay additional  funds to Humphrey Systems
as would be necessary  to increase the net proceeds  from the sale of the assets
to $375,000.  Since  Humphrey  Systems  realized  only $162,818 from the sale of
78,947 shares of our common stock, we issued 80,000 additional shares in January
1999 to enable Humphrey Systems to receive its guaranteed  amount. The amount of
$21,431  was paid to us as  excess  proceeds  from  the sale of this  additional
stock.

         The rights to the ophthalmic  diagnostic  instruments,  which have been
purchased from Humphrey Systems, complement both our cataract surgical equipment
and our ocular Blood Flow Analyzer(TM).  The Ultrasonic  Biometer calculates the
prescription for the intraocular  lens to be implanted during cataract  surgery.
The P55 pachymetric  measures corneal thickness for the new refractive  surgical
applications   that  eliminate  the  need  for  eyeglasses  and  for  optometric
applications  including  contact  lens  fitting.  The P37  Ultrasonic  A/B  Scan
combines the Ultrasonic  Biometer and ultrasound imaging for advanced diagnostic
testing throughout the eye and is a viable tool for retinal specialists. The P40
UBM Ultrasound  Biomicroscope utilizes microscopic digital ultrasound resolution
for detection of tumors and improved glaucoma management.  We introduced the P45
in the fall of  2000,  which  combines  the P37  Ultrasonic  A/B  Scan,  and the
Ultrasonic Biometer in one machine.

         On October 21,  1999,  we purchased  Mentor's  surgical  product  line,
consisting of the Phaco  SIStem(TM),  the Odyssey(TM)  and the  Surg-E-Trol(TM).
This  acquisition was an attempt to round out our cataract  surgery product line
by  adding  entry-level,   moderately  priced  cataract  surgery  products.  The
transaction was paid for with $1.5 million worth of our common stock. Due to the
lack of sales volume of these products,  they were determined to be obsolete and
a reserve  was  established  to  offset  all  inventory  associated  with  these
products.  During the fourth  quarter of 2003,  we sold all inventory and rights
associated with the SIStem(TM) and Odyssey(TM) for $125,000 in cash.


                                       32



         On June 5, 2000,  we  purchased  Vismed Inc.  d/b/a  Dicon(TM)  under a
pooling of interest  accounting  treatment.  The purchase included the Dicon(TM)
perimeter  product line  consisting  of the LD 400,  the TKS 5000,  the SST(TM),
FieldLink(TM),  FieldView(TM) and Advanced FieldView and the corneal topographer
product  line,  the CT 200(TM),  the CT 50 and an ongoing  service and  software
business.  Perimeters  are used to  determine  retinal  sensitivity  testing the
visual  pathway.  Corneal  topographers  are used to  determine  the  shape  and
integrity of the cornea,  the anterior surface of the eye. Corneal  topographers
are used for the refractive  surgical  applications  that eliminate the need for
eyeglasses and for optometric applications including contact lens fitting.

         In January  2002,  we purchased  the  Innovatome(TM)  microkeratome  of
Innovative  Optics,  Inc. by issuing an  aggregate  of  1,272,825  shares of its
common stock,  warrants to purchase  250,000 shares of our common stock at $5.00
per share,  exercisable  over a period of three years from the closing date, and
$100,000 in cash. The  transaction was accounted for as a purchase in accordance
with  Statement  of Financial  Accounting  Standards  No. 141. We acquired  from
Innovative Optics raw materials, work in process and finished goods inventories.
Additionally,  we acquired the furniture and equipment used in the manufacturing
process of the  microkeratome  console and the  inspection  and packaging of the
disposable blades.

         We  were   unsuccessful   in  supplying  the  disposable   blades.   We
discontinued  the marketing  and sales efforts of this product  during the third
quarter of 2002. On April 1, 2002, we entered into a consulting  agreement  with
John Charles Casebeer,  M.D. to develop and promote the  microkeratome.  For Dr.
Casebeer's  services during the period from April 1, 2002 to September 30, 2002,
we issued him a total of 43,684 shares of our common stock, representing payment
of $100,000 in stock for his services. On October 9, 2003, an additional 300,000
shares of our common stock was issued to Dr. Casebeer in settlement of a lawsuit
he brought  against us for  additional  consideration  due under the  consulting
agreement.  All assets  acquired from  Innovative  Optics,  including  remaining
inventory with a book value of $160,000 and equipment and intangible assets with
a book value of $2,082,000, were written off during 2002.

         On September 19, 2002, we completed a  transaction  with  International
Bio-Immune  Systems,  Inc.,  a  Delaware  corporation  , in  which  we  acquired
2,663,254  shares,  or 19.9% of the outstanding  shares of its common stock, and
warrants to purchase  1,200,000 shares of its common stock of at $2.50 per share
for a period of two years,  through the exchange and issuance of 736,945  shares
of our common  stock,  the lending of 300,000  shares of our common stock to the
company and the payment of certain of its  expenses  through the  issuance of an
aggregate of 94,000 shares of our common stock to the company and its counsel.

         International  Bio-Immune Systems,  Inc. may sell the 300,000 shares of
our common stock loaned by us and the proceeds  therefrom shall be deemed a loan
from us payable on the  earlier of  September  19,  2002,  or the closing of any
private  placement  or  public  offering  of  the  securities  of  International
Bio-Immune Systems, any merger involving more than 50% of the outstanding shares
of International  Bio-Immune Systems,  or any sale,  dissolution,  transfer,  or
assignment  of corporate  assets other than in the ordinary  course of business.
Interest shall accrue on the unpaid principal of the loan at the rate of 10% per
annum. If International Bio-Immune Systems does not sell the shares by September
19, 2004, it is required to return the shares,  or any amount which has not been
sold, to us.  International  Bio-Immune  Systems  currently  controls the voting
decisions  regarding these shares.  The President and Chief Executive Officer of
International  Bio-Immune  Systems is Leslie F. Stern, who exercises sole voting
and investment powers regarding the shares.

         On August 3, 2004, we sold our investment in  International  Bio-Immune
Systems,  Inc. for $533,000 pursuant to a stock purchase and sale agreement with
William Ungar, a current  director and shareholder of  International  Bio-Immune
Systems.  The securities sold to Mr. Ungar consisted of 2,663,254  common shares
of International  Bio-Immune  Systems and warrants to purchase  1,200,000 common
shares of International Bio-Immune Systems at $2.50 per share.

         On December 3, 2003,  we executed a purchase  agreement  with  American
Optisurgical, Inc. for the sale of the Mentor surgical products line, consisting
of the Phaco SlStem(TM) and the Odyssey(TM).  The assets sold in the transaction
included patents,  trademarks,  software codes and programs,  supplies,  work in
process,  finished goods, and molds related to the equipment. The purchase price
paid to us by American  Optisurgical  for the assets was $125,000.  The purchase
agreement also contained a noncompete  provision in which we agreed for a period
of three years from the closing date not to own, manage,  operate or control any
business that competes with cataract removal equipment substantially the same as
the proprietary technology of the Phaco SlStem(TM) and the Odyssey(TM).

         On September 28, 2004, we entered into an Investment  Banking Agreement
with Alpha  Advisory  Services,  Inc.  Under the terms of the  agreement,  Alpha
Advisory  Services is to use its best efforts to provide the following  services
to us: (i) review of and make  recommendations  regarding  our business plan and
promotional  materials;  (ii)  identify and contact  potential  investors in the
United  States and Europe for  potential  investment  in our  securities;  (iii)
organize meetings with potential investors and participate in such meetings; and
(iv)  assist  us in  future  financings,  mergers,  acquisitions  and  potential
buyouts.


                                       33



         The term of the agreement is for a period of three months,  which is to
be automatically  renewed for successive one- year terms.  Following the initial
three month  period,  either  party may  terminate  the  agreement  upon 15 days
written  notice to the other  party.  In  consideration  for the  services to be
performed  under the agreement,  Alpha Advisory  Services is to receive a fee of
$3,000 per month,  plus reasonable  travel and other  expenses,  and warrants to
purchase  25,000 shares of our common stock at $.15 per share.  The warrants are
exerciseable,  on a  cashless  basis,  over a two year  period  from the date of
issuance.

Background

         Corporate History: Our business originated with Paradigm Medical, Inc.,
a  California  corporation  formed  in  October  1989.  Paradigm  Medical,  Inc.
developed  our present  ophthalmic  business  and was  operated by our  founders
Thomas F.  Motter and Robert W.  Millar.  In May 1993,  Paradigm  Medical,  Inc.
merged with Paradigm Medical Industries, Inc. At the time of the merger, we were
a dormant  public  shell  existing  under the name French Bar  Industries,  Inc.
French Bar had operated a mining and tourist  business in Montana.  Prior to its
merger  with  Paradigm  Medical,  Inc. in 1993,  French Bar had  disposed of its
mineral and mining assets in a settlement of  outstanding  debt and had returned
to the  status  of a  dormant  entity.  Pursuant  to the  merger,  we  caused  a
1-for-7.96  reverse stock split of our shares of common stock.  We then acquired
all of the issued and  outstanding  shares of common stock of Paradigm  Medical,
Inc.  using  shares of our own  common  stock as  consideration.  As part of the
merger, we changed our name from French Bar Industries, Inc. to Paradigm Medical
Industries, Inc. and the management of Paradigm Medical, Inc. assumed control of
the  company.  In April  1994,  we caused a 1-for-5  reverse  stock split of our
shares of common  stock.  In  February  1996,  we  re-domesticated  to  Delaware
pursuant to a reorganization.

Overview

         Disorders of the Eye: The human eye is a complex organ which  functions
much  like a  camera,  with a lens in front and a  light-sensitive  screen,  the
retina,  in the rear. The  intervening  space contains a transparent  jelly-like
substance,  the vitreous,  which  together with the outer layer,  the sclera and
cornea,  helps the  eyeball to  maintain  its shape.  Light  enters  through the
cornea,  a  transparent  domed  window at the front of the eye.  The size of the
pupil, an aperture in the center of the iris,  controls the amount of light that
is then focused by the lens onto the retina as an upside-down image. The lens is
the internal  optical  component  of the eye and is  responsible  for  adjusting
focus. The lens is enclosed in a capsule. The retina is believed to contain more
than 130 million  light-receptor  cells.  These cells  convert  light into nerve
impulses  that are  transmitted  right-side  up by the optic nerve to the brain,
where they are interpreted. Muscles attached to the eye control its movements.

         Birth  defects,   trauma  from  accidents,   disease  and  age  related
deterioration  of  the  components  of  the  eye  could  all  contribute  to eye
disorders.  The most common eye disorders are either pathological or refractive.
Many  pathological  disorders  of the eye can be  corrected  by  surgery.  These
include cataracts  (clouded lenses),  glaucoma  (elevated  pressure in the eye),
corneal   disorders   such  as  scars,   defects  and  irregular   surfaces  and
vitro-retinal disorders such as the attachment of membrane growths to the retina
causing blood leakage within the eye. All of these  disorders can impair vision.
Many  refractive  disorders can be corrected  through the use of eyeglasses  and
contact  lenses.  Myopia  (nearsightedness),   hyperopia   (farsightedness)  and
presbyopia  (inability  to  focus)  are  three  of the  most  common  refractive
disorders.

         Ultrasound   Technology:   Ultrasound   devices   have   been  used  in
ophthalmology  since the late 1960's for  diagnostic  and surgical  applications
when  treating  or  correcting  eye  disorders.   In   diagnostics,   ultrasound
instruments are used to measure distances and shapes of various parts of the eye
for  prescription  of eyeglasses and contact lenses and for  calculation of lens
implant  prescriptions for cataract surgery treatment.  These devices emit sound
waves  through a  hand-held  probe that is placed  onto or near the eye with the
sound waves  emitted  being  reflected by the targeted  tissue.  The  reflection
"echo" is computed into a distance value that is presented as a visual image, or
cross-section  of the eye, with precise  measurements  displayed and printed for
diagnostic use by the surgeon.

         Surgical use of ultrasonics in ophthalmology is limited to treatment of
cataract  lenses in the eye through a procedure  called  phacoemulsification  or
"phaco."  A primary  objective  of  cataract  surgeries  is the  removal  of the
opacified (cataract) lens through an incision that is as small as possible.  The
opacified  lens is then replaced by a new synthetic  lens  intraocular  implant.
Phaco  technology  involves a process by which a cataract  is broken  into small
pieces using ultrasonic shock waves delivered through a hollow, open-ended metal
needle attached to a hand-held probe. The fragments of cataracts tissue are then
removed through aspiration. Phaco systems were first designed in the late 1960's
after various  attempts by surgeons to use other  techniques to remove opacified
lenses, including crushing,  cutting, freezing,  drilling and applying chemicals
to the  cataract.  By the  mid-1970's,  ultrasound  had  proven  to be the  most
effective   technology  to  fragment  cataracts.   Market  Scope's  (Manchester,
Missouri),  "The 2001 Report on the  Worldwide  Cataract  Market",  January 2001
indicates that phaco cataract  treatment was the technology for cataract removal
used in over 80% of surgeries  in the United  States and over 20% of all foreign
surgeries.

                                       34


         Laser   Technology:   The  term   "laser"  is  an  acronym   for  Light
Amplification  by Stimulated  Emission of  Radiation.  Lasers have been commonly
used for a variety of medical and ophthalmic procedures since the 1960's. Lasers
emit photons into a highly intense beam of energy that  typically  radiates at a
single wavelength or color. Laser energy is generated and intensified in a laser
tube or solid-state  cavity by charging and exciting photons of energy contained
within  material  called the lazing  medium.  This stored  light  energy is then
delivered to targeted tissue through focusing lenses by means of optical mirrors
or fiber optics.  Most laser systems use solid-state  crystals or gases as their
lazing  medium.  Differing  wavelengths  of  laser  light  are  produced  by the
selection  of the  lazing  medium.  The  medium  selected  determines  the laser
wavelength  emitted,  which in turn is  absorbed by the  targeted  tissue in the
body.  Different tissues absorb different  wavelengths or colors of laser light.
The degree of absorption by the tissue also varies with the choice of wavelength
and is an important  variable in treating various tissues.  In a surgical laser,
light is emitted in either a continuous  stream or in a series of short duration
"pulses",  thus  interacting  with the  tissue  through  heat and  shock  waves,
respectively.  Several  factors,  including the  wavelength of the laser and the
frequency and duration of the pulse or exposure,  determine the amount of energy
that interacts with the targeted tissue and, thus, the amount of surgical effect
on the tissue.

         Lasers are widely accepted in the ophthalmic community for treatment of
certain eye disorders and are popular for surgical applications because of their
relatively  non-invasive  nature. In general,  ophthalmic lasers, such as argon,
Nd:YAG  and  excimer  (argon-fluoride)  are  used to  coagulate,  cut or  ablate
targeted  tissue.  The argon laser is used to treat leaking blood vessels on the
retina  (retinopathy)  and  retinal  detachment.  The  excimer  laser is used in
corneal refractive surgery. The Nd:YAG pulsed laser is used to perforate clouded
posterior  capsules  (posterior  capsulotomy)  and to  relieve  glaucoma-induced
elevated   pressure  in  the  eye   (iridotomy,   trabeulorplasty,   transcleral
cyclophotocoagulation).  Argon, Nd:YAG and excimer lasers are primarily used for
one or two clinical  applications  each. In contrast to these conventional laser
systems,  our  Photon(TM)  laser  cataract  system  is  designed  to be used for
multiple ophthalmic applications, including certain new applications that may be
made possible with our proprietary technology.  Such new applications,  however,
must be tested in clinical trials and be approved by the FDA.

Products

         Our  principal  proprietary  surgical  products  are systems for use by
ophthalmologists  to perform surgical treatment  procedures to remove cataracts.
We have  complete  ownership  of each product  with no  technological  licensing
limitations.

         Precisionist ThirtyThousand(TM): The Precisionist ThirtyThousand(TM) is
our core  phaco  surgical  technology.  The  Precisionist(TM)  was  placed  into
production and offered for sale in 1997. As a phaco cataract surgery system,  we
believe the Precisionist(TM) with its new fluidics panel is equal or superior to
the present competitive systems in the United States.  However,  due to the lack
of recent sales, the majority of our inventory  associated with the Precisionist
Thirty  Thousand(TM)  has been  estimated to be obsolete and therefore a reserve
for such  inventory  has been  recorded.  The system  features  a graphic  color
display and unique  proprietary  on-board  computer and graphic  user  interface
linked to a soft-key  membrane panel for flexible  programmable  operation.  The
system provides real-time "on-the-fly" adjustment capabilities for each surgical
parameter  during  the  surgical  procedure  for  high-volume  applications.  In
addition,  the Precisionist(TM)  provides one hundred  pre-programmable  surgery
set-ups,  with a second level of  sub-programmed  custom modes within each major
surgical screen (i.e.,  ultrasound phaco and  irrigation/aspiration  modes). The
Precisionist(TM)  features our newly developed  proprietary fluidics panel which
is  completely  non-invasive  for improved  sterility  and to provide a surgical
environment  in the eye that  virtually  eliminates  fluidic  surge  and  solves
chamber  maintenance  problems normally  associated with phaco cataract surgery.
This new fluidics system provides greater control for the surgeon and allows the
safe operation at much higher vacuum settings by sampling  changes in aspiration
100  times  per  second.  Greater  vacuum  in phaco  surgery  means  less use of
ultrasound  or laser  energy  to  fragment  the  cataract  and less  chance  for
surrounding  tissue  damage.  In  addition  to the full  complement  of surgical
modalities  (e.g.,  irrigation,  aspiration,  bipolar  coagulation  and anterior
vitrectomy),  system automation includes  "dimensional" audio feedback of vacuum
levels and voice confirmation for major system functions, providing an intuitive
environment in which the advanced phaco surgeon can  concentrate on the surgical
technique rather than the equipment.  Sales of the  Precisionist(TM) and related
accessories  were 0% and 3% of the total  revenues in the fiscal  years 2003 and
2002,  respectively,  and 0% of the total  revenues  for the nine  months  ended
September 30, 2004.

         Ocular  Surgery  Workstation(TM):  The Ocular  Surgery  Workstation(TM)
comprises  the base  system of the  Precisionist  ThirtyThousand(TM)  and is the
first system to our knowledge,  which uses the expansive capabilities of today's
advanced computer  technology to offer seamless open architecture  expandability
of the system hardware and software  modules.  The  Workstation(TM)  utilizes an
embedded  open  architecture  computer  developed  for  us and  controlled  by a
proprietary  software system developed by us that interfaces with all components
of  the  system.  Ultrasound,   fluidics  (irrigation),   aspiration,   venting,
coagulation  and anterior  vitrectomy  (pneumatic)  are all included in the base
model.  Each  component is controlled  as a peripheral  module within this fully
integrated system. This approach allows for seamless expansion and refinement of
the  Workstation(TM)  with  the  ability  to add  other  hardware  and  software
features.  Expansion  such as our  Photon(TM)  laser  system  and  hardware  for
additional   surgical   applications  are  easily  implemented  by  means  of  a
pre-existing  expansion rack, which resides in the base of the  Workstation(TM).
These expanded  capabilities  could  include,  but would not be limited to laser
systems,  video  surgical  fiber  optic  imaging,   cutting  and  electrosurgery


                                       35


equipment.  However,  there is no  guarantee  that the  Workstation(TM)  will be
accepted in the marketplace.  If the FDA approves the Photon(TM),  we will refer
to the  Workstation(TM)  as the Photon(TM)  Ocular Surgery  Workstation(TM).  To
date,  we have not  commercially  developed  or offered for sale any other added
hardware or software features to its Workstation(TM).

         Photon(TM) Laser System: The Photon(TM) laser cataract system, which is
still subject to FDA approval, is designed to be installed as a seamless plug-in
upgrade or add-on to our Precisionist(TM)  Ocular Surgery  Workstation(TM).  The
plug-in platform concept is unique in the ophthalmic surgical market for systems
of this  magnitude  and presents a unique  market  opportunity  for us. The main
elements  of the laser  system are the Nd:YAG  laser  module,  Photon(TM)  laser
software  package and  interchangeable  disposable  hand-held  fiber optic laser
cataract  probe.  The  Photon(TM)  laser  utilizes the  on-board  microprocessor
computer of the  Workstation(TM)  to generate short pulse laser energy developed
through the patented  LCP(TM) to targeted  cataract tissue inside the eye, while
simultaneously  irrigating the eye and aspirating the diseased  cataract  tissue
from the eye.  The probe is smaller in  diameter  than  conventional  ultrasound
phaco  needles and presents no damaging  vibration or heat  build-up in the eye.
Our Phase I clinical trials demonstrated that this probe could easily reduce the
size of the  cataract  incision  from 3.0 mm to under  2.0 mm  thereby  reducing
surgical  trauma  and  complementing   current  foldable   intraocular   implant
technology.

         The laser probe may also eliminate any possibility for burns around the
incision  or at the  cornea  and may  therefore  be used with  cataract  surgery
techniques  that  utilize  a more  delicate  clear  cornea  incision  which  can
eliminate sutures and be conducted with topical anesthesia. However, this system
may not effectively remove harder grade cataracts. Harder grade cataracts can be
removed   using   the   already   existing   ultrasound    capability   of   the
Precisionist(TM).  Because  of  the  "going  concern"  status  of  the  company,
management has focused  efforts on those  products and activities  that will, in
its opinion,  achieve the most resource  efficient  short-term  cash flow to the
company. As reflected in the results for the fiscal year ended December 31, 2003
and the nine months ended September 30, 2004,  diagnostic products are currently
our major focus and the Photon(TM) and other extensive  research and development
projects  have been put on hold pending  future  evaluation  when our  financial
position  improves.  Due  to  the  uncertainty  surrounding  the  timetable  for
obtaining  FDA  approval  and the lack of  significant  revenue  from the  other
surgical products, we have recorded an inventory reserve against the majority of
the  inventory  associated  with  the  Photon(TM)  and the  Precisionist  Thirty
Thousand(TM).  Our focus is not on any specific  diagnostic product or products,
but rather on our entire group of diagnostic products.

         At some  point  in the  future,  we may  intend,  subject  to  economic
feasibility and the availability of adequate funds, to refine the laser delivery
system and laser cataract  surgical  technique  used on soft  cataracts  through
expanded   research  and  clinical  studies.   Subject  to  the   aforementioned
constraints,  we intend to refine the  fluidics  management  system by improving
chamber  maintenance  during  surgical  procedures and to develop  techniques to
optimize time and improve  invasive  techniques  through  expanded  research and
clinical  studies.  As for as we  can  determine,  no  integrated  single  laser
photofragmenting  probe is  presently  available  on the market  that uses laser
energy directly,  contained in an enclosed probe, to denature cataract tissue at
a precise location inside the eye while simultaneously irrigating and aspirating
the site.

         Our laser  system is based upon the concept  that pulsed  laser  energy
produced  with the  micro-processor  controlled  Nd:YAG  laser  system  provides
ophthalmic  surgeons  with a more  precise  and less  traumatic  alternative  in
cataract surgery.  Although conventional ultrasonic surgical systems have proven
effective  and  reliable  in  clinical  use for many  years,  their  use of high
frequency  shock waves and  vibration  to  fragment  the  cataract  can make the
procedure  difficult and can present risk of complication  both during and after
surgery. In contrast,  our laser system, which utilizes short centralized energy
bursts,  should  permit  the  delivery  of the laser  beam  with less  trauma to
adjacent tissue.  Therefore,  unlike  ultrasonic  systems,  whose vibrations and
shock waves affect (and can damage)  non-cataracts  tissues  within the eye, our
Photon(TM)  laser cataract system should only affect tissues with which it comes
into direct contact.

         In  October  of 2000,  we  received  FDA  approval  for the  Photon(TM)
Workstation(TM)  to be used with a 532mm  green  laser  which is  effective  for
medical  procedures other than cataract  removal,  such as  photocoagulation  of
retinal and venous anomalies within or outside the eye, pigmented lesions around
the orbital socket, posterior or anterior procedures associated with glaucoma or
diabetes  and  general   photocoagulation  for  various   dermatological  venous
anomalies including  telangiectasia  (surface veins), or commonly referred to as
"spider veins".  The goal is to be able to integrate  multiple laser wavelengths
into  one  system  or  workstation   that  can  be  used  for  multiple  medical
specialties.  This approval  represents  only one of the potential  applications
that could represent substantial growth opportunities including additional sales
of equipment, instruments, accessories and disposables.

         The Photon(TM) Ocular Surgery Workstation(TM) has not been commercially
developed  with any other  added  hardware  or  software  features.  There is no
guarantee  that the  ophthalmic  surgery  market  will  accept the laser in this
capacity or that the FDA will grant approval.  Regulatory approval would require
completion of pending  Photon(TM)  clinical trials and  resubmission of a 510(k)
predicate  device  application to the FDA. Because of the "going concern" status
of the company,  management has focused efforts on those products and activities
that will, in its opinion,  achieve the most resource efficient  short-term cash
flow to the  company.  As  reflected  in the  results  for the fiscal year ended
December  31,  2003,  diagnostic  products  consisting  mainly  of the  P40  UBM

                                       36


Ultrasound Biomicroscope,  perimeter, CT 50 Corneal Topographer,  and Blood Flow
Analyzer(TM)  are  currently  our  major  focus  and the  Photon(TM)  and  other
extensive research and development projects have been put on hold pending future
evaluation when the financial position of the company improves. Our focus is not
on any specific  diagnostic product or products,  buy rather on the entire group
of diagnostic products.

         The SIStem(TM) and the Odyssey(TM):  The SIStem(TM) and the Odyssey(TM)
have been our entry-level  phacoemulsification  systems.  The SIStem(TM) and the
Odyssey(TM) were designed to be a full-featured,  cost-effective, reliable phaco
machines;  however,  due to the  lack  of  sales  in  2002,  the  products  were
determined to be obsolete. Sales of the SIStem(TM),  the Odyssey(TM) and related
accessories  represented  approximately  11% and 4% of the  total  revenues  for
fiscal years 2003 and 2002,  respectively,  and 0% of the total revenues for the
nine months ended September 30, 2004. On December 3, 2003, we completed the sale
of the SIStem(TM) and the Odyssey(TM),  including patents, trademarks,  software
codes and programs,  supplies,  work in process,  finished  goods and molds,  to
American Optisurgical, Inc.

         Surgical  Instruments  and  Disposables:  In addition  to the  cataract
surgery  equipment,  our  surgical  systems  utilize or will  utilize  accessory
instruments and disposables,  some of which are proprietary to us. These include
replacement ultrasound tips, sleeves, tubing sets and fluidics packs, instrument
drapes and laser cataract probes. We intend to expand its disposable accessories
as it further  penetrates the cataract  surgery market and expands the treatment
applications for its Workstation(TM).  These products contributed  approximately
0% and 3% of the total revenues for 2003 and 2002,  respectively,  and 0% of the
total revenues for the nine months ended September 30, 2004.

         Diagnostic  Eye Care  Products:  Glaucoma is a second  leading cause of
adult  blindness in the world.  Glaucoma is described as a partial or total loss
of visual field  resulting from certain  progressive  disease or degeneration of
the  retina,  macula or nerve  fiber  bundle.  The cause  and  mechanism  of the
glaucoma pathology is not completely understood. Present detection methods focus
on the  measurement  of  intraocular  pressure  in the  eye,  visual  field  and
observation  of the optic nerve head to determine  the  possibility  of pressure
being exerted upon the retina, and optic nerve fiber bundle,  which can diminish
visual field.  Recently,  retinal blood  circulation has been indicated as a key
component in the presence of glaucoma.  Some  companies  produce  color  Doppler
equipment in the $80,000 price range  intended to provide  measurement of ocular
blood flow activity in order to diagnose and treat glaucoma at an earlier stage.

         Blood Flow  Analyzer(TM):  In June 1997,  we received FDA  clearance to
market the Blood Flow Analyzer(TM) for early detection and treatment  management
of glaucoma  and other retina  related  diseases.  The device  measures not only
intraocular  pressure but also  pulsatile  ocular blood flow,  the  reduction of
which may cause  nerve  fiber  bundle  death  through  oxygen  deprivation  thus
resulting  in visual  field  loss  associated  with  glaucoma.  Our  Blood  Flow
Analyzer(TM)  is  a  portable  automated   in-office  system  that  presents  an
affordable  method  for  ocular  blood  flow  testing  for  the  ophthalmic  and
optometric  practitioner.  This was our first  diagnostic  eye care device.  The
device is a portable  desktop  system that utilizes a  proprietary  and patented
pneumatic Air Membrane Applanation Probe(TM) or AMAP(TM),  which can be attached
to any model of  standard  examination  slit lamp,  which is then  placed on the
cornea of the patient's eye to measure the intraocular  pressure within the eye.
The device is unique in that it reads a series of  intraocular  pressure  pulses
over a short period of time  (approximately five to ten seconds) and generates a
waveform profile, which can be correlated to blood flow volume within the eye. A
proprietary  software  algorithm  developed by David M. Silver,  Ph.D., at Johns
Hopkins  University,  calculates  the blood flow volume.  The device  presents a
numerical  intraocular  pressure  reading  and blood flow  analysis  rating in a
concise printout, which is affixed to the patient history file. In addition, the
data generated by the device can be downloaded to a personal computer system for
advanced database development and management.

         We market the Blood Flow  Analyzer(TM) as a stand-alone  model packaged
with a custom built  computer  system.  The Blood Flow  Analyzer(TM)  utilizes a
single-use  disposable  cover  for the Air  Membrane  Applanation  Probe(TM),  a
corneal probe which is shipped in sterile packages. The probe tip cover provides
accurate readings and acts as a prophylactic barrier for the patient. The device
has been  issued a patent in the  European  Economic  Community  and the  United
States  and has a patent  pending  in Japan.  The FDA  cleared  the  Blood  Flow
Analyzer(TM)  for marketing in June 1997 and we commenced  selling the system in
September 1997. In addition to the Humphrey  products,  this diagnostic  product
allowed us to expand its market to approximately 35,000 optometry  practitioners
in the  United  States  in  addition  to  the  approximately  18,000  ophthalmic
practitioners  who currently  perform eye surgeries and are  candidates  for our
surgical systems.

         In April 2001, we received written authorization from the CPT Editorial
Research and Development  Department of the American Medical  Association to use
common  procedure  terminology  or CPT code  number  92120  for our  Blood  Flow
Analyzer(TM),  for reimbursement purposes for doctors using the device. However,
certain  payers  have  elected  not to  reimburse  doctors  using the Blood Flow
Analyzer(TM).  We are continuing  our aggressive  campaign to educate the payers
about the Blood Flow  Analyzer(TM),  its  purposes and the  significance  of its
performance in patient care in order to achieve  reimbursements  to the doctors.
Currently, there is reimbursement by insurance payors to doctors using the Blood
Flow  Analyzer(TM) in 22 states and partial  reimbursement in four other states.
The  amount of  reimbursement  to  doctors  using the  Blood  Flow  Analyzer(TM)
generally ranges from $56.00 to $76.00 per patient, depending upon the insurance
payor. Insurance payors providing  reimbursement for the Blood Flow Analyzer(TM)
have the  discretion to increase or reduce the amount of  reimbursement.  We are
endeavoring to obtain  reimbursement  by insurance  payors in other states where
there is currently no reimbursement being made.

                                       37


         The manufacturing  activities for the Blood Flow Analyzer(TM) have been
moved to the Salt  Lake City  facility  from the  outsourced  plant  located  in
England. On October 21, 2002, we received FDA approval on our 510(k) application
for  additional  indications  of  use  for  the  Blood  Flow  Analyzer(TM).  The
additional  indications include pulsatile ocular blood flow and pulsatile ocular
blood volume. These are diagnostic  measurements that assess the hemodynamic and
vascular  health of the eye. Also, we are continuing our aggressive  campaign to
educate the insurance payers about the Blood Flow Analyzer(TM), its purposes and
the  significance  of its  performance  in  patient  care in  order  to  achieve
reimbursements  to the doctors using our Blood Flow  Analyzer(TM).  Sales of the
Blood Flow Analyzer(TM) and related accessories  accounted for approximately 16%
and 12% of total revenues for the fiscal years ended December 31, 2003 and 2002,
respectively,  and 21% of total revenues for the nine months ended September 30,
2004.

         Dicon(TM)  Perimeters:  Dicon(TM) perimeters consist of the LD 400, the
TKS 5000,  the SST(TM),  FieldLink(TM),  FieldView(TM)  and Advanced  FieldView.
Perimeters are used to determine retinal sensitivity testing the visual pathway.
Perimeters  have become a standard of care in the  detection  and  monitoring of
glaucoma  worldwide.   Perimetry  is  reimbursable   worldwide.   The  Dicon(TM)
perimeters  feature  patented  kinetic  fixation and voice  synthesis  now in 27
different languages. Software programs are sold to assist in the analysis of the
test  results.  Sales  of  the  perimeters  and  related  accessories  generated
approximately 27% and 20% of the total revenues for 2003 and 2002, respectively,
and 28% of the total revenues for the nine months ended September 30, 2004.

         LD  400FT:  The LD  400FT,  or  Fast  Threshold  Autoperimeter,  is the
successor to the LD 400. The device is an autoperimeter  used to measure patient
visual  fields.  The LD 400FT is identical in hardware to the LD 400 but it uses
new  software  to  enable a fast  threshold  test.  This test  reduces  the time
required by ophthalmologists and optometrists conducting  autoperimetry tests by
more than 40% by running an  abbreviated  test at light levels  determined to be
sufficient to be seen in normal  patients.  The procedure  currently  takes more
than 15 minutes.  The fast threshold test by the LD 400FT is similar to tests by
other devices on the market.  Healthy patients will pass the test. Patients with
reduced  visual  fields  will be  flagged  by the test  enabling  the  device to
automatically  run a more  comprehensive  examination to determine the extent of
the visual  field loss.  All existing LD 400s can be upgraded to support the new
fast threshold test through the purchase of a software package.

         Dicon(TM) Corneal Topographers:  Dicon(TM) corneal topographers include
the CT 200(TM) and the CT 50.  Corneal  topographers  are used to determine  the
shape and  integrity of the cornea,  the anterior  surface of the eye.  Clinical
applications for corneal topographers include refractive surgery that eliminates
the need for  eyeglasses  and  optometric  applications  including  contact lens
fitting. Revenues from the topographer and related accessories were 9% and 7% of
the total revenues for 2003 and 2002, respectively, and 4% of the total revenues
for the nine months  ended  September  30, 2004.  An enhanced  version of the CT
200(TM),  the CT  2000(TM),  is  scheduled  to be  introduced  during the fourth
quarter of 2003. We are completing the development of upgrades to the CT 200(TM)
and the CT 50 Corneal  Topographer,  which will be operating upon  completion of
the  upgrades  with  Windows  XP  software  rather  than the  former  Windows 95
operating systems. We are also revising our upgrade to offer the CT 200(TM) with
Windows 2000  software  rather than the Windows XP software that we announced in
August 2003.

         P55  Pachymetric  Analyzer:  The  ultrasonic  pachymeter  is  used  for
measurement  of corneal  thickness.  The Model P55 is  positioned  as a standard
office pachymeter.  This device is targeted to the refractive surgery market and
contributed  approximately  3% of the total revenues for both 2003 and 2002, and
3% of the total revenues for the nine months ended September 30, 2004.

         P20 A-Scan Biometric Ultrasound  Analyzer:  The A-Scan has been removed
from our line of diagnostic  products.  The A-Scan is a  prerequisite  procedure
reimbursed  by Medicare and is performed  before every  cataract  surgery.  Over
5,000 A-Scan systems have been installed in the worldwide market, representing a
substantial  market  opportunity  for software  upgrades  and extended  warranty
contract  sales.  A-Scan sales were  approximately  2% of the total revenues for
both  2003 and 2002,  and 0% of the total  revenues  for the nine  months  ended
September 30, 2004.

         P37 A/B  Scan  Ocular  Ultrasound  Diagnostic:  The A/B Scan is used by
retinal  sub-specialists  to identify foreign bodies in the posterior chamber of
the eye and to evaluate the structural  integrity of the retina. The A/B Scan is
attractive  to the general  ophthalmic  community at large  because of its lower
price point.  Sales from this product were  approximately 4% and 7% of the total
revenues for 2003 and 2002,  respectively,  and 6% of the total revenues for the
nine months ended September 30, 2004.

         P40 and P45 UBM Ultrasound  Biomicroscopes:  Humphrey Systems developed
the P40 UBM Ultrasound  Biomicroscope  in conjunction  with the New York Eye and
Ear Infirmary in Manhattan and the University of Toronto.  The P40 biomicroscope
and its  intellectual  property  were  included in the  purchase  from  Humphrey
Systems  and  gives  us  the  proprietary   rights  to  this  device.   The  P40
biomicroscope  creates a  high-resolution  computer image of the unseen parts of

                                       38


the eye that is a "map" for the glaucoma  surgeon.  The P40  biomicroscope is an
"enabling technology" for the ophthalmologist, one that we have repositioned for
broader market sales penetration.  Formerly sold only to glaucoma  sub-specialty
practitioners,  we reintroduced the P40 biomicroscope at a price-point  targeted
for  the  average  practitioners  seeking  to add  glaucoma  filtering  surgical
procedures and income to their cataract surgical practice.

         The P40 biomicroscope  related surgical filtering  procedures are fully
reimbursable  by Medicare  and  insurance  providers.  This  untapped new market
positions us with our proprietary P40  biomicroscope  and to our knowledge,  the
only commercially  viable product of this type on the market, as a leader in the
rapidly expanding glaucoma imaging and treatment segment. In the fall of 2000 we
introduced  the  P45  UBM  Ultrasound  Biomicroscope,  which  combines  the  P40
biomicroscope  and  the  P37  A/B  Scan  Ocular  Ultrasound  Diagnostic  in  one
instrument.  We believe that by combining functions,  the P45 biomicroscope will
appeal to a broader market. The P40 biomicroscope and related  accessories sales
were  approximately  7%  and  12% of the  total  revenues  for  2003  and  2002,
respectively,  and 12% of the total revenues for the nine months ended September
30, 2004. The P45 UBM Ultrasound  Biomicroscope  and related  accessories  sales
contributed  approximately  13% and 12% of the total revenues for 2003 and 2002,
respectively,  and 17% of the total revenues for the nine months ended September
30, 2004.

         On October 25, 2004, we entered into a Manufacturing  and  Distribution
Agreement  with  E-Technologies,  Inc.,  a Iowa based  developer of software and
related technology for technical applications. Under the terms of the agreement,
E- Technologies  granted to us the exclusive right to manufacture,  market, sell
and distribute an ultrasound biomicroscope.  Upon execution of the agreement, we
paid  $30,000  to  E-Technologies  for  engineering  costs  associated  with the
development of the biomicroscope. Once the bioimicroscope receives FDA approval,
we agree to pay E-Technologies an additional fee of $45,000.

         In consideration  for the exclusive right to manufacture and distribute
the biomicroscope, we agree to pay E- Technologies the sum of $5,000 for each of
the  first  25  biomicroscopes  sold  by  us.  Thereafter,  we  agree  to pay E-
Technologies  the sum of $4,000 for each  biomicroscope  sold.  As an additional
condition,  we agree to sell 25 biomicroscopes  during the first 12 months after
the biomicroscope  receives FDA approval.  The agreement is effective for a term
of two years.  After the expiration of the two year period,  the agreement is to
automatically renew for additional one year periods,  unless either party elects
to terminate  the agreement  upon at least 30 days prior  written  notice to the
other party before the end of any term of the agreement.

         In July of 2000, we received ISO 9001 and EN 46001  certification using
TUV Essen as the notified body. Under ISO 9001  certification,  our products are
now CE  marked.  The CE mark  allows us to ship  product  for  revenue  into the
European Community. We successfully retained our certification in 2002.

         Parts and Services:  The parts and services revenue from the repair and
service of equipment  sold accounted for  approximately  8% and 11% of the total
revenues in 2003 and 2002,  respectively,  and 9% of the total  revenues for the
nine months ended September 30, 2004.

         Sales of other products  represented 0% and 4% of the total revenues in
2003 and 2002,  respectively,  and 0% of the total  revenues for the nine months
ended September 30, 2004.

         The following table identifies each product class, status of commercial
development,  the percentage of sales  contributed by that class,  reimbursement
status, and status of applicable United States and foreign regulatory approvals:


                                       39




                                                      Commercial       Reimbursement      %2003      %2004           Regulatory
   Product (1)             Product Class             Development           Status         Sales      Sales(2)         Approvals
                                                                                             

                                                                                                 
 P55 Pachymetric         System, Imaging, Pulsed       Complete             Yes             3%         3%      FDA 510(K) K844299*
 Analyzer                    Echo Diagnostic                                                                   ISO 9001: 1994, 
                                                                                                               EN ISO 9001**

 P20 A-Scan              System, Imaging, Pulsed     Discontinued           Yes             2%         0%      FDA 510(K) K844299*
 Biometric                   Echo Diagnostic                                                                   ISO 9001: 1994,
 Ultrasound Analyzer                                                                                           EN ISO 9001**

 P37 A/B Scan             Transducer, Ultrasound       Complete             Yes             4%         6%      FDA 510(K) K844299*
 Ocular Ultrasound              Diagnostic                                                                     ISO 9001: 1994,
 Diagnostic                                                                                                    EN ISO 9001**

 P40 UBM                 System, Imaging, Pulsed       Complete             Yes             7%        12%      FDA 510(K) K844299*
 Ultrasound                  Echo Ultrasound                                                                   ISO 9001: 1994,
 BioMicroscope                  Diagnostic                                                                     EN ISO 9001**

 P45 UBM                 System, Imaging, Pulsed       Complete             Yes            13%        17%      FDA 510(K) K844299*
 Ultrasound                  Echo Ultrasound                                                                   ISO 9001: 1994,
 Biomicroscope,                 Diagnostic                                                                     EN ISO 9001**
 Workstation Plus
 BFA Ocular Blood           Tonometer, Manual          Complete             Yes****        16%        21%      FDA 510(K) K844299*
 Flow Analyzer(TM) and          Diagnostic                                                                     ISO 9001: 1994,
 Disposables                                                                                                   EN ISO 9001**

 CT 200 Corneal            Topographer Corneal         Complete             Yes             9%         4%      FDA 510(K) K844299*
 Topography System              AC-Powered                                                                     ISO 9001: 1994,
                                Diagnostic                                                                     EN ISO 9001**

 LD 400                    Perimeter, Automatic        Complete             Yes            24%        24%      FDA 510(K) K844299*
 Autoperimetry                  AC-Powered                                                                     ISO 9001: 1994,
 System                         Diagnostic                                                                     EN ISO 9001**

 LD 400FT                  Perimeter, Automatic        Complete             Yes             0%         0%      FDA 510(K) K844299*
 Autoperimetry                  AC-Powered                                                                     ISO 9001: 1994,
 System                         Diagnostic                                                                     EN ISO 9001**

 TKS 5000                  Perimeter, Automatic        Complete             Yes             3%         4%      FDA 510(K) K844299*
 Autoperimetry            AC-Powered, Diagnostic                                                               ISO 9001: 1994,
 System                                                                                                        EN ISO 9001**

 Precisionist Thirty        Phacofragmentation         Complete             Yes             0%         0%      FDA 510(K) K844299*
 Thousand(TM), Ocular                                                                                          ISO 9001: 1994,
 Surgery Workstation                                                                                           EN ISO 9001**
 with Surgical
 Equipment and
 Disposables

 SIStem(TM) and                Phacofragmentation           Sold            Yes            11%         0%      FDA 510(K) K844299*
 Odyssey(TM)(3)

 Photon(TM) Laser,            Phacoemulsification      In-Process (5)        No             0%         0%      IDE G940151
 Ocular Surgery                  BFA tips                                                                      ISO 9001: 1994,
 Workstation with                                                                                              EN ISO 9001
 Surgical Equipment
 and Disposables(4)

 Parts and Services          Perimeter, BFA,           Complete             Yes             8%         9%      FDA 510(K) K844299*
                                Tonometer,                                                                     ISO 9001: 1994,
                         Topographer, Ultrasound                                                               EN ISO 9001**
                          Workstations, Systems,
                                 Imaging


                                       40


 --------------------------

(1)      Except for the Photon(TM) Ocular Surgery Workstation, which can only be
         sold in countries outside the United States, these products can be sold
         in the United States and in foreign countries including but not limited
         to Argentina,  Australia,  Bangladesh,  Borneo,  Brazil, Canada, China,
         Czechoslovakia,  Egypt,  France,  Germany,  Greece,  Hong Kong,  India,
         Israel,  Italy, Japan, Jordan,  Korea,  Malaysia,  Mexico, New Zealand,
         Pakistan,  Peru, Poland,  Puerto Rico, Russia, Saudi Arabia, Spain, Sri
         Lanka,  Taiwan,  Thailand,  Turkey,  United  Kingdom,  and United  Arab
         Emirates
(2)      Sales for 2004 are for the nine months ended September 30, 2004.
(3)      Due to the lack of recent sales volume,  the inventory  associated with
         the   Precisionist   Thirty  Thousand  (TM),  the  SIStem(TM)  and  the
         Odyssey(TM) has been deemed obsolete and a reserve has been recorded to
         offset such inventory.
(4)      Due to the lack of recent  evidence  to support the  recoverability  of
         inventory associated with the Photon(TM), we have recorded a reserve to
         offset the majority of such inventory on hand.
(5)      The  Photon(TM)  is  in-process  and not  complete  because we have not
         completed  the  clinical  trials  in order  to  obtain  FDA  regulatory
         approval.
*        FDA 510(K) K844299  represents  domestic approval by U.S. Food and Drug
         Administration
**       ISO 9001: 1994, EN ISO 9001 represents international approval

***      IDE G940151 represents approval for international distribution only
****     Represents full reimbursement in 22 states and partial reimbursement in
         four other states.

         As detailed in the table above,  except for the Photon(TM) Laser Ocular
Surgery  Workstation,  which  requires  additional  development  and  regulatory
approvals,  our current  products are  developed  and  available for sale in the
footnote (1) of the table.  Our possible future efforts to finalize  development
of the Photon(TM) and obtain the necessary  regulatory approvals would depend on
our economic  evaluations and adequate funding. If these efforts were undertaken
but proved to be  unsuccessful,  the impact would  include the costs  associated
with these efforts and the anticipated future revenues that we would not receive
as expected. The "Use of Proceeds" section provides information on the estimated
application  of proceeds for  Research and  Development.  We  anticipate  that a
majority of the estimated  costs for Research and  Development  will be used for
the enhancement and upgrading of our current products  approved for sale. We are
unable to provide an estimate of the  details of  possible  liquidity  needs and
expected source of funds for possible future efforts to finalize  development of
the Photon(TM) and obtain the necessary regulatory approvals since this estimate
would depend on a possible comprehensive economic evaluation.

         Any possible  future efforts to complete  development of the Photon(TM)
laser  system and obtain the  necessary  regulatory  approvals  would  depend on
adequate   funding.   If  these  efforts  were   undertaken  but  proved  to  be
unsuccessful,  the impact would include the costs  associated with these efforts
and the anticipated  future revenues that we would not receive as expected.  The
"Use of Proceeds" section provides  information on the estimated  application of
proceeds for  research and  development.  We  anticipate  that a majority of the
estimated  costs for research and  development  will be used for the enhancement
and upgrading of our current  products  being offered for sale. We estimate that
the liquidity  needed to complete the clinical trials on the Photon(TM) in order
to obtain the necessary FDA regulatory approval to be approximately $225,000.

         We currently purchase  components and parts used in our products from a
limited number of key suppliers.  Our reliance on our principal  suppliers could
result in delays  associated  with  redesigning a product due to an inability to
obtain an adequate supply of required  components and parts, and reduced control
over pricing,  quality and timely  delivery.  The loss of any of these principal
suppliers  or the  inability  of a  supplier  to meet  performance  and  quality
specifications,  requested  quantities  or  delivery  schedules  could cause our
revenues to decline.  In addition,  any  interruption or  discontinuance  in the
supply of  components  or parts  could have an adverse  effect on our  business,
results of operation and financial  condition.  Our principal  suppliers include
Capistrano Labs, US Ultrasound and Anello.

Marketing and Sales

         Ophthalmologists are mainly office-based and perform their surgeries in
local  hospitals  or  surgical  centers  that  provide  the  necessary  surgical
equipment and  supplies.  Ophthalmologists  are generally  involved in decisions
relating to the  purchase of equipment  and  accessories  for their  independent
ambulatory   surgical  centers  and  for  the  hospitals  with  which  they  are
affiliated.  This  provides  the  opportunity  for  direct,  targeted,  personal
selling,  responsive  high quality  customer  service and short buying cycles to
achieve a product  sale in the office or  hospital.  Hospitals  also  comprise a
significant  market, as recent demand for ultrasonic  surgery technology has put
pressure on the  ophthalmologist,  who in turn persuades the hospital to install
the latest technology system so that he can offer this procedure to his patients
and the community.

         Industry  analysts  report that the United States  ophthalmic  surgical
device market has been  characterized by slower growth in recent years. This has
apparently been caused by the potential reforms  associated with the health care
industry.  Further,  hospitals  have been  inclined  to keep their  older  phaco
machines  longer than  expected as they have been  forced to mind  budgets  more
carefully and have become less willing to invest in capital equipment until more
information on health care reform becomes available.  However,  analysts predict
that the ophthalmic surgical device market will see renewed growth in the coming
years as the health  care  environment  stabilizes  and as the  growing  elderly
population produces an increased number of cataract surgeries.  As a consequence
of these  factors,  the market should see a greater rate of replacement of older
machines that hospitals and surgeons have been postponing for longer than usual.


                                       41


         Current Market  Acceptance and Potential:  The principal  purchasers of
our  products  have been  ophthalmologists,  optometrists  and  clinics  in many
countries  throughout the world.  We believe that the market for our products is
being  driven by: (i) the aging of the  population,  which is  evidenced  by the
domestic and  international  cataract  surgery volume growth trend over the past
ten years, (The National Eye Institute reported in March 2002 that the number of
blind or  visually  impaired  Americans  is likely  to  double  over the next 30
years.) (ii) the entry by emerging countries (including China, Russia, and other
countries in Asia,  Eastern Europe and Africa) into advanced  technology medical
care for their populations,  (iii) increased awareness worldwide of the benefits
of the minimally  invasive phaco cataract procedure and (iv) the introduction of
technology improvements such as our laser system.

         Marketing Organization:  We market our products internationally through
a network of dealers and  domestically  through  direct  sales  representatives,
independent sales  representatives,  and ophthalmic product distributors.  As of
December 31,  2003,  we had ten direct  domestic  sales  representatives  in the
United  States and 65 foreign  dealers.  As of November  30,  2004,  we had four
direct  domestic  sales  representatives  in the  United  States  and 28 foreign
dealers. These sales representatives are assigned exclusive territories and have
entered into contracts with us that contain performance  quotas.  Domestic sales
channels have been expanded to include  independent  sales  representatives  and
distributors  who began training on our products in August 2003. We also plan to
continue to market our products by identifying customers through internal market
research,  trade shows and direct marketing programs. We also utilize a Clinical
Advisory Board comprised of leading ophthalmic surgeons in the United States and
Europe  who speak at  conventions,  train  ophthalmologists  and  visit  foreign
doctors and dealers to promote our products.

         Product  advertising  is intended  to be focused in the major  industry
trade  newspapers.  Most of the  ophthalmologists  or optometrists in the United
States receive one or more of these magazines through professional  subscription
programs. The media has shown strong interest in our technology and products, as
evidenced by several recent front-page articles in these publications.

         Manufacturing and Raw Materials: Currently, we maintain a 23,238 square
foot facility in Salt Lake City. We transferred the manufacturing activities for
the Blood Flow  Analyzer(TM)  to San Diego from  Occular  Blood  Flow,  Ltd.  in
England  during 2001.  During the second  quarter of 2002, we  consolidated  and
closed the San Diego  operations into the Salt Lake City facility.  The facility
accommodates  our  manufacturing,  marketing and  engineering  capabilities.  We
manufacture under systems of quality control and testing,  which comply with the
Quality  System  Requirements  established  by  the  FDA,  as  well  as  similar
guidelines  established  by  foreign  governments,  including  the CE  Mark  and
IS0-9001.

         We subcontract the manufacturing of some of its ancillary  instruments,
accessories  and  disposables  through  specified  vendors in the United States.
These  products are contracted in quantities  and at costs  consistent  with our
financial  purchasing  capabilities  and pricing needs.  We manufacture  certain
accessories and fluidics surgical tubing sets at our facility in Salt Lake City.

         Product Service and Support:  Service for our products is overseen from
our Salt Lake City location and is augmented by our international dealer network
who provide technical service and repair.  Installation,  on-site training and a
limited product  warranty are included as the standard terms of sale. We provide
distributors  with  replacement  parts at no charge during the warranty  period.
International  distributors are responsible for  installation,  repair and other
customer service to installed systems in their territory.  All systems parts are
modular  sub-components  that are  easily  removed  and  replaced.  We  maintain
adequate parts inventory and provides  overnight  replacement parts shipments to
its dealers.

         On July 11, 2002, we entered into a Major Account Facilitator  Contract
with Peter Kristensen and F. Briton  McConkie.  Under the terms of the contract,
Messrs. Kristensen and McConkie agreed to serve as intermediators between us and
an  international  agent or  customer  that  would  result  in an order  for 150
Photon(TM) laser systems in Asia. The contract provides that upon execution,  we
are to issue  100,000  shares of our  common  stock to  Messrs.  Kristensen  and
McConkie to cover all expenses  associated with the pursuit of the  transaction,
and upon  presentation  of a  verified  order to us, we have  agreed to issue an
additional  100,000  shares of common stock to Messrs.  Kristensen and McConkie.
Upon  completion,  and  delivery  and  receipt  of  payment  in  full  from  the
international  agent or customer for the 150 Photon(TM)  laser systems,  Messrs.
Kristensen and McConkie  would be issued an additional  480,000 shares of common
stock for serving as transaction facilitator.  We have issued a total of 100,000
shares of our common stock to Messrs.  Kristensen  and McConkie  pursuant to the
terms of the contract.

         Messrs.  Kristensen  and McConkie have retained Ralph Thompson of Novus
Technologies,  a Utah based firm,  to assist in the  marketing  and sales of our
Photon(TM)  laser system in Asia. Mr.  Thompson,  who lived in China for over 10
years,  represents U.S.  businesses  doing business in China. He currently makes
trips to China on a regular  basis on behalf of the  businesses  he  represents.
Although Mr.  Thompson  continues to represent us in the sale of our  Photon(TM)
laser  system  in  Asia,  he has not  been  successful  to date in  selling  our
Photon(TM) laser system to any customers in China or other Asian countries.

Research and Development

         Our primary  market for our surgical  products is the cataract  surgery
market.  However, we believe that our laser systems may potentially have broader
ophthalmic  applications.  Consequently,  we believe that a strong  research and
development  capability is important for our future. In addition to our expanded
in-house  research  and  development  capabilities,  we  have  enlisted  several
recognized and respected  consultants  and other  technical  personnel to act in
technical and medical advisory capacities.

                                       42


         We believe our research and  development  capabilities  provide us with
the ability to respond to regulatory  developments,  including new products, new
product features devised from our users and new applications for our products on
a timely and proprietary  basis. We intend to continue investing in research and
development  and to  strengthen  our ability to enhance  existing  products  and
develop new products.

         Research,  development and service expenses (which includes  production
and  manufacturing  support and the service  department  expenses)  decreased by
$1,786,000, or 63%, to $1,033,000 for the twelve months ended December 31, 2003,
from  $2,819,000  for the same period in 2002.  Pursuant  to the asset  purchase
agreement with Innovative  Optics,  Inc., we issued 477,000 shares of our common
stock,  which was valued at $630,000  based upon the current market value of the
stock at the time of issue.  This  amount  was  recorded  in 2002 as  in-process
research and development costs related to the blade cost reduction  project.  No
such  expense  was  recorded  in  2003.  Consulting  fees  related  to  software
development and enhancements increased to $197,000 during 2002 from $111,000 for
the  same  period  in  2002.  None of the  costs  of  research  and  development
activities during 2003 and 2002 was borne directly by customers.

         From December 1, 2000 to November 30, 2002, we entered into a series of
consulting  agreements  with  Michael B.  Limberg,  M.D.,  in which he agreed to
evaluate new  technologies  and instruments for us. For his services during that
period,  we issued Dr.  Limberg a total of 48,000 shares of our common stock and
warrants to purchase  300,000 shares of common stock at exercise  prices ranging
from $4.00 to $6.75 per share.

         During the period in which Thomas F. Motter  served as our chairman and
chief executive  officer,  he formed a clinical advisory board and met from time
to time with the board.  Jeffrey F. Poore, who served as our president and chief
executive officer from March 19, 2003 to March 18, 2004,  decided not to utilize
the clinical  advisory board.  Instead,  he consulted with former members of the
advisory board on an informal basis.  John Y. Yoon, who currently  serves as our
president  and chief  executive  officer,  has also  decided  not to utilize the
clinical advisory board. We currently have no agreements with any former members
of the clinical  advisory board and none of these former members hold or own any
rights to our products or technologies.

Competition

         General.  We are subject to competition in the cataract surgery and the
glaucoma  diagnostic  markets from two principal  sources:  (i) manufacturers of
competing  ultrasound systems used when performing  cataract treatments and (ii)
developers of technologies  for ophthalmic  diagnostic and surgical  instruments
used for  treatment.  A few large  companies  that are well  established  in the
marketplace,  have  experienced  management,  are well  financed  and have  well
recognized  trade  names and  product  lines  dominate  the  surgical  equipment
industry.  We believe that the combined sales of five entities  account for over
90% of the cataract  surgery market.  The remaining  market is fragmented  among
emerging smaller companies, some of which are foreign. The ophthalmic diagnostic
market has a similar composition.

         Most major competitors  either entered or expanded into the cataract or
glaucoma   markets   through  the   acquisition   of  smaller,   entrepreneurial
high-technology manufacturing companies. Therefore, because existing competitors
or other entities desiring to enter the market could conceivably acquire current
entrepreneurial  enterprises with small market activity, any and all competitors
must be considered to be formidable.

         The  Cataract  Surgical  System  Industry.   The  major   manufacturers
utilizing  ultrasonic  technology offer products currently in use. Those systems
rely on accessories  including  single-use  cassette  packs and other  ancillary
surgical disposables such as saline solution, sutures and intraocular lenses for
their profits.  The cassette packs are required for fluid and tissue  collection
during the surgical  procedure.  The  cassette  packs are  generally  unique and
proprietary  to their  respective  systems and  represent a barrier to entry for
third-party,  lower-cost after-market  suppliers.  While there is growing market
resistance in the United States and internationally to single-use cassettes,  we
anticipate that  manufacturers of ultrasound  equipment will continue to develop
and  enhance  their  present  ultrasound  products  in  order to  protect  their
investments in system and cassette  technology and to protect their profits from
sales of these cassettes and accessories.  Our Precisionist  Thirty Thousand(TM)
ultrasonic  phaco  system has the ability to use either  reusable or  single-use
disposable components.  The Photon(TM) laser cataract system will utilize probes
and cassette  packs  designed for  single-use  and  semi-disposable  instruments
priced at a level  consistent with the demands of health care cost  containment.
This will  allow  the  health  care  providers  a  substantial  measure  of cost
containment,  while providing us with the quality control and income  capability
of cassette sales.

         The international market, with significantly lower medical budgets, has
not been able to justify the expense of using disposable  components.  Budgetary
constraints have limited current  manufacturers from gaining a significant share
of the international  ultrasound equipment market, and have provided a niche for
the emerging smaller companies discussed above.

                                       43


         Ultrasound Equipment Manufacturers. As a relatively recent entrant into
the cataract  surgical  equipment  market with a newer  equipment  line,  we are
establishing ourself and, as yet, do not hold a significant share of the market.
We currently recognize Bausch & Lomb, Alcon  Laboratories,  and Allergan Medical
Optics as our primary  competitors  in the ultrasound  phaco cataract  equipment
market.

         Laser  Equipment  Manufacturers.  There  are  several  other  companies
attempting to develop laser equipment for cataract surgery.  These companies can
be  differentiated  by the laser wavelength  employed for the cataract  surgery.
Based on the  information  currently  available to us;  Er:YAG laser  wavelength
appears  to offer a less  viable  means of  removing  cataracts  than the Nd:YAG
wavelength  used by the  Photon(TM).  One competitor  uses a Nd:YAG  wavelength,
however the laser is used only to vibrate an ultrasonic needle.  Thus the device
remains an  ultrasonic  system  subject to same risk  factors of phaco,  thereby
eliminating  the  benefits  of using a laser to  remove  the  cataract.  We also
believe that our product is sufficiently  distinctive and, if properly marketed,
can capture a significant share of the cataract surgical device market. However,
there are  substantial  risks in undertaking a new venture in an established and
already  highly  competitive  industry.  In the  short-term,  we are  seeking to
exploit  these  opportunities.  Depending  upon  further  developments,  we  may
ultimately exploit those  opportunities  through a merger with a stronger entity
already established or one that desires to enter the medical industry.

         We believe that our ability to compete  successfully will depend on our
capability  to create and  maintain  advanced  technology,  develop  proprietary
products,  attract  and  retain  scientific  personnel,  obtain  patent or other
proprietary  protection  for our  products  and  technologies,  obtain  required
regulatory approvals and manufacture,  assemble and successfully market products
either alone or through third parties.

         The  Retinal  Diagnostic  Market.  The  Glaucoma  Research   Foundation
suggests that with the aging of the so-called baby boom  generation,  there will
be an increase of macular  degeneration  and glaucoma in the United States,  the
leading causes of adult blindness  worldwide.  The National Eye Institute stated
in 2002 that the number of visually impaired  Americans is likely to double over
the next three  decades.  Their report  estimated that 2.4 million people suffer
some vision  impairment in this country.  The damage caused by these diseases is
irreversible.  The  preconditions  for the  onset  of  macular  degeneration  or
glaucoma are low ocular blood flow and/or high intraocular pressure.  Diagnostic
screening is important for individuals susceptible to these diseases.  People in
high  risk  categories  include:  African  Americans  over 40 years of age,  all
persons  over 60 years of age,  persons  with a family  history of  glaucoma  or
diabetes, and the very nearsighted.  The glaucoma Research Foundation recommends
that these high-risk individuals be tested regularly for glaucoma.  According to
the U.S.  Census  Bureau,  in 1995 there were over 30 million adults 65 years of
age and older and 8 million  African  Americans  45 years of age and older.  The
Glaucoma Research  Foundation  reports that glaucoma currently accounts for more
than 7 million visits to physicians annually.

         We are  subject to intense  competition  in the  ophthalmic  diagnostic
market from well-financed,  established  companies with recognizable trade names
and product lines and new and developing technologies. The industry is dominated
by  several  large  entities  which  we  believe  account  for the  majority  of
diagnostic  equipment sales. We continue to derive revenues from the sale of its
ultrasound diagnostic equipment and blood flow analyzer. The blood flow analyzer
is designed to detect  glaucoma in an earlier stage than is presently  possible.
In  addition,  the device  performs  tonometry  and blood flow  analysis.  Other
ophthalmic diagnostic devices that do not detect glaucoma in the early stages of
the disease as does our analyzer retail at comparable  prices.  Thus, we believe
that we can compete in the  diagnostic  market  place based upon the lower price
and improved diagnostic functions of the analyzer.

Intellectual Property Protection

         Our cataract surgical  products are proprietary in design,  engineering
and performance. Our surgical ultrasonic products have not been patented to date
because the primary technology for ultrasonic tissue fragmentation, as available
to all competitors in the market, is mainly in the public domain.

         We did acquire  proprietary  intellectual  property in the  transaction
with Humphrey Systems when we purchased the diagnostic  ultrasonic  product line
in 1999. This technology  uses ultrasound to create a  high-resolution  computer
image of the unseen parts of the eye that is a "map" for the  practitioner.  The
P40 UBM Ultrasound  Biomicroscope,  one of the ultrasonic products we purchased,
is subject to a license  agreement  dated  September 27, 1990,  with  Sunnybrook
Health Science  Center.  Under the terms of the license  agreement,  we have the
exclusive  worldwide rights to manufacture and sell the UBM  biomicroscope,  for
which we are required to pay a royalty of $150 for each  licensed  product sold.
The license agreement was automatically terminated by its terms on September 27,
2002, at which time we had a royalty free world-wide license to use and sell the
P40 UBM Ultrasound Biomicroscope. However, we have a continuing obligation after
such termination to continue to use and sell the biomicroscope only in the field
of ophthalmology.

         The Photon(TM)  laser cataract probe is protected under a United States
patent issued to Daniel M. Eichenbaum, M.D. in 1987 and subsequently assigned to
PhotoMed International,  Inc. and a Japanese patent issued to us in 1997 for the
utility and  methods of laser  ablation,  aspiration  and  irrigation  of tissue
through a hand-held  probe of a unique design.  The United States patent expired
in September 2004.

                                       44


         We secured the exclusive  worldwide rights to this patent shortly after
its issue, and to the international patents pending, from PhotoMed by means of a
license agreement dated July 7, 1993. The license agreement provides us with the
rights to  manufacture,  distribute and sell a laser system using the Photon(TM)
laser cataract probe and related  components to customers on a world wide basis,
for which  PhotoMed is to receive a 1% royalty on all net sales of such  systems
and related components sold worldwide.

         Under  the  license  agreement  PhotoMed  is  entitled  to all  royalty
payments  from net sales at the time of  billing to the  purchaser  or within 30
days of the date of shipment,  whichever  occurs  first.  We are  required  each
quarter to prepare a summary of sales and the  royalties  to which  PhotoMed  is
entitled to be paid. The sales summary must list the number of surgical  systems
and  disposable  units sold in each  country,  the dollar value of gross and net
sales,  the amount of the royalty to which  PhotoMed is entitled,  and any other
information  requested  by  PhotoMed  from time to time.  Under the terms of the
agreement,  we have  agreed  to be  actively  engaged  in  either  research  and
development  of a saleable  product  utilizing  the patent or in  marketing  and
selling such a product.

         The license agreement was amended on December 5, 1997 to allow PhotoMed
the right to conduct research, development and marketing utilizing the patent in
certain  medical  subspecialties  other  than  ophthalmology  for which we would
receive  royalty  payments  equal to 1% of the  proceeds  from the net  sales of
products  utilizing the patent.  The license  agreement  expired when the United
States patent rights expired in September 2004, but the license  agreement shall
be  automatically  extended  or  renewed  for any term of  extension  or renewal
awarded for the patent rights.  In addition,  we have the right to terminate the
license  agreement  at any time after  July 7, 2003 upon 90 days  prior  written
notice to PhotoMed.

         PhotoMed  and  Dr.  Eichenbaum  brought  legal  action  against  us  on
September 11, 2000  involving an amount of royalties  that are allegedly due and
owing to them from the sale of  equipment  by us. We have paid  $14,736 to bring
all royalty payments up to date through June 30, 2001. We have been working with
PhotoMed and Dr.  Eichenbaum to ensure that the royalty  calculations  have been
correctly  made.  It is  anticipated  that once the parties agree on the correct
royalty calculations, the legal action will be dismissed. However, if the partes
are unable to agree on a method for calculating royalties,  there is a risk that
PhotoMed and Dr. Eichenbaum might amend the complaint to request  termination of
the  license  agreement  and,  if  successful,  we  would  lose  our  rights  to
manufacture or sell the Photon(TM) laser system.

         The Photon(TM)  laser  cataract probe is also protected  under a United
States patent issued to us in 2002 for a laser  surgical  device for the removal
of  intraocular  tissue  including a handpiece and a trap.  The patent is due to
expire in August 2019. There are also two pending United States patents relating
to the Photon(TM) laser cataract probe.

         The Blood  Flow  Analyzer(TM)  has been  granted a patent in the United
Kingdom in 1998 and in the United  States in 1999,  and has a patent  pending in
Japan.  These patents relate to pneumatic  pressure  probes for use in measuring
change in intra- ocular pressure and in measuring  pulsatile  ocular blood flow.
The United States  patent  rights expire in January 2019 and the United  Kingdom
patent rights expire in November 2015.

         The Dicon(TM) Perimeter and the Dicon(TM) Corneal Topographer each have
a U.S.  patent  with a wide scope of claims.  The United  States  patent for the
Dicon(TM)  Perimeter  was issued in 1991 and the patent  rights  expire in March
2010. The United States patent for the Dicon(TM) Corneal Perimeter was issued in
2002 and the patent rights expire in January 2018.

         Our  trademarks  are  important  to our  business.  It is our policy to
pursue trademark  registrations for its trademarks  associated with its products
as  appropriate.  Also,  we rely on common law  trademark  rights to protect its
unregistered trademarks,  although common law trademark rights do not provide us
with the same level of protection as would U.S. federal  registered  trademarks.
Common law trademark  rights only extend to the  geographical  area in which the
trademark is actually used while U.S. federal registration  prohibits the use of
the trademark by any party anywhere in the United States.

         We also  rely on  trade  secret  law to  protect  some  aspects  of our
intellectual  property.  All of our key employees,  consultants and advisors are
required  to  enter  into a  confidentiality  agreement  with  us.  Most  of our
third-party  manufacturers  and  formulators  are also bound by  confidentiality
agreements with us.

Regulation

         The FDA under the Food,  Drug and  Cosmetics Act regulates our surgical
and  diagnostic  systems as medical  devices.  As such,  these  devices  require
Premarket  clearance or approval by the FDA prior to their  marketing  and sale.
Such clearance or approval is premised on the production of evidence  sufficient
for us to show reasonable  assurance of safety and  effectiveness  regarding our
products.  Pursuant to the Food,  Drug and Cosmetics  Act, the FDA regulates the
manufacture, distribution and production of medical devices in the United States
and the export of medical  devices from the United  States.  Noncompliance  with
applicable  requirements  can  result in fines,  injunctions,  civil  penalties,
recall or seizure of products, total or partial suspension of production, denial
of Premarket clearance or approval for devices.  Recommendations by the FDA that
we not be allowed to enter into  government  contracts and criminal  prosecution
may also be made.

                                       45


         Following the enactment of the Medical  Device  Amendments to the Food,
Drug and Cosmetics Act in May 1976, the FDA began classifying medical devices in
commercial  distribution  into one of three  classes:  Class I, II or III.  This
classification  is based on the controls  that are  perceived to be necessary to
reasonably  ensure the  safety and  effectiveness  of medical  devices.  Class I
devices are those devices,  the safety and effectiveness of which can reasonably
be ensured through general  controls,  such as adequate  labeling,  advertising,
pre-marketing   notification   and  adherence  to  the  FDA's   Quality   System
Requirements  regulations.  Some  Class I devices  are  exempt  from some of the
general   controls.   Class  II  devices  are  those   devices  the  safety  and
effectiveness  of which can  reasonably  be assured  through  the use of special
controls,  such  as  performance  standards,  postmarket  surveillance,  patient
registries and FDA  guidelines.  Class III devices are devices that must receive
pre-marketing  approval  by the FDA to ensure  their  safety and  effectiveness.
Generally, Class III devices are limited to life-sustaining,  life-supporting or
implantable  devices,  or  to  new  devices  that  have  been  found  not  to be
substantially equivalent to legally marketed devices.

         There are two principal  methods by which FDA approval may be obtained.
One method is to seek FDA approval through a pre-marketing  notification  filing
under Section 510(k) of the Food,  Drug and Cosmetics Act. If a manufacturer  or
distributor  of a  medical  device  can  establish  that a  proposed  device  is
"substantially  equivalent"  to a legally  marketed  Class I or Class II medical
device or to a  pre-1976  Class  III  medical  device  for which the FDA has not
called for a pre-marketing  approval,  the  manufacturer or distributor may seek
FDA Section  510(k)  pre-marketing  clearance for the device by filing a Section
510(k) pre-marketing notification. The Section 510(k) notification and the claim
of substantial  equivalence will likely have to be supported by various types of
data and materials,  possibly including clinical testing results, obtained under
an  Investigational  Device  Exemption  granted by the FDA. The  manufacturer or
distributor may not place the device into interstate  commerce until an order is
issued by the FDA granting pre-marketing  clearance for the device. There can be
no assurance that we will obtain Section 510(k) pre-marketing  clearance for any
of the future devices for which we seek such clearance  including the Photon(TM)
laser system.

         The FDA may determine that the device is "substantially  equivalent" to
another  legally  marketed  Class I, Class II or  pre-1976  Class III device for
which  the FDA has not  called  for a  pre-marketing  approval,  and  allow  the
proposed  device to be marketed  in the United  States.  The FDA may  determine,
however,  that the  proposed  device  is not  substantially  equivalent,  or may
require further  information,  such as additional  test data,  before the FDA is
able  to  make  a  determination  regarding  substantial  equivalence.   A  "not
substantially  equivalent" determination or a request for additional information
could delay our market  introduction  of our  products and could have a material
adverse effect on our business, operating results and financial condition.

         The  alternate  method  to seek  approval  is to  obtain  pre-marketing
approval from the FDA. If a  manufacturer  or  distributor  of a medical  device
cannot establish that a proposed device is  substantially  equivalent to another
legally  marketed  device,  whether or not the FDA has made a  determination  in
response to a Section 510(k) notification,  the manufacturer or distributor will
have to seek  pre-marketing  approval for the proposed  device.  A pre-marketing
approval  application  would have to be submitted  and be supported by extensive
data,  including  preclinical  and  clinical  trial data to prove the safety and
efficacy  of the  device.  If human  clinical  trials of a  proposed  device are
required and the device  presents a significant  risk, the  manufacturer  or the
distributor of the device will have to file an Investigational  Device Exemption
application  with  the FDA  prior  to  commencing  human  clinical  trials.  The
Investigational   Device  Exemption  application  must  be  supported  by  data,
typically  including  the  results  of animal  and  mechanical  testing.  If the
Investigational Device Exemption application is approved,  human clinical trials
may begin at a specific number of investigational sites, and the approval letter
could include the number of patients approved by the FDA.

         An Investigational  Device Exemption clinical trial can be divided into
several parts or phases.  Sometimes,  a company will conduct a feasibility study
(Phase  I) to  confirm  that a device  functions  according  to its  design  and
operating  parameters.  This is a usual  clinical  trial  site.  If the  Phase I
results are promising, the applicant may, with the FDA's permission,  expand the
number of  clinical  trial  sites and the  number of  patients  to be treated to
assure reasonable stability of clinical results.  Phase II studies are performed
to confirm  predictability of results and the absence of adverse reactions.  The
applicant may, upon receipt of the FDA's authorization,  subsequently expand the
study to a third  phase  with a larger  number  of  clinical  trial  sites and a
greater number of patients. This involves longer patient follow-up times and the
collection of more patient data. Product claims,  labeling and core data for the
pre-marketing  approval are derived  primarily from this portion of the clinical
trial. The applicant may also, upon receipt of the FDA's permission, consolidate
one or more of such  portions  of the study.  Sponsors  of  clinical  trials are
permitted to sell those devices distributed in the course of the study, provided
such  compensation  does  not  exceed  recovery  of the  costs  of  manufacture,
research,  development and handling.  Although both approval methods may require
clinical  testing of the device in question  under an  approved  Investigational
Device Exemption,  the pre-marketing approval procedure is more complex and time
consuming.

         Upon receipt of the pre-marketing approval application, the FDA makes a
threshold  determination  whether the  application is  sufficiently  complete to
permit a  substantive  review.  If the FDA  determines  that  the  pre-marketing
approval is sufficiently  complete to permit a substantive  review, the FDA will
"file" the application.  Once the submission is filed, the FDA has by regulation
90 days to review it; however,  the review time is often extended  significantly
by the FDA asking for more information or  clarification of information  already

                                       46


provided in the submission.  During the review period, an advisory committee may
also  evaluate  the  application  and provide  recommendations  to the FDA as to
whether the device  should be approved.  In  addition,  the FDA will inspect the
manufacturing  facility  to  ensure  compliance  with the FDA's  Quality  System
Requirements prior to approval of a pre-marketing application. While the FDA has
responded  to  pre-marketing  approval  applications  within the  allotted  time
period,  pre-marketing  approval reviews  generally take  approximately 12 to 18
months or more from the date of filing to approval.  The pre-marketing  approval
process  is  lengthy  and  expensive,  and there can be no  assurance  that such
approval  will be obtained for any of our products  determined  to be subject to
such  requirements.  A number of devices for which other  companies  have sought
pre-marketing approval have never been approved for marketing.

         Any products  manufactured or distributed by us pursuant to a premarket
clearance  notification  or  pre-marketing  approval  are or will be  subject to
pervasive and continuing regulation by the FDA. The Food, Drug and Cosmetics Act
also requires that our products be manufactured in registered establishments and
in  accordance   with  Quality  System   Requirements   regulations.   Labeling,
advertising and  promotional  activities are subject to scrutiny by the FDA and,
in certain  instances,  by the Federal Trade  Commission.  The export of medical
devices is also subject to regulation in certain instances. In addition, the use
of our  products  may  be  regulated  by  various  state  agencies.  All  lasers
manufactured  for us are subject to the Radiation  Control for Health and Safety
Act administered by the Center for Devices and  Radiological  Health of the FDA.
The law requires laser  manufacturers to file new product and annual reports and
to maintain quality control,  product testing and sales records,  to incorporate
certain  design and operating  features in lasers sold to end users  pursuant to
specific  performance  standards,  and to comply with labeling and certification
requirements.  Various warning labels must be affixed to the laser, depending on
the class of the product, as established by the performance standards.

         Although  we believe  that we  currently  comply and will  continue  to
comply with all applicable  regulations  regarding the  manufacture  and sale of
medical  devices,  such  regulations  are  always  subject  to change and depend
heavily on administrative interpretations. There can be no assurance that future
changes in review guidelines,  regulations or administrative  interpretations by
the FDA or other regulatory bodies,  with possible  retroactive effect, will not
materially adversely affect us. In addition to the foregoing,  we are subject to
numerous federal,  state and local laws relating to such matters as safe working
conditions,  manufacturing  practices,  environmental  protection,  fire  hazard
control  and  disposal  of  potentially  hazardous  substances.  There can be no
assurance that we will not be required to incur significant costs to comply with
such laws and  regulations  and that such  compliance  will not have a  material
adverse effect upon our ability to conduct business.

         We and the  manufacturers of our products may be inspected on a routine
basis by both the FDA and individual  states for compliance with current Quality
System Requirements regulations and other requirements.

         Congress  has  considered  several  comprehensive  federal  health care
programs  designed  to  broaden  coverage  and  reduce  the  costs  of  existing
government and private insurance programs.  These programs have been the subject
of criticism within Congress and the health care industry,  and many alternative
programs and features of programs have been proposed and  discussed.  Therefore,
we cannot  predict  the content of any federal  health care  program,  if any is
passed by Congress,  or its effect on us and our  business.  Some  measures that
have been  suggested as possible  elements of a new program,  such as government
price  ceilings on  non-reimbursable  procedures  and  spending  limitations  on
hospitals  and other  healthcare  providers  for new  equipment,  could  have an
adverse  effect on our  business,  operating  results  or  financial  condition.
Uncertainty concerning the features of any health care program considered by the
Congress,  its  adoption  by the  Congress  and the effect of the program on our
business could result in volatility of the market price of our common stock.

         Furthermore,  the introduction of our products in foreign countries may
require us to obtain  foreign  regulatory  clearances.  We  believe  that only a
limited  number of foreign  countries have  extensive  regulatory  requirements,
including  France,  Germany,  Korea,  China and  Japan.  The time  involved  for
regulatory  approval in foreign countries varies and can take a number of years.
A number of European and other economically advanced countries, including Italy,
Norway,  Spain and Sweden, have not developed  regulatory agencies for intensive
supervision of such devices. Instead, they generally have been willing to accept
the approval of the FDA. Therefore, a pre-marketing approval,  Section 510(k) or
approved Investigational Device Exemption from the FDA is tantamount to approval
in those  countries.  These countries and most developing  countries have simply
deferred  direct  discretion  to licensed  practicing  surgeons to determine the
nature of devices that they will use in medical  procedures.  Our two ultrasound
systems,  the Photon(TM)  laser cataract system we are developing and the ocular
blood flow analyzer are all devices,  which require FDA approval.  Therefore,  a
significant  aspect of the  acceptance  of the  devices in the market is the our
effectiveness  in  obtaining  the  necessary   approvals.   Having  an  approved
Investigational  Device  Exemption  allows us to export a product  to  qualified
investigational sites.

Regulatory Status of Products

         All of our products, with the exception of the Photon(TM), are approved
for sale in the U.S. by the FDA under a 510(k).  All of our  products  have been
accepted for import into CE countries and various non-CE countries.

                                       47


         We  acquired  permission  from the FDA to export the  Photon(TM)  Laser
Cataract System outside the United States under an open  Investigational  Device
Exemption  granted by the FDA in September 1994.  Although the Photon(TM)  laser
cataract system is uniquely  configured in an original and  proprietary  manner,
the laser system,  a Nd:YAG laser, is not proprietary to the device or us and is
widely used in the medical  industry and other industries as well. Of particular
significance  is the fact that this particular  component has received  previous
market  clearance from the FDA for other  ophthalmic  and medical  applications.
Also of significance is our belief that the surgical  treatment method used with
the Photon(TM)  laser is similar to the current  ultrasound  cataract  treatment
employed by ophthalmologists.

         We submitted a Premarket Notification 510(k) application to the FDA for
the  Photon(TM)  laser  cataract  system in September  1993.  The FDA  requested
clinical  support  data for claims  made in the 510(k),  and in October  1994 we
submitted  an  Investigational  Device  Exemption  application  to provide for a
"modest  clinical  study" in order to collect  the data  required by the FDA for
clearance  of the  Photon(TM)  laser  cataract  system.  The  FDA  granted  this
Investigational Device Exemption in May 1995 for a Phase I Feasibility Study. We
began human  clinical  trials in April 1996 and  completed  the Phase I study in
November  1997.  We  started  Phase II trials in  September  1998 and  completed
numerous  cases of  treatment  group and  control  group  patients,  which  were
included in our submission to the FDA.

         We received a warning letter dated August 30, 2000,  from the Office of
Compliance,  Center for  Devices  and  Radiological  Health of the Food and Drug
Administration relating to certain deficiencies in the human clinical trials for
our Photon(TM) Laser Cataract System. The warning letter concerns the conditions
found by the FDA during several audits at our clinical sites. The FDA's comments
were  isolated  to the  administrative  procedures  of  compiling  data from the
clinical  sites.  We  responded  to the  warning  letter in a  submission  dated
September 27, 2000. In the  submission we took  corrective  action that included
submitting a revised clinical  protocol and case report forms and procedures for
the  collection  and control of data. In a subsequent  letter dated  November 2,
2000 to us,  the FDA  granted  conditional  approval  provided  that we  correct
certain deficiencies. After providing several additional submissions to the FDA,
we received a letter  dated  February  13,  2001 from the FDA  stating  that the
deficiencies had been corrected and the clinical trials could continue.

         Subsequent to the warning letter,  we received approval to continue our
clinical  trials,  the  results  of  which  were  included  in our  supplemental
submission to the FDA in October 2001 for the existing (510)(k) predicate device
application  for the  Photon(TM)  laser system.  In December 2001, we received a
preliminary  review from the FDA regarding  the  supplemental  submission.  As a
result of that preliminary review, we submitted  additional clinical information
to the FDA on February 6, 2002. The  application is receiving  ongoing review by
the FDA. On May 7, 2002,  we received a letter from the FDA  requesting  further
clinical  information.  We have  generated  additional  clinical  information in
response to the letter and are uncertain if we will make a submission to the FDA
with the additional clinical information.  Because of the "going concern" status
of the company,  management has focused efforts on those products and activities
that will, in its opinion,  achieve the most resource efficient  short-term cash
flow to the company.  Our diagnostic  products are currently our major focus and
the Photon(TM) and other extensive research and development  prospects have been
put on hold pending future evaluation when our financial position improves.  Our
focus is not on any specific  diagnostic product or products,  but rather on our
entire group of diagnostic products.

Facilities

         Our executive  offices are  currently  located at 2355 South 1070 West,
Salt Lake City, Utah. This facility consists of approximately 23,238 square feet
of leased  office space under a three-year  lease that was to expire on March 1,
2003 with an additional  three-year renewal option.  These facilities are leased
from Eden Roc, a California partnership,  at a base monthly rate of $21,163 plus
a $3,342 monthly common area maintenance fee. In January 2003, we renegotiated a
three-year  lease with Eden Roc at a monthly rate of $9,295 plus a $1,859 common
area  maintenance  fee for the year 2003, with rate increases to $9,574 for 2004
and to  $9,861for  2005.  Pursuant  to the  lease,  we pay all real  estate  and
personal property taxes and the insurance costs on the premises.

         We believe that these facilities are adequate and satisfy our needs for
the foreseeable future.

Employees

         As of December 31, 2004,  we had 30  full-time  employees.  This number
does  not  include  our  manufacturer's   representatives  who  are  independent
contractors rather than our employees.  We also utilize several  consultants and
advisors.  There can be no assurance that we will be successful in recruiting or
retaining key personnel. None of our employees are a member of a labor union and
we have never  experienced  any business  interruption  as a result of any labor
disputes.

         In  December  2001,  we  initiated  the  first  phase  of  a  corporate
downsizing program to reduce our operating  expenses.  We implemented the second
phase of our  downsizing  program in the second  quarter of 2002, by closing and
transferring our  manufacturing  from our site in San Diego,  California to Salt
Lake City, resulting in further reductions in operating expenses. As a result of
the downsizing  program and some  resignations,  the number of our employees has
been reduced by 75% from 112 to 30 employees.  The  estimated  cost savings from
the downsizing  program will be in excess of $2,000,000  annually.  The costs of
downsizing have included one-time  expenses of approximately  $43,000 for moving
and  travel.  In  addition,   we  incurred   additional   one-time  expenses  of
approximately  $18,000 for housing  accommodations  for key employees working in
Salt Lake City.  We realized a net cost savings from  downsizing in excess of $2
million during each of the years 2003 and 2002.

                                       48


Legal Proceedings

         An action was  brought  against us in March 2000 by George  Wiseman,  a
former employee, in the Third District Court of Salt Lake County, State of Utah.
The complaint  alleges that we owe Mr.  Wiseman 6,370 shares of our common stock
plus costs, attorney's fees and a wage penalty (equal to 1,960 additional shares
of our common stock) pursuant to Utah law. The action is based upon an extension
of a written  employment  agreement.  We dispute the amount  allegedly  owed and
intend to vigorously defend against the action.

         An action was  brought  against us on  September  11,  2000 by PhotoMed
International,  Inc. and Daniel M. Eichenbaum,  M.D. in the Third District Court
of Salt Lake County,  State of Utah. The action  involves an amount of royalties
that  are  allegedly  due and  owing to  PhotoMed  International,  Inc.  and Dr.
Eichenbaum  under a license  agreement  dated July 7, 1993,  with respect to the
sale of certain equipment,  plus costs and attorney's fees.  Discovery has taken
place and we have paid  royalties  of $14,736 to bring all  payments  up to date
through June 30, 2001. We have been working with PhotoMed and Dr.  Eichenbaum to
ensure that the  calculations  have been correctly made on the royalties paid as
well as the proper method of calculation for the future.

         It is  anticipated  that  once the  parties  can  agree on the  correct
calculations on the royalties,  the legal action will be dismissed. The issue in
dispute  concerning  the method of  calculating  royalties is whether  royalties
should be paid on returned  equipment.  Since July 1, 2001,  only one Photon(TM)
laser  system  has been  sold and no  systems  returned.  Thus,  the  amount  of
royalties due, according to our calculations, is $981. We intend to make payment
of this  amount to PhotoMed  and Dr.  Eichenbaum  and, as a result,  to have the
legal action dismissed.  However, if the parties are unable to agree on a method
for  calculating  royalties,  there is a risk that  PhotoMed and Dr.  Eichenbaum
might amend their complaint to request termination of the license agreement and,
if successful,  we would lose our right to  manufacture  and sell the Photon(TM)
laser system.

         On May 14, 2003, a complaint  was filed in the United  States  District
Court, District of Utah, captioned Richard Meyer,  individually and on behalf of
all others similarly suited v. Paradigm Medical Industries, Inc., Thomas Motter,
Mark  Miehle and John  Hemmer,  Case No.  2:03  CV00448TC.  The  complaint  also
indicates  that it is a  "Class  Action  Complaint  for  Violations  of  Federal
Securities  Law and  Plaintiffs  Demand a Trial by Jury." We have retained legal
counsel to review the  complaint,  which  appears to be focused on alleged false
and  misleading  statements  pertaining  to  the  Blood  Flow  Analyzer(TM)  and
concerning a purchase order from Valdespino Associates  Enterprises and Westland
Financial Corporation.

         More specifically,  the complaint alleges that we falsely stated in our
Securities  and  Exchange  Commission  filings  and press  releases  that we had
received  authorization to use an insurance  reimbursement CPT code from the CPT
Code Research and Development  Division of the American Medical  Association for
reimbursement to doctors in connection with the Blood Flow Analyzer(TM),  adding
that the CPT code provides for a reimbursement  to doctors of $57.00 per patient
for use of the Blood Flow Analyzer(TM). According to the complaint, the CPT code
was critical.  Without a reimbursement  code,  physicians would not purchase the
Blood  Flow  Analyzer(TM)  because  they  could  not  receive  compensation  for
performance  of medical  procedures  using the  medical  device.  The  complaint
further  contends that we never received the CPT code from the American  Medical
Association  at any time.  Nevertheless,  it is  alleged  that we  continued  to
misrepresent  in our SEC filings and press releases that we had received the CPT
code. It is also alleged that we have never made a full,  corrective  disclosure
with respect to this alleged misstatement.

         The  complaint  also alleges  that on July 11, 2002,  we issued a press
release falsely announcing that we had received a purchase order from Valdespino
Associates  Enterprises and Westland  Financial  Corporation for 200 sets of our
entire portfolio of products, with $70 million in systems to be delivered over a
two-year period, then another $35 million of orders to be completed in the third
year. The complaint  further  alleges that we had never received a true purchase
order  for our  products.  As a  result  of  these  alleged  misstatements,  the
complaint contends that the price of our shares of common stock was artificially
inflated  during the period from April 25, 2001  through May 14,  2003,  and the
persons who purchased or retained our common shares during that period  suffered
substantial  damages.  The complaint requests judgment for unspecified  damages,
together with interest and attorney's fees.

         We dispute having issued false and misleading statements concerning the
Blood Flow Analyzer(TM) and a purchase order from Westland Financial Corporation
and  Valdespino  Associates  Enterprises.  On April 25, 2001,  we issued a press
release  that  stated we had  received  authorization  to use  common  procedure
terminology or CPT code number 92120 for our Blood Flow Analyzer(TM). This press
release was based on a letter we received  from the CPT  Editorial  Research and
Development Department of the American Medical Association stating that CPT code
number 92120 was the appropriate common procedure terminology or CPT code number
for doctors to use when reporting  certain  procedures  performed with our Blood
Flow Analyzer(TM).

                                       49


         Currently,  there is reimbursement by insurance payors to doctors using
the Blood Flow Analyzer(TM) in 22 states and partial reimbursement in four other
states. The amount of reimbursement to doctors using the Blood Flow Analyzer(TM)
generally ranges from $56.00 to $76.00 per patient, depending upon the insurance
payor. Insurance payors providing  reimbursement for the Blood Flow Analyzer(TM)
have the  discretion to increase or reduce the amount of  reimbursement.  We are
endeavoring to obtain  reimbursement  by insurance  payors in other states where
there is currently no reimbursement  being made. We believe we have continued to
correctly  represent in our Securities and Exchange  Commission filings that the
CPT  Editorial  Research and  Development  Department  of the  American  Medical
Association  has advised us that CPT code number  92120 is the  appropriate  CPT
code for our Blood Flow  Analyzer(TM),  for  reimbursement  purposes for doctors
using the device.

         On July 11, 2002,  we issued a press  release that stated we received a
purchase order from Westland  Financial  Corporation  and Valdespino  Associates
Enterprises for 200 complete sets of our entire product  portfolio of diagnostic
and surgical equipment for Mexican ophthalmic practitioners, to be followed by a
second order of 100 sets of equipment. The press release was based on a purchase
order  dated  July  10,  2002  that we  entered  into  with  Westland  Financial
Corporation  for the sale of 200 complete  sets of our  surgical and  diagnostic
equipment to Mexican  ophthalmic  practitioners.  The press  release also stated
that the initial  order was for $70 million of our equipment to be filled over a
two-year  period  followed by the second order of $35 million in equipment to be
completed in the third year.  The press  release  further  stated that  delivery
would be made in traunches of 25 complete sets of our equipment, beginning in 30
days from the date of the purchase order.

         On September  13, 2002,  the board of directors  issued a press release
regarding   the  status  of  our  product   sales  to  the  Mexican   ophthalmic
practitioners.  In that  press  release  the  board  stated  that we had been in
discussions for the prior nine months with Westland Financial Corporation, aimed
at  supplying  our  medical  device  products  to  the  Mexican   market.   Upon
investigation,  the board of directors had  determined  that the purchase  order
referenced  in the July 11, 2002 press release was not of such a nature as to be
enforceable for the purpose of sales or revenue recognition. In addition, we had
not sent any shipment of medical  products to Mexican  ophthalmic  practitioners
nor  received  payment for those  products  pursuant to those  discussions.  The
September 13, 2002 press release also stated that  discussions  were  continuing
with Westland Financial Corporation regarding sales and marketing activities for
our medical device products in Mexico, but we could not, at the time, predict or
provide any assurance that any transactions would result.

         On June 2, 2003, a complaint  was filed in the United  States  District
Court,  captioned Michael Marrone v. Paradigm Medical  Industries,  Inc., Thomas
Motter,  Mark Miehle and John  Hemmer,  Case No. 2:03  CV00513  PGC. On July 11,
2003, a complaint was filed in the same United States District Court,  captioned
Lidia Milian v. Paradigm Medical  Industries,  Inc., Thomas Motter,  Mark Miehle
and John Hemmer,  Case No. 2:03  CV00617PGC.  Both  complaints seek class action
status.  These  cases are  substantially  similar  in nature to the Meyer  case,
including  the  contention  that  as a  result  of  allegedly  false  statements
regarding  the Blood Flow  Analyzer(TM)  and the  purchase  order from  Westland
Financial  Corporation and Valdespino Associates  Enterprises,  the price of our
common stock was artificially  inflated and the persons who purchased our common
shares during the class period suffered  substantial damages. In a press release
dated July 11, 2003,  captioned  "Milberg Weiss  announces the filing of a class
action suit against Paradigm Medical  Industries,  Inc. on behalf of investors,"
the law firm of Milberg  Weiss  Bershad  Hynen & Levach  LLP,  which  represents
purchasers  of our  securities  in the class action suit filed on July 11, 2003,
stated that our alleged  misrepresentations caused the market price of the stock
to be artificially  inflated during the class period. As a result, it is alleged
that  investors  suffered  millions  of  dollars  in  damages  from our  alleged
misstatements.

         The cases  request  judgment for  unspecified  damages,  together  with
interest and attorney's  fees. These cases have now been  consolidated  with the
Meyer case into a single action,  captioned In re: Paradigm  Medical  Industries
Securities  Litigation,  Case No.  03-CV-448TC.  The law firm of  Milberg  Weiss
Bershad & Schulman  LLP is  representing  purchasers  of our  securities  in the
consolidated class action. On June 28, 2004, a consolidated amended class action
complaint was filed on behalf of purchasers of our securities.  The consolidated
complaint  is similar to the three class action  complaints  and alleges that we
made  false   representations   regarding  the  CPT  code  for  the  Blood  Flow
Analyzer(TM),  but it includes additional allegations that we failed to disclose
in a timely manner that doctors were being denied  reimbursement  for procedures
performed  with the Blood Flow  Analyzer(TM).  The  consolidated  complaint also
alleges that we made false statements regarding the purchase order from Westland
Financial  Corporation  and Valdespino  Associates  Enterprises.  We believe the
consolidated  complaint  is without  merit and intend to  vigorously  defend and
protect our interests in the case.

         We  were  issued  a  Directors  and  Officers   Liability  and  Company
Reimbursement Policy by United States Fire Insurance Company for the period from
July 10, 2002 to July 10, 2003 that  contains a $5,000,000  limit of  liability,
which is excess of a $250,000 retention. The officers and directors named in the
consolidated  cases have  requested  coverage  under the  policy.  U.S.  Fire is
currently  investigating  whether it may have a right to deny  coverage  for the
consolidated  cases based upon policy  terms,  conditions  and  exclusions or to
rescind the policy based upon  misrepresentations  contained in our  application
for insurance.

                                       50


         We have paid $30,000 to U.S. Fire toward  satisfaction  of the $250,000
retention  that is applicable to the  consolidated  cases.  We have advised U.S.
Fire that we cannot pay the  $250,000  retention  due to our  current  financial
circumstances.  As a  consequence,  on  January  8,  2004,  we  entered  into  a
non-waiver  agreement  with  U.S.  Fire in which  U.S.  Fire  agreed to fund and
advance our retention  obligation in  consideration  for which we have agreed to
reimburse  U.S. Fire the sum of $5,000 a month for a period of six months,  with
the first of such payments due on February 15, 2004.  Thereafter,  commencing on
August 15, 2004,  we are required to reimburse  U.S. Fire the sum of $10,000 per
month until the entire amount of $250,000 has been  reimbursed to U.S.  Fire. We
have made payments to U.S. Fire in the aggregate  amount of $30,000 of which our
last payment of $10,000 was made on October 11, 2004.  These  payments  were for
the $5,000 monthly  payments due during the six month period from February 15 to
July  15,  2004,  leaving  a  remaining  retention  obligation  to U.S.  Fire of
$220,000.

         In the event U.S. Fire  determines  that we or our former  officers and
directors named in the consolidated cases are not entitled to coverage under the
policy,  or that it is entitled to rescind the policy,  or should we be declared
in default under the non-waiver  agreement,  for not making the monthly payments
in a timely manner that are owed to U.S.  Fire,  then we agree to pay U.S. Fire,
on demand,  the full amount of all costs advanced by U.S. Fire, except for those
amounts  that we may  have  reimbursed  to U.S.  Fire  pursuant  to the  monthly
payments  due under the  non-waiver  agreement.  Moreover,  if U.S.  Fire denies
coverage  for  the  consolidated  cases  under  the  policy,  we  would  owe our
litigation counsel in the class action lawsuits,  for any legal fees not paid by
U.S.  Fire.  However,  U.S.  Fire has  currently  agreed to pay the  legal  fees
relating to the class action lawsuits.

         We will be in default under the non-waiver agreement if we fail to make
any payment due to U.S. Fire  thereunder  when such payment is due, or institute
proceedings to be adjudicated as bankrupt or insolvent.  U.S. Fire's  obligation
to advance  defense costs under the agreement  will  terminate in the event that
the  $5,000,000  policy  limit of liability is  exhausted.  If U.S.  Fire denies
coverage for the  consolidated  cases under the policy and we are not successful
in defending and protecting our interests in the cases,  resulting in a judgment
against us for  substantial  damages,  we would be unable to pay such  liability
and, as a result, would be forced to seek bankruptcy protection.

         On July 10, 2003, a complaint was filed in the United  States  District
Court,  District of Utah captioned  Innovative Optics,  Inc. and Barton Dietrich
Investments,  L.P. v. Paradigm Medical  Industries,  Inc.,  Thomas Motter,  Mark
Miehle and John  Hemmer,  Case No. 2:03 CV 00582DB.  The  complaint  claims that
Innovative  and  Barton  entered  into an asset  purchase  agreement  with us on
January 31, 2002, in which we agreed to purchase all the assets of Innovative in
consideration for the issuance of 1,310,000 shares of the Company's common stock
to Innovative.  The complaint  claims we breached the asset purchase  agreement.
The complaint also claims that we allegedly made false and misleading statements
pertaining to the Blood Flow  Analyzer(TM)  and concerning a purchase order from
Valdespino  Associates  Enterprises  and  Westland  Financial  Corporation.  The
purpose  of  these  statements,  according  to  the  complaint,  was  to  induce
Innovative  to sell its assets and  purchase  the shares of our common  stock at
artificially  inflated  prices while  simultaneously  deceiving  Innovative  and
Barton  into  believing  that the  Company's  shares  were  worth more than they
actually were.  The complaint  contends that had Innovative and Barton known the
truth they would not have sold  Innovative  to us, would not have  purchased our
stock for the assets of Innovative, or would not have purchased the stock at the
inflated prices that they allegedly paid. The complaint further contends that as
a result of the  allegedly  false  statements,  Innovative  and Barton  suffered
substantial damages in an amount to be proven at trial.

         The  complaint  also claims that  491,250 of the shares to be issued to
Innovative in the asset purchase  transaction  were not issued on a timely basis
and we also did not  file a  registration  statement  with  the  Securities  and
Exchange Commission within five months of the closing date of the asset purchase
transaction.  As a result, the complaint alleges that the value of the shares of
our  common  stock  issued  to  Innovative  in  the  transaction  declined,  and
Innovative and Barton suffered damages in an unspecified  amount to be proven at
trial. We filed an answer to the complaint and also filed counterclaims  against
Innovative  and Barton for breach of  contract.  We  believe  the  complaint  is
without merit and intend to  vigorously  defend and protect our interests in the
action.  If we are not  successful in defending and  protecting our interests in
this action,  and a judgment for substantial  damages is entered against us, and
U.S.  Fire denies  coverage in the  litigation  under the Directors and Officers
Liability  and  Company  Reimbursement  Policy,  we would be  unable to pay such
liability and, as a result, would be forced to seek bankruptcy protection.

         On October 14, 2003, an action was filed in the Third Judicial District
Court,  Salt  Lake  County,  State of Utah,  captioned  Albert  Kinzinger,  Jr.,
individually and on behalf of all others similarly situated vs. Paradigm Medical
Industries,  Inc.,  Thomas  Motter,  Mark Miehle,  Randall A.  Mackey,  and John
Hemmer,  Case No.  030922608.  The complaint  also indicates that it is a "Class
Action Complaint for Violations of Utah Securities Laws and Plaintiffs  Demand a
Trial by Jury." We have retained  legal counsel to review the  complaint,  which
appears to be focused on alleged  false or misleading  statements  pertaining to
the Blood Flow Analyzer(TM).  More  specifically,  the complaint alleges that we
falsely stated in Securities and Exchange  Commission filings and press releases
that we had received  authorization to use an insurance  reimbursement  CPT code
from the CPT Code  Research and  Development  Division of the  American  Medical
Association in connection with the Blood Flow Analyzer(TM),  adding that the CPT
code provides for a reimbursement to doctors of $57.00 per patient for the Blood
Flow Analyzer(TM).

                                       51


         The purpose of these  statements,  according to the  complaint,  was to
induce investors to purchase shares of our Series E preferred stock in a private
placement  transaction at artificially  inflated prices.  The complaint contends
that as a result of these statements, the investors that purchased shares of our
Series E preferred stock in the private offering suffered substantial damages to
be proven at trial.  The complaint  also alleges that we sold Series E preferred
shares  without  registering  the sale of such shares or  obtaining an exemption
from registration.  The complaint requests rescission,  compensatory damages and
treble damages,  including  interest and attorneys'  fees. We filed an answer to
the  complaint.  We  believe  the  complaint  is  without  merit  and  intend to
vigorously  defend our  interests  in the action.  If we are not  successful  in
defending and  protecting  our interests in the action,  resulting in a judgment
against  us for  substantial  damages,  and U.S.  Fire  denies  coverage  in the
litigation under the Directors and Officers Liability and Company  Reimbursement
Policy,  we would be unable to pay such  liability  and,  as a result,  would be
forced to seek bankruptcy protection.

         On December 8, 2004, we announced that verbal agreements have been made
to settle certain lawsuits brought against us and our former executive officers,
Thomas F.  Motter,  Mark R. Miehle and John W.  Hemmer.  The  following  are the
lawsuits that have been verbally settled:

         o    The class action  lawsuit filed on May 14, 2003 by Richard  Meyer,
              individually  and on  behalf  of all  others  similarly  situated,
              against us and  certain  former  executive  officers in the United
              States  District  Court  for  the  District  of  Utah,  which  was
              consolidated  into a single action on June 28, 2004 with two other
              class action lawsuits -- the class action lawsuit filed by Michael
              Marone on June 2, 2003 and the class action lawsuit filed by Lidia
              Milian  on July  21,  2003  against  us and our  former  executive
              officers in the same court. The  consolidated  action is captioned
              In re Paradigm Medical Industries Securities Litigation, with lead
              plaintiffs Rock Solid  Investments of Miami,  Inc.,  Brito & Brito
              Accounting, Inc. and Joseph Savanjo.

         o    The class  action  lawsuit  filed on  October  14,  2003 by Albert
              Kinzinger, Jr., individually and on behalf of all others similarly
              situated,  in the  Third  District  Court  for the  State  of Utah
              against us and certain former executive officers.

         o    The lawsuit  filed on July 10,  2003 by  Innovative  Optics,  Inc.
              against us and certain former executive officers.

         Under the  terms of the  settlement  agreements,  U.S.  Fire  Insurance
Company,   which  issued  a  Directors   and  Officers   Liability  and  Company
Reimbursement  Policy to us for the period from July 10, 2002 to July 10,  2003,
has agreed to pay $2,500,000 in cash to the classes in the class action lawsuits
and to Innovative Optics, Inc. in settlement of these lawsuits.  Under the terms
of  settlement,  we are to pay U.S. Fire the sum of $220,000,  representing  the
remaining  amount owing under a $250,000  retention  obligation in the insurance
policy,  and to execute a policy  release in favor of U.S.  Fire as to  coverage
under the insurance policy.

         The parties to the settlement and their respective legal counsel are in
the process of preparing written settlement  agreements to memorialize the terms
of the  verbal  agreements.  Settlement  of the  lawsuits  is subject to certain
conditions, which include but are not limited to the following:

         o    Each of the settlement  classes shall, in their respective actions
              and at their own expense, obtain preliminary approval of the terms
              of  settlement  by both the court in the  federal  action  and the
              court in the state action.

         o    After obtaining a court order granting preliminary approval of the
              terms of settlement in the respective actions, each of the classes
              are  required,  in  their  respective  actions  and at  their  own
              expense,  to  provide  notice to all  persons  that are  potential
              members of the federal  settlement  class and the state settlement
              class, respectively.

         o    The federal  settlement  class  members  and the state  settlement
              class  members  shall  have a period  of time from the date of the
              mailing  of such  notice  in which  to  "opt-out"  of the  federal
              settlement class and state settlement class, respectively.

         Under  the  terms  of the  settlement,  U.S.  Fire  has the  option  to
terminate the settlement agreements if the cumulative dollar value of the claims
held by individuals or entities that "opt-out" of the federal  settlement  class
or the state  settlement  class exceeds  $250,000.  However,  if such "opt-outs"
exceed  $250,000,  the  parties  in the  class  have a period of time to cure by
reducing the amount of "opt-outs" to less than $250,000. The remaining retention
obligation of $220,000 is payable in monthly  installments  of $10,000 until the
entire amount owing is paid.

         If  U.S.  Fire   exercises  its  option  to  terminate  the  settlement
agreements  in the event the  "opt-outs"  exceed  $250,000  and the  parties are
unable to reduce the amount of "opt-outs"  within an allowable time period,  the
terms and conditions of the settlement agreements will have no further force and
effect,  and all parties will be restored to their  respective  positions in the
various legal actions prior to such settlement.

                                       52


         An action  was filed on June 20,  2003 in the Third  Judicial  District
Court, Salt Lake County,  State of Utah (Civil No. 030914195) by Citicorp Vendor
Finance, Inc., formerly known as Copelco Capital, Inc. The complaint claims that
$49,626  plus  interest  is due for the leasing of two copy  machines  that were
delivered to our Salt Lake City facilities on or about April of 2000. The action
also seeks an award of attorney's fees and costs incurred in the collection.  We
dispute the amounts allegedly owed,  asserting that the equipment we returned to
the leasing company did not work properly. A responsive pleading has been filed.
We were  engaged in  settlement  discussions  with  Citicorp  until  counsel for
Citicorp  withdrew  from the case.  New  counsel has not yet been  appointed  to
represent Citicorp in the case.

         An action was filed in June, 2003 in the Third Judicial District Court,
Salt Lake County, State of Utah (Civil No. 030914719) by Franklin Funding,  Inc.
in which it alleges that we had entered into a lease  agreement for the lease of
certain  equipment for which payment is due. It is claimed that there is due and
owing  approximately  $89,988 after accruing late fees,  interest,  repossession
costs,  collection costs and attorneys' fees. On August 28, 2003, we agreed to a
settlement  of the case with  Franklin  Funding by  agreeing  to make 24 monthly
payments of $2,300 to Franklin  Funding,  with the first monthly  payment due on
August 29, 2003.  As of December 31, 2004,  we have made 17 monthly  payments of
$2,300 each to Franklin Funding.

         We received demand letters dated July 18, 2003,  September 26, 2003 and
November 10, 2003 from counsel for Douglas A. MacLeod,  M.D., a  shareholder  of
the  company.  In the July 18, 2003  letter,  Dr.  MacLeod  demands  that he and
certain  entities  with which he is involved or controls,  namely the Douglas A.
MacLeod, M.D. Profit Sharing Trust, St. Marks' Eye Institute and Milan Holdings,
Ltd., be issued a total of 2,296,667  shares of our common stock and warrants to
purchase  1,192,500  shares of our common stock at an exercise price of $.25 per
share. Dr. MacLeod claims that these common shares and warrants are owing to him
and the related  entities  under the terms of a mutual release dated January 16,
2003,  which he and the  related  entities  entered  into with us.  Dr.  MacLeod
renewed his  request  for these  additional  common  shares and  warrants in the
September  26, 2003 and  November 10, 2003 demand  letters.  We believe that Dr.
MacLeod's  claims and  assertions  are without merit and that neither he nor the
related  entities are entitled to any  additional  shares of our common stock or
any  additional  warrants  under the terms of the mutual  release.  We intend to
vigorously defend against any legal action that Dr. MacLeod may bring.

         On August 3, 2003, a complaint was filed against us by Corinne  Powell,
a former employee, in the Third Judicial District Court, Salt Lake County, State
of Utah (Civil No. 030918364).  Defendants consist of the Company and Randall A.
Mackey, Dr. David M. Silver and Keith D. Ignotz,  directors of the company.  The
complaint alleges that at the time we laid off Ms. Powell on March 25, 2003, she
was owed  $2,030 for  business  expenses,  $11,063 for  accrued  vacation  days,
$12,818 for unpaid  commissions,  the fair market value of 50,000 stock  options
exercisable  at  $5.00  per  share  that  she  claims  she  was  prevented  from
exercising,  attorney's  fees and a continuing  wage penalty  under Utah law. We
dispute the amounts  allegedly owed and intend to vigorously  defend and protect
our interests in the action.

         On September 10, 2003, an action was filed against us by Larry Hicks in
the Third Judicial  District Court,  Salt Lake County,  State of Utah (Civil No.
030922220), for payments due under a consulting agreement with us. The complaint
claims that monthly payments of $3,083 are due for the months of October 2002 to
October 2003 under a consulting  agreement  and, if the agreement is terminated,
for the sum of  $110,000  minus  whatever  we have paid Mr.  Hicks prior to such
termination,  plus costs,  attorney's  fees and a wage penalty  pursuant to Utah
law.  We dispute  the amount  allegedly  owed and  intend to  vigorously  defend
against such action.

         On May 25, 2004, an action was brought  against us by Jeffrey F. Poore,
former  President  and Chief  Executive  Officer  of the  company,  in the Third
Judicial  District  Court  of  Salt  Lake  County,  State  of  Utah  (Civil  No.
040910875).  The  complaint  alleges that we unlawfully  terminated  the written
employment  agreement  between Mr. Poore and us. As a result,  Mr. Poore demands
judgment  against us for  $350,000,  representing  his annual salary for the two
remaining years under the employment agreement,  for money judgment based on the
value  of his  benefits  for  the  two  remaining  years  under  the  employment
agreement,  including profit sharing plans, 401(k) and cafeteria plans,  health,
hospitalization,  dental,  disability and other  insurance plans canceled by us,
and for money  judgment  equal to the value of the stock options  granted to him
under the  employment  agreement.  We dispute the amounts  allegedly owed in the
complaint and believe that there was a sufficient basis to terminate Mr. Poore's
employment for cause under the terms of the employment  agreement.  Accordingly,
we intend to vigorously defend against the action.

         On August 9, 2004, a third party  complaint  was brought  against us by
Wakefield  Eye Center.  The  original  action was  brought by  American  Express
Business  Corporation  against  Westfield  Eye  Center  on May  27,  2004 in the
District Court, Clark County, State of Nevada (Civil No. A486307, Dept. No. XXI)
concerning the financing of the purchase of a Blood Flow Analyzer(TM)  involving
Westfield Eye Center. The transaction took place during the latter half of 2001.
Westfield  Eye Center takes the position that if there is liability of Westfield
to American Express this liability is ultimately ours and the other  third-party
defendants.  The amount being sought  against  Westfield  Eye Center by American
Express in the original  action  includes the sum of  $29,765.83,  together with
interest and  attorney's  fees.  Westfield's  alleged  claims against us include

                                       53


fraud, breach of contract, promissory estoppel,  declaratory relief, negligence,
negligent   supervision,   damages  for  injuries   resulting  from  actions  of
employee/contractor,  wilful and wanton  misconduct,  conspiracy,  and breach of
fiduciary  duty as well as costs  and  attorney's  fees.  Westfield  also  seeks
punitive damages.  We have filed an answer to the third party complaint in which
we deny liability. Formal discovery in the matter involving us has not commenced
apart  from  initial  disclosure  requirements.  The case has been  referred  to
arbitration. We intend to vigorously defend the action.

         We are not a party to any other material legal proceedings  outside the
ordinary  course of its  business or to any other legal  proceedings  which,  if
adversely  determined,  would have a material  adverse  effect on our  financial
condition or results of operations.


                                   MANAGEMENT

Directors and Executive Officers

         As of December 31, 2004, our executive  officers and  directors,  their
ages and their positions are set forth below:

     Name                         Age     Position
     ----                         ---     --------
     John Y. Yoon                 40      President and Chief Executive Officer
     Aziz A. Mohabbat             44      Vice President of Operations and Chief
                                          Operating Officer
     Randall A. Mackey, Esq.      59      Chairman of the Board, Secretary and 
                                          Director
     David M. Silver, Ph.D.       61      Director
     Keith D. Ignotz              54      Director
     John C. Pingree              64      Director

         The  directors  are elected for one-year  terms that expire at the next
annual meeting of shareholders.  Executive  officers are elected annually by the
Board of Directors to hold office until the first meeting of the Board following
the next annual meeting of  shareholders  and until their  successors  have been
elected and qualified.

         John Y. Yoon has served as our  President and Chief  Executive  Officer
since  March 19,  2004.  From June 2003 to March 19,  2004,  Mr.  Yoon served as
Senior  Director of  Marketing,  Enterprise  Voice  Solutions  Division of 3 Com
Corporation.  From 1997 to June 2003,  he served as Senior  Director  of Product
Management and Director of Product  Management of 3 Com Corporation.  During the
period  from 1996 to 1997,  Mr.  Yoon was  Director of  Strategic  Planning  and
Product  Development  of US  Robotics.  During the period from 1993 to 1996,  he
served as Manager of  Marketing  and  Strategic  Planning,  Senior  Director  of
Product Management and Management of Product Development for Ericsson, Inc. From
1990 to 1993, Mr. Yoon was Manager of Public Service  Marketing and Product Line
Manager Mobile Radios for Ericsson, Inc. During the period from 1986 to 1988, he
was Product Planner of Business and Industrial  Trucking and Marketing  Research
Analyst for General  Electric  Mobile  Communications.  Mr. Yoon received a B.A.
degree in Economics from Harvard College in 1985 and an M.B.A.  degree from Duke
University in 1992.

         Aziz A. Mohabbat has served as our Chief Operating  Officer since March
23, 2004 and from August 2002 to March 2003,  and Vice  President of  Operations
since March 23, 2004 and from 2001 to March 2003.  From 2000 to 2001,  he served
as Managing  Director of the San Diego  Division of our company and from 1999 to
2000 as its Regulatory Affairs and Quality Assurance Manager. From March 2003 to
March 2004, Mr. Mohabbat served as Division  Manager of the Medical  Division of
TUV  Rheilland  of North  America,  a medical  products  safety  and  compliance
services  company.  From 1997 to 1999,  he served as Operations  and  Regulatory
Affairs and Quality Assurance Manager of Codan U.S., a subsidiary of Codan GmbH,
a manufacturer of disposable sterile and non-sterile  medical devices.  Prior to
1989, Mr. Mohabbat held various management and  bioengineering  positions in the
medical  laboratory  and  diagnostics  field  in  the  Eye  Care  Clinic  of the
University  Hospital-  Eppendorf and the General Hospital of Barmbek in Hamburg,
Germany. Mr. Mohabbat received a B.S. degree in Medical Laboratory Technology in
1986 from St. George Hospital College in Hamburg, Germany. He is a member of the
American Society for Quality Assurance.

         Randall A. Mackey, Esq. has been our Chairman of the Board since August
20, 2002,  and a director since January 2000. He had served as a director of the
company from November 1995 to September  1998.  Mr. Mackey has been President of
the Salt  Lake  City law firm of  Mackey  Price &  Thompson  since  1992,  and a
shareholder and director of the firm and its  predecessor  firms since 1989. Mr.
Mackey  received a B.S. degree in Economics from the University of Utah in 1968,
an M.B.A.  degree from the Harvard  Business  School in 1970, a J.D. degree from
Columbia Law School in 1975 and a B.C.L.  degree from Oxford University in 1977.
Mr.  Mackey has also served as Chairman of the Board from June 2001 to May 2003,
and as a director  from 1998 to May 2003 of Cimetrix,  Incorporated,  a software
development company. Mr. Mackey has additionally served as Chairman of the Board
from July 2000 to July 2003 and as a trustee from 1993 to July 2003 of Salt Lake
Community College.



                                       54


         David M. Silver,  Ph.D.  has been a director since January 2000. He had
served as a director of the company from  November 1995 to September  1998.  Dr.
Silver is a Principal Senior Scientist in the Milton S. Eisenhower  Research and
Technology  Development  Center at the Johns Hopkins  University Applied Physics
Laboratory,  where he has been  employed  since  1970.  He  served  as the J. H.
Fitzgerald  Dunning  Professor of  Ophthalmology in the Johns Hopkins Wilmer Eye
Institute in Baltimore  during 1998-99.  He received a B.S. degree from Illinois
Institute of  Technology,  an M.A.  degree from Johns Hopkins  University  and a
Ph.D. degree from Iowa State University before holding a postdoctoral fellowship
at Harvard  University  and a visiting  scientist  position at the University of
Paris.

         Keith D. Ignotz has been a director  since  November  2000. He has been
President and Chief  Operating  Officer of SpectRx,  Inc., a medical  technology
company  that he founded  in 1992,  which  develops,  manufactures  and  markets
alternatives to traditional  blood-based  medical tests.  From 1986 to 1992, Mr.
Ignotz  was  Senior  Vice  President  of  Allergan  Humphrey,  Inc.,  a  medical
electronics company. From 1985 to 1986, he was President of Humphrey Instruments
Limited-SKB,  a medical electronics  company,  and from 1980 to 1985, Mr. Ignotz
was President of Humphrey  Instruments GmbH, also a medical electronics company.
Mr.  Ignotz also served on the Board of Directors of Vismed,  Inc.,  d/b/a Dicon
from 1992 to June 2000.  Mr.  Ignotz  received a B.A.  degree in  Sociology  and
Political Science from San Jose University and an M.B.A.  degree from Pepperdine
University.  Mr.  Ignotz  has  served as a trustee  of  Pennsylvania  College of
Optometry since 1990, as a director for FluoRx, Inc. since 1997, and as a member
of the American  Marketing  Association of the American  Association of Diabetes
Education.

         John C. Pingree has been a director  since April 2004.  He has been the
Executive  Director of the Semnani  Foundation  since August  2001,  which funds
projects to assist women and children in developing countries. From July 1998 to
July 2001, Mr. Pingree was a Mission President for the Church of Jesus Christ of
Latter-day  Saints,  serving  in Mexico  City,  Mexico.  From 1977 to 1997,  Mr.
Pingree  was  General  Manager  and  Chief  Executive  Officer  of Utah  Transit
Authority.  From  1970  to  1975,  he was  Director  of  Marketing  for  Memorex
Corporation. From 1967 to 1970, Mr. Pingree was Regional Manager, Sales Planning
at Xerox  Corporation.  He also  currently  serves as a member of the Utah State
Board of Education.  Mr.  Pingree  received a B.A.  degree in Economics from the
University of Utah and an M.B.A. degree from the Harvard Business School.

Appointment of New President and Chief Executive Officer

         On March 18,  2004,  John Y. Yoon was  appointed as our  President  and
Chief  Executive  Officer,  replacing  Jeffrey  F. Poore who had served in those
positions from March 19, 2003 to March 18, 2004.

Appointment of New Chief Operating Officer

         On March 23, 2004, Aziz A. Mohabbat was appointed as our Vice President
of Operations and Chief Operating Officer,  replacing David I. Cullumber who had
resigned as Chief Operating Officer and Chief Technical  Officer.  Mr, Cullumber
served as Chief  Operating  Officer from November 6, 2003 to March 22, 2004. Mr.
Mohabbat had previously  served as our Chief Operating  Officer from August 2002
to March 2003, and as Vice President of Operations from 2001 to March 2003.

Board Meetings and Committees

         The Board of Directors held a total of seven meetings during the fiscal
year  ended  December  31,  2004.  No  director  attended  fewer than 75% of all
meetings  of the Board of  Directors  during  the 2004  fiscal  year.  The Audit
Committee of the Board of Directors  consists of directors  Dr. David M. Silver,
Randall A. Mackey,  Keith D. Ignotz and John C. Pingree. The Audit Committee met
once during the fiscal year. The Audit  Committee is primarily  responsible  for
reviewing  the services  performed by our  independent  public  accountants  and
internal audit  department  and  evaluating  our  accounting  principles and our
system of internal accounting controls.  The Compensation Committee of the Board
of Directors consists of directors Dr. David M. Silver, Randall A. Mackey, Keith
D. Ignotz and John C. Pingree.  The Compensation  Committee met two times during
the fiscal  year.  The  Compensation  Committee  is  primarily  responsible  for
reviewing  compensation  of executive  officers and  overseeing  the granting of
stock options.

Executive Compensation

         The  following  table sets  forth,  for each of the last  three  fiscal
years, the compensation  received by John Y. Yoon, President and Chief Executive
Officer and other executive  officers whose salary and bonus for all services in
all  capacities  exceed  $100,000 for the fiscal years ended  December 31, 2004,
2003 and 2002.

                                       55



                                              Summary Compensation Table

                                                    Annual Compensation                              Long Term Compensation
                                                                                                  Awards                 Payouts
                                                          Other                           Securities
                                                          Annual         Restricted       Underlying     Long-term      All Other
 Name and                                                 Compen-        Stock             Options/      Incentive      Compensa-
 Principal Position      Year     Salary$      Bonus($)   sation($)      Awards($)          SARs(#)      Payouts($)     tion($)
 ------------------      ----     -------      --------   ---------      ---------          -------      ----------     -------
                                                                                              
 John Y. Yoon            2004(1)  $110,961(4)               $18,494(4)          0        1,000,000(5)           0          0
 President and Chief
 Executive Officer

 Aziz A. Mohabbat        2004(1)  $106,244          0             0             0                0              0          0
 Vice President of       2003(2)  $ 24,219          0             0             0                0              0          0
 Operations and          2002(3)  $126,878          0             0             0                0              0     $9,634(7)
 Chief Operating
 Officer(6)

 Jeffrey F. Poore        2004(1)  $ 41,052          0             0             0                0              0          0
 Former President        2003(2)  $136,015          0             0             0        1,000,000(8)           0          0
 and Chief Executive
 Officer

 David I. Cullumber,     2004(1)  $ 15,894          0       $18,059(9)        0                  0              0          0
 Former Chief            2003(2)  $ 22,312          0       $16,616(9)        0            150,000(10)          0          0
 Operating Officer
 and Chief Technical
 Officer

 Gregory C. Hill         2004(1)         0          0             0             0                0              0          0
 Former Vice             2003(2)    $34,000         0             0             0                0              0          0
 President of Finance
 and Chief Financial
 Officer

 Thomas F. Motter        2004(1)         0          0             0             0                0              0          0
 Former Chairman of      2003(2)         0          0             0             0                0              0          0
 the Board and Chief     2002(3)  $187,483(11)      0             0             0                0              0    $19,750(12)(13)
 Executive Officer

 Mark R. Miehle          2004(1)         0          0             0             0                0              0          0
 Former President        2003(2)         0          0             0             0                0              0          0
 and Chief Operating     2002(3)  $134,202          0             0             0           55,000(14)          0    $18,000(12)(15)
 Officer

 Heber C. Maughan        2004(1)         0          0             0             0                0              0          0
 Former Vice             2003(2)  $ 36,855          0             0             0          150,000(17)          0          0
 President of Finance    2002(3)  $114,416          0             0             0                0              0          0
 and Chief Financial
 Officer(16)


 --------------------
(1)      For the fiscal year ended December 31, 2004
(2)      For the fiscal year ended December 31, 2003
(3)      For the fiscal year ended December 31, 2002
(4)      Of the salary payable to Mr. Yoon pursuant to his employment agreement,
         $110,961  was paid to him  during  2004  and the  remaining  amount  of
         $18,494  payable in 2004 was deferred  until our board of directors has
         determined that our financial condition is improved.
(5)      On March 18, 2004,  our board of directors  granted Mr. Yoon options to
         purchase  1,000,000  shares of our common stock at an exercise price of
         $.13 per share.
(6)      Mr.  Mohabbat  has  served a Vice  President  of  Operations  and Chief
         Operating  Officer since March 22, 2004 and as Chief Operating  Officer
         from  August  30,  2002 to March  2003.  He was not an officer in prior
         years.

                                       56


(7)      The amounts under "All Other Compensation" for 2004 consist of payments
         to Mr. Mohabbat for accrued vacation days prior to his resignation from
         the Company in March 2003.
(8)      On March 19, 2003, our board of directors  granted Mr. Poore options to
         purchase  1,000,000  shares of our common stock at an exercise price of
         $.16 per share.  These  options were  terminated on March 18, 2003 when
         our board of directors  terminated Mr. Poore's  employment for cause as
         defined in the employment agreement.
(9)      We paid  A-Mech  Engineering,  Inc. a total of $16,616  and $18,059 for
         consulting  services during 2003 and 2004,  respectively.  From 1982 to
         March 2004, Mr.  Cullumber  served as President of A-Mech  Engineering,
         Inc.
(10)     On  November 6, 2003,  our board of  directors  granted  Mr.  Cullumber
         options to purchase  150,000  shares of our common stock at an exercise
         price of $.21 per share.  These  options  were  terminated  on June 20,
         2003,  90 days  after Mr.  Cullumber  resigned  as our Chief  Operating
         Officer and Chief Technical Officer.
(11)     Although Mr. Motter resigned as Chairman and Chief Executive Officer on
         August 30, 2002,  he continued to receive his salary under the terms of
         his employment agreement through December 16, 2002.
(12)     The  amounts  under "All Other  Compensation"  for 2004,  2003 and 2002
         include  payments  related  to  the  operation  of  automobiles  and/or
         automobiles and insurance by the named executives.
(13)     The amounts under "All Other  Compensation"  for 2002 include  payments
         related to the residential  housing  accommodations  for our employees,
         living  outside  of Utah  while  they  were  working  at our  corporate
         headquarters  in Salt Lake City,  leased from Mr.  Motter at $2,500 per
         month.
(14)     On January 29, 2002, our Board of Directors  granted Mr. Miehle options
         to purchase the 55,000 shares of our common stock at an exercise  price
         of $2.75 per share. These options were terminated on February 28, 2004,
         one year after expiration of a six-month  consulting agreement with the
         Company, which expired on February 28, 2003.
(15)     On September 3, 2002, we entered into a consulting  agreement  with Mr.
         Miehle in which we are required to pay him monthly  consulting  fees of
         $5,000 over a period of six months.  We paid him a total of $15,000 for
         consulting  services  during  the  months  of  September,  October  and
         November of 2002.
(16)     Mr. Maughan served as Interim Chief  Executive  Officer from August 30,
         2002 to March  19,  2003.  He  served  as Vice  President  of  Finance,
         Treasurer  and Chief  Financial  Officer from October 1, 2001 until his
         resignation on May 31, 2003.
(17)     On May 13, 2003, our Board of Directors  granted Mr. Maughan options to
         purchase  150,000  shares of our common  stock at an exercise  price of
         $.16 per share.  These  options were  terminated on August 29, 2003, 90
         days after Mr. Maughan  resigned as Vice President of Finance and Chief
         Financial Officer.

Options

         The  following  table sets forth  information  regarding  stock options
granted during the fiscal year ended December 31, 2004, to each named  executive
officer.

                        Option Grants in Last Fiscal Year




                                                                                    Individual Grants
                                                                    Percentage of Total
                                          Number of Securities       Options Granted to      Exercise Price
                                            UnderlyingOptions           Employees in           Per Share           Expiration
 Name                                          Granted (#)             Fiscal Year(%)            ($/Sh)               Date
 ----                                          -----------             --------------            ------               ----
                                                                                                           
 John Y. Yoon.........................       1,000,000(1)                   56.3%                  $.13               4/1/09
 Aziz A. Mohabbat.....................         200,000(2)                   11.3%                  $.12               4/1/09


(1)      Options vest in 36 monthly installments of 27,778 shares,  beginning on
         April 30, 2004, until such shares are vested.
(2)      Options vest in 36 monthly  installments of 5,556 shares,  beginning on
         April 30, 2004, until such shares are vested.

         The  following  table  sets  forth  information  regarding  unexercised
options to acquire  shares of our common stock held as of December 31, 2004,  by
each named executive officer.





 Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values


                                                                       Number of Securities
                                                                            Underlying                    Value of Unexercised
                                                                       Unexercised Options                In-the-Money Options
                                                                     at December 31, 2004(#)            at December 31, 2004($)
                                                                     -----------------------            -----------------------
                             Shares Acquired       Value
 Name                          on Exercise      Realized($)       Exercisable       Unexercisable      Exercisable    Unexercisable
 ----                          -----------      -----------       -----------       -------------      -----------    -------------
                                                                                                            
 John Y. Yoon.............          0                0               250,002           749,998                0               0
 Aziz A. Mohabbat...........        0                0                50,004           149,996                0               0


                                       57


Director Compensation

         On April 19, 2004,  John C.  Pingree,  a director of our  Company,  was
granted  options to purchase  125,000  shares of our common stock at an exercise
price of $.12 per share. On September 30, 2004,  Messrs.  Randall A. Mackey, Dr.
David M. Silver and Keith D. Ignotz, directors of our company, were each granted
options to purchase  125,000  shares of our common stock at an exercise price of
$.13 per share.  In addition,  outside  directors are also  reimbursed for their
expenses in attending board and committee meetings.  Directors are not precluded
from serving us in any other capacity and receiving compensation therefore.  The
options were not issued at a discount to the then market price.

Employee 401(k) Plan

         In October  1996,  our board of directors  adopted a 401(k)  Retirement
Savings  Plan.  Under the terms of the 401(k) plan,  effective as of November 1,
1996, we may make discretionary employer matching contributions to our employees
who choose to  participate  in the plan.  The plan allows the board to determine
the amount of the  contribution at the beginning of each year. The Board adopted
a contribution  formula  specifying that such  discretionary  employer  matching
contributions would equal 100% of the participating  employee's  contribution to
the  plan  up  to a  maximum  discretionary  employee  contribution  of  3% of a
participating employee's  compensation,  as defined by the plan. All persons who
have  completed  at least six months'  service  with us and  satisfy  other plan
requirements are eligible to participate in the plan.

1995 Stock Option Plan

         We adopted a 1995  Stock  Option  Plan,  for the  officers,  employees,
directors  and  consultants  of our  company  on  November  7,  1995.  The  plan
authorized  the  granting of stock  options to purchase an aggregate of not more
than 300,000  shares of our common  stock.  On February  16,  1996,  options for
substantially all 300,000 shares were granted. On June 9, 1997, our shareholders
approved an  amendment  to the plan to  increase  the number of shares of common
stock reserved for issuance thereunder from 300,000 shares to 600,000 shares. On
September  3,  1998,  our  shareholders  approved  an  amendment  to the plan to
increase the number of shares of common stock  reserved for issuance  thereunder
from 600,000 shares to 1,200,000  shares. On November 29, 2000, our shareholders
approved an  amendment  to the plan to  increase  the number of shares of common
stock  reserved  for  issuance  thereunder  from  1,200,000  shares to 1,700,000
shares.  On September 11, 2001,  our  shareholders  approved an amendment to the
1995 plan to increase the number of shares of common stock reserved for issuance
thereunder  from  1,700,000  shares to 2,700,000  shares.  On June 13, 2003, our
shareholders  approved an amendment to the plan to increase the member of shares
of common stock  reserved  for  issuance  thereunder  from  2,700,000  shares to
3,700,000 shares.

         The compensation  committee  administers the 1995 Stock Option Plan. In
general, the compensation  committee will select the person to whom options will
be granted  and will  determine,  subject to the terms of the plan,  the number,
exercise,  and other provisions of such options.  Options granted under the plan
will become  exercisable at such times as may be determined by the  compensation
committee. Options granted under the plan may be either incentive stock options,
as such term is defined in the Internal  Revenue  Code, or  non-incentive  stock
options.  Incentive  stock  options  may only be granted to persons  who are our
employees.  Non-incentive stock options may be granted to any person, including,
but not  limited  to, our  employees,  independent  agents,  consultants  as the
compensation  committee  believes has contributed,  or will  contribute,  to our
success  as  the  compensation  committee  believes  has  contributed,  or  will
contribute,  to our success. The compensation  committee determines the exercise
price of options granted under the 1995 Stock Option Plan, provided that, in the
case of incentive  stock options,  such price is not less than 100% (110% in the
case of incentive stock options granted to holders of 10% of voting power of our
stock) of the fair market  value (as defined in the plan) of the common stock on
the date of grant.  The aggregate  fair market value  (determined at the time of
option  grant) of stock with respect to which  incentive  stock  options  become
exercisable for the first time in any year cannot exceed $100,000.

         The term of each option shall not be more than ten years (five years in
the case of  incentive  stock  options  granted  to holders of 10% of the voting
power of our stock) from the date of grant.  The Board of Directors  has a right
to amend, suspend or terminate the 1995 Stock Option Plan at any time; provided,
however, that unless ratified by our shareholders, no amendment or change in the
plan will be effective  that would  increase the total number of shares that may
be issued under the plan,  materially  increase the benefits accruing to persons
granted under the plan or materially  modify the  requirements as to eligibility
and  participation in the plan. No amendment,  supervision or termination of the
plan  shall,  without  the  consent  of an  employee  to  whom an  option  shall
heretofore  have been  granted,  affect the rights of such  employee  under such
option.

Employment Agreements

         We entered into an employment  agreement  with Thomas F. Motter,  which
commenced on January 1, 1998 and expires on December 31,  2002.  The  employment
agreement requires Mr. Motter to devote substantially all of his working time as
our Chairman and Chief Executive Officer, provided that he may be terminated for
"cause" (as provided in the agreements) and prohibits him from competing with us
for two  years  following  the  termination  of his  employment  agreement.  The
employment  agreement  provides  for the  payment of an initial  base  salary of
$135,000,  effective  as of January  1,  1998.  The  employment  agreement  also
provides  for  salary  increases  and  bonuses  as  shall be  determined  at the
discretion of the Board of Directors. Effective as of October 1, 1999, the Board
of  Directors  approved  an  increase  in Mr.  Motter's  annual  base  salary to
$160,000,  and effective as of July 1, 2000,  the board  approved an increase in
his annual base salary to $200,000,  which  remained in effect during 2002.  Mr.
Motter resigned as Chairman and Chief  Executive  Officer on August 30, 2002. He
continued  to receive  his salary  under the terms of the  employment  agreement
through December 16, 2002.

                                       58


         We entered into an  employment  agreement  with Mark R.  Miehle,  which
commenced  on June 5, 2000,  and was to expire on June 4, 2003.  The  employment
agreement required Mr. Miehle to devote substantially all of his working time as
our President and Chief  Operating  Officer,  provided that he may be terminated
for "cause" (as provided in the  agreement)  and  prohibited  him from competing
with us for two years following the termination of his employment agreement. The
employment  agreement  provided for the payment of an initial annual base salary
of $150,000,  effective as of June 5, 2000, and the issuance of stock options to
purchase  150,000 shares of our common stock at $6.00 per share, to be vested in
equal annual  amounts over a three year period.  The  employment  agreement also
provided for salary  increases and bonuses as to be determined at the discretion
of the Board of  Directors.  The stated annual  compensation  remained in effect
through  December 31, 2001 and into 2002. The Board of Directors  terminated the
employment  agreement  with Mr. Miehle on August 30, 2002. He entered into a six
month consulting  agreement,  which expired on February 28, 2003, for $5,000 per
month.  Mr.  Miehle was paid  $15,000 in 2002 under the terms of the  consulting
agreement.

         We entered into an employment  agreement  with Jeffrey F. Poore,  which
commenced  on March 19,  2003 and  expires  on March 19,  2006.  The  employment
agreement requires Mr. Poore to devote  substantially all of his working time as
our President and Chief  Executive  Officer,  provided that he may be terminated
for "cause" (as provided in the  agreements)  and prohibits  him from  competing
with us for two years following the termination of the employment agreement. The
employment  agreement  provides  for the  payment of an initial  base  salary of
$175,000, effective as of March 19, 2003. The employment agreement also provides
for salary increases and bonuses as shall be determined at the discretion of our
Board of Directors.  The employment  agreement further provides for the issuance
of stock  options to purchase  1,000,000  shares of our common stock at $.16 per
share, of which options to purchase 800,000 shares of common stock shall vest on
March 19, 2003,  options for an additional  100,000 shares of common stock shall
vest on March 19, 2004,  and options for an additional  100,000 shares of common
stock shall vest on March 19, 2005.

         On March  18,  2004,  our Board of  Directors  terminated  Mr.  Poore's
employment for cause as defined in the employment agreement.  As a result of the
termination  of the  employment  agreement,  we believe  that we have no further
obligations  to make salary or bonus  payments or provide  benefits to Mr. Poore
and all of his stock options have terminated. On May 25, 2004, Mr. Poore brought
a lawsuit against us. In his complaint he alleges that we unlawfully  terminated
his employment and, as a consequence,  demands judgment against us for $350,000,
representing  his annual salary for the two remaining years under the employment
agreement,  for  money  judgment  for  the  value  of his  benefits  for the two
remaining years under the employment  agreement,  and for the value of the stock
options granted to him. We dispute the claims in the complaint and believe there
was a sufficient  basis to terminate Mr. Poore's  employment for cause under the
terms of the employment agreement.

         We  entered  into an  employment  agreement  with John Y.  Yoon,  which
commenced  on March 18,  2004 and  expires  on March 18,  2007.  The  employment
agreement  requires Mr. Yoon to devote  substantially all of his working time as
our President and Chief  Executive  Officer,  provided that he may be terminated
for "cause" (as provided in the agreement) and prohibits him from competing with
us for two years  following the  termination  of the employment  agreement.  The
employment  agreement  provides  for the  payment of an initial  base  salary of
$175,000,  effective as of April 1, 2004. The employment agreement also provides
for salary increases and bonuses as shall be determined at the discretion of our
Board of Directors.  The employment  agreement further provides for the issuance
of stock  options to purchase  1,000,000  shares of our common stock at $.13 per
share.  These options vest in 36 equal monthly  installments  of 27,778  shares,
beginning on April 30, 2004, until such shares are vested.

         In  the  event  of a  change  of  control  of  the  company,  then  all
outstanding  stock options  granted to Mr. Yoon shall be immediately  vested.  A
change of control  shall be deemed to have  occurred if (i) a tender offer shall
be made and  consummated  for the ownership of more than 25% of our  outstanding
shares;  (ii) we are merged or consolidated  with another  corporation and, as a
result,  less  than  25% of  the  outstanding  common  shares  of the  surviving
corporation shall be owned in the aggregate by our former  shareholders,  as the
same shall have listed prior to such merger or consolidation;  (iii) we sell all
or substantially all of its assets to another  corporation that is not a wholly-
owned  subsidiary or affiliate;  (iv) as a result of any contested  election for
our Board of  Directors,  or any tender or  exchange  offer,  merger of business
combination or sale of assets,  the persons who were our directors before such a
transaction  shall cease to constitute a majority of our Board of Directors;  or
(v) a person other than an officer or director of the company shall acquire more
than 20% of the outstanding shares of our common stock.

         We  entered  into an  employment  agreement  with Aziz A.  Mohabbat  on
October 5, 2004,  which is effective  as of April 1, 2004,  and expires on March
18, 2006.  However,  the term shall be extended an additional one year period to
March 18, 2007 in the event Mr.  Mohabbat  moves from San Diego,  California  to
Salt Lake City, Utah and becomes a resident of the state of Utah. The employment
agreement requires Mr. Mohabbat to devote  substantially all of his working time
as our Vice President of Operations and Chief Operating  Officer,  provided that
he may be terminated  for "cause" (as provided in the  agreement)  and prohibits
him from  competing  with us for two  years  following  the  termination  of the
employment  agreement.  The employment  agreement provides for the payment of an
initial base salary of $144,500,  effective as of April 1, 2004.  The employment
agreement also provides for salary  increases and bonuses as shall be determined
at the discretion of our Board of Directors.  The employment  agreement  further
provides for the  issuance of stock  options to purchase  200,000  shares of our
common  stock  at  $.12  per  share.  These  options  vest in 36  equal  monthly
installments of 5,556 shares, beginning on April 30, 2004, until such shares are
vested.

                                       59


         In  the  event  of a  change  of  control  of  the  company,  then  all
outstanding stock options granted to Mr. Mohabbat shall be immediately vested. A
change of control  shall be deemed to have  occurred if (i) a tender offer shall
be made and  consummated  for the ownership of more than 25% of our  outstanding
shares;  (ii) we are merged or consolidated  with another  corporation and, as a
result,  less  than  25% of  the  outstanding  common  shares  of the  surviving
corporation shall be owned in the aggregate by our former  shareholders,  as the
same shall have listed prior to such merger or consolidation;  (iii) we sell all
or substantially all of its assets to another  corporation that is not a wholly-
owned  subsidiary or affiliate;  (iv) as a result of any contested  election for
our Board of  Directors,  or any tender or  exchange  offer,  merger of business
combination or sale of assets,  the persons who were our directors before such a
transaction  shall cease to constitute a majority of our Board of Directors;  or
(v) a person other than an officer or director of the company shall acquire more
than 20% of the outstanding shares of our common stock.

Severance Agreement

         On August 30, 2002,  the Board of Directors  terminated  the employment
agreement  with Mark R. Miehle who had been serving as our  President  and Chief
Operating Officer. Under the terms of the termination of Mr. Miehle's employment
agreement, the stock options issued to him on April 19, 2000 to purchase 150,000
shares of our common stock at $6.00 per share, on September 11, 2001 to purchase
110,000  shares of our common stock at $2.75 per share,  and on January 28, 2002
to  purchase  55,000  shares of our  common  stock at $2.75 per share were fully
vested as of the date of such  termination  and continue to be exercisable for a
period of one year following the termination of a consulting agreement, at which
time such options would expire.

         The  termination of the employment  agreement also required us to enter
into a consulting  agreement with Mr. Miehle.  Under the terms of the consulting
agreement,  Mr. Miehle is to provide  consulting  services to us for a period of
six  months for a fee of $5,000 per month.  The  consulting  agreement  is to be
automatically  renewed for an additional six months at a fee of $3,000 per month
unless we deliver  written notice to Miehle at least 30 days prior to the end of
the  initial  six month term that we will not renew the  agreement.  We paid Mr.
Miehle a total of $15,000 under the consulting agreement for consulting services
during the months of  September,  October and November of 2002. We also provided
written  notice to Mr.  Miehle more than 30 days prior to the end of the initial
six month term of the  consulting  agreement of our  intention not to review the
agreement.

Consulting Agreement

         On April 3, 2003, we entered into a consultant  agreement with Kinexsys
Corporation.  Under the terms of the  agreement,  Kinexsys  through  its  Senior
Partner,  Timothy  R.  Forstrom,  is to  prepare  a capital  markets  plan and a
corporate  positioning and communications  plan for us, for which Kinexsys is to
receive  warrants  to purchase  up to 200,000  shares of our common  stock at an
exercise  price of $.16 per  share.  The  capital  markets  plan is to include a
detailed  analysis  of our  capital  market  structure  in  relation  to current
investors,  market trends and projected equity movements, and recommendations on
capital management strategies. The corporate positioning and communications plan
is to include a corporate  positioning matrix for markets,  analysts,  customers
and partners,  and a  communications  plan. The agreement is for a one-year term
but may be renewed at the option of both parties. The agreement expired on April
3, 2004.

Limitation of Liability and Indemnification

         We  reincorporated  in  Delaware  in February  1996,  in part,  to take
advantage  of  certain  provisions  in  Delaware's  corporate  law  relating  to
limitations on liability of corporate  officers and  directors.  We believe that
the  reincorporation  into  Delaware,  the  provisions  of  its  Certificate  of
Incorporation and Bylaws and the separate  indemnification  agreements  outlined
below are  necessary to attract and retain  qualified  persons as directors  and
officers.  Our Certificate of Incorporation limits the liability of directors to
the maximum  extent  permitted by Delaware  law.  This  provision is intended to
allow our  directors  the  benefit  of  Delaware  General  Corporation  Law that
provides  that  directors of Delaware  corporations  may be relieved of monetary
liabilities  for breach of their  fiduciary  duties as  directors,  except under
certain  circumstances,  including  breach  of their  duty of  loyalty,  acts or
omissions  not in good faith or involving  intentional  misconduct  or a knowing
violation of law,  unlawful  payments of dividends or unlawful stock repurchases
or redemptions or any  transaction  from which the director  derived an improper
personal  benefit.  Our Bylaws provide that we shall  indemnify our officers and
directors to the fullest extent  provided by Delaware law. Our Bylaws  authorize
the use of  indemnification  agreements and we have entered into such agreements
with each of our directors and executive officers.

         There is pending  litigation  against Thomas F. Motter,  Mark R. Miehle
and  John  W.  Hemmer,   former  officers  of  the  company,  to  whom  we  have
indemnification  obligations.  The pending  litigation  consists of class action
complaints for alleged  violations of the federal  securities  laws filed in the
United  States  District  Court,  District  of Utah,  captioned  Richard  Meyer,
individually  and on behalf of others  similarly  situated v.  Paradigm  Medical
Industries,  Inc.,  Thomas  Motter,  Mark Miehle and John Hemmer,  Case No. 2:03
CV00448TC,  Michael Marrone v. Paradigm Medical Industries, Inc., Thomas Motter,
Mark Miehle, and John Hemmer,  Case No. 2:03 CV00513PGC,  and Milian v. Paradigm
Medical  Industries,  Inc., Thomas Motter, Mark Miehle and John Hemmer, Case No.
2:03 CV00617PGC. We have retained legal counsel to review the complaints,  which
appear to be focused on alleged false and  misleading  statements  pertaining to
the Blood Flow  Analyzer(TM)  and  concerning a purchase  order from  Valdespino
Associates Enterprises and Westland Financial Corporation.

                                       60


         More  specifically,  each of the  complaints  alleges  that we  falsely
stated in our Securities and Exchange Commission filings and press releases that
we had received  authorization to use an insurance  reimbursement  CPT code from
the  CPT  Code  Research  and  Development  Division  of  the  American  Medical
Association in connection with the Blood Flow Analyzer(TM),  adding that the CPT
code  provides for a  reimbursement  to doctors of $57.00 per patient for use of
the Blood Flow  Analyzer(TM).  The complaints also allege that on July 11, 2002,
we issued a press  release  falsely  announcing  that we had received a purchase
order from Valdespino Associates  Enterprises and Westland Financial Corporation
for 200 sets of our entire portfolio of products, with $70 million in systems to
be delivered  over a two-year  period,  then another $35 million of orders to be
completed in the third year.  As a result of these  statements,  the  complaints
contend that the price of our shares of common stock was  artificially  inflated
during the period from April 25, 2001 through May 14, 2003,  and the persons who
purchased our common shares during that period suffered substantial damages. The
complaints request judgment for unspecified damages,  together with interest and
attorneys' fees. These three cases have been  consolidated into a single action.
If we are not  successful  in defending  and  protecting  our interests in these
cases, resulting in a judgment against us for substantial damages, and U.S. Fire
Insurance  Company denies coverage in the cases under the Directors and Officers
Liability  and  Company  Reimbursement  Policy,  we would not be able to pay the
indemnification obligations and, as a result, would be forced to seek bankruptcy
protection.

         There is also pending  litigation  against Messrs.  Motter,  Miehle and
Hemmer in an action filed in the United States District Court,  District of Utah
by Innovative  Optics,  Inc. The  complaint  claims that  Innovative  and Barton
entered into an asset  purchase  agreement with us on January 31, 2002, in which
we agreed to purchase  all the assets of  Innovative  in  consideration  for the
issuance of 1,310,000  shares of the Company's  common stock to Innovative.  The
complaint  also claims that we allegedly  made false and  misleading  statements
pertaining to the Blood Flow  Analyzer(TM)  and concerning a purchase order from
Valdespino  Associates  Enterprises  and  Westland  Financial  Corporation.  The
purpose  of  these  statements,  according  to  the  complaint,  was  to  induce
Innovative  to sell its assets and  purchase  the shares of our common  stock at
artificially  inflated  prices while  simultaneously  deceiving  Innovative  and
Barton  into  believing  that the  Company's  shares  were  worth more than they
actually  were.  Had  Innovative  and  Barton  known the  truth,  the  complaint
contends,  they would not have sold  Innovative to us, would not have  purchased
our stock for the assets of Innovative, or would not have purchased the stock at
the inflated  prices that were paid.  The complaint  further  contends that as a
result of these statements,  Innovative and Barton suffered  substantial damages
in an amount to be proven at trial.

         The complaint further claims that 491,250 of the shares to be issued to
Innovative in the asset purchase  transaction  were not issued on a timely basis
and we also did not  file a  registration  statement  with  the  Securities  and
Exchange Commission within five months of the closing date of the asset purchase
transaction.  As a result, the complaint alleges that the value of the shares of
our  common  stock  issued  to  Innovative  in  the  transaction  declined,  and
Innovative and Barton  suffered  damages in an amount to be proven at trial.  We
filed an answer to the complaint and also filed counterclaims against Innovative
and Barton for breach of contract.  If we are not  successful  in defending  and
protecting our interests in this action,  resulting in a judgment against us for
substantial  damages,  and U.S.  Fire  denies  coverage  in the cases  under the
Directors and Officers Liability and Company  Reimbursement Policy, we would not
be able to pay the indemnification obligations and, as a result, would be forced
to seek bankruptcy protection.

         Finally,  there is also  pending  litigation  against  Messrs.  Motter,
Miehle and Hemmer and Randall A. Mackey, Chairman of the Board and Secretary, to
whom we have indemnification  obligations,  in a class action complaint filed in
the Third Judicial  District Court, Salt Lake County,  State of Utah,  captioned
Albert  Kinzinger,  Jr.,  individually  and on  behalf of all  others  similarly
situated vs. Paradigm  Medical  Industries,  Inc.,  Thomas Motter,  Mark Miehle,
Randall A. Mackey, and John Hemmer,  Case No. 030922608.  We have retained legal
counsel to review the complaint, which appears to be focused on alleged false or
misleading   statements   pertaining  to  the  Blood  Flow  Analyzer(TM).   More
specifically, the complaint alleges that we falsely stated in its Securities and
Exchange   Commission   filings  and  press   releases   that  it  had  received
authorization  to use an  insurance  reimbursement  CPT  code  from the CPT Code
Research  and  Development  Division  of the  American  Medical  Association  in
connection with the Blood Flow  Analyzer(TM),  adding that the CPT code provides
for a  reimbursement  to  doctors  of $57.00  per  patient  for the  Blood  Flow
Analyzer(TM).

         The purpose of these  statements,  according to the  complaint,  was to
induce investors to purchase shares of our Series E preferred stock in a private
placement  transaction at artificially  inflated prices.  The complaint contends
that as a result of these statements, the investors that purchased shares of our
Series E preferred stock in the private offering suffered substantial damages to
be proven at trial.  The complaint  also alleges that we sold Series E preferred
shares  without  registering  the sale of such shares or  obtaining an exemption
from registration.  The complaint requests rescission,  compensatory damages and
treble damages,  including  interest and attorneys'  fees. We filed an answer to
the  complaint.  If we are  not  successful  in  defending  and  protecting  our
interests  in the action,  resulting  in a judgment  against us for  substantial
damages,  and U.S.  Fire denies  coverage in this action under the Directors and
Officers Liability and Company Reimbursement Policy, we would not be able to pay
the  indemnification  obligations  and,  as a  result,  would be  forced to seek
bankruptcy protection.

         Except for these litigation matters,  there is no pending litigation or
proceedings  involving  a  director,  officer,  employee  or other  agent of our
company as to which  indemnification  is being  sought,  nor are we aware of any
threatened  litigation  that may  result in claims  for  indemnification  by any
director, officer, employee or other agent.

                                       61


         Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to  directors,  officers  and  controlling  persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange  Commission,  such indemnification is
against  public policy as expressed in the  Securities  Act of 1933, as amended,
and is, therefore, unenforceable.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

         Section  16(a) of the  Securities  Exchange  Act of 1934  requires  our
executive officers,  directors and persons who own more than 10% of any class of
our common stock to file initial  reports of ownership and reports of changes of
ownership of common stock. Such persons are also required to furnish us with all
Section  16(a)  reports  they file.  Based solely on our review of the copies of
such  reports   received  by  us  with  respect  to  fiscal  2003,   or  written
representations  from  certain  reporting  persons,  we believe  that all filing
requirements  applicable  to  its  directors,  officers  and  greater  than  10%
beneficial owners were complied with.

         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  following  table sets forth  certain  information  with respect to
beneficial  ownership  of our common  stock as of December 31, 2004 for (i) each
executive  officer (ii) each  director,  (iii) each person known to us to be the
beneficial  owner  of more  than 5% of the  outstanding  shares,  and  (iv)  all
directors and officers as a group.

                                                 Number of          Percent of
 Name and Address(1)                             Shares             Ownership
 -------------------                             ------             ---------
 Douglas A. MacLeod, M.D. (2)                   3,068,451                 12.0%
     502 South M Street
     Tacoma Washington 98405
 Dr. David M. Silver (3)                          761,166                  3.0%
 Randall A. Mackey (3)                            725,000                  2.8%
 Keith D. Ignotz (3)                              454,560                  1.7%
 John Y. Yoon (3)                                 222,224                     *
 John C. Pingree (3)                              231,500                     *
 Aziz A. Mohabbat (3)                              44,448                     *
                                             ------------
 Executive officers and directors
    as a group (six persons)                    2,438,898                  9.5%
         -----------------
         *Less than 1%.

(1)      Unless otherwise  indicated,  the address of each listed stockholder is
         c/o Paradigm Medical Industries,  Inc., 2355 South 1070 West, Salt Lake
         City, Utah, 84119.
(2)      Based on our shareholder  records, Dr. McLeod owns 1,218,451 shares and
         is our largest sole shareholder.  Dr. McLeod's beneficial  ownership is
         believed to also include 400,000 shares held by the Douglas A. MacLeod,
         M.D.  Profit  Sharing  Trust,  200,000  shares  held by St.  Mark's Eye
         Institute and 720,000  shares held by Milan  Holdings,  Ltd.,  which we
         believe  Dr.  MacLeod  to have sole or shared  voting  and  dispositive
         powers with regard to such shares.  Dr. McLeod's  beneficial  ownership
         further  includes  shares that may be acquired  currently  or within 60
         days after  December  31,  2004  through  the  exercise  of warrants as
         follows: Dr. MacLeod,  200,000 shares;  Douglas A. MacLeod, M.D. Profit
         Sharing Trust; 100,000 shares; St. Mark's Eye Institute, 50,000 shares;
         and Milan Holdings, Ltd., 180,000 shares.
(3)      The amounts shown  include  shares that may be acquired  currently,  or
         within 60 days after  December  31, 2004  through the exercise of stock
         options are follows:  Dr. Silver,  725,000 shares; Mr. Mackey,  725,000
         shares;  Mr. Ignotz,  453,851 shares; Mr. Yoon,  222,224;  Mr. Pingree,
         125,000 shares; and Mr. Mohabbat, 44,448 shares.

                              CERTAIN TRANSACTIONS

         The information set forth herein describes certain transactions between
us and certain affiliated parties. Future transactions, if any, will be approved
by a  majority  of the  disinterested  members  and  will  be on  terms  no less
favorable to us than those that could be obtained from unaffiliated parties.

         Thomas F. Motter,  our former Chairman of the Board and Chief Executive
Officer, leased his former residence to us for $2,500 per month. The primary use
of the  residential  property was for housing  accommodations  for our employees
living outside of Utah while they were working at our corporate  headquarters in
Salt Lake  City.  We paid  $2,500  and  $14,000  in rent  during  2003 and 2002,
respectively. This agreement was terminated on January 31, 2003.

         We entered into a consulting  agreement with Mark R. Miehle, our former
president and chief operating  officer for a period of six- months commencing on
September 3, 2002.  The agreement was renewable for  additional six month terms.
We did not renew the contract  upon its  expiration.  We paid $1,000 and $15,000
under this agreement during 2003 and 2002,  respectfully,  and had an accrual of
$5,000 as of December 31, 2002.

                                       62


         Randall  A.  Mackey,  a  director  since  January  21,  2000,  and from
September  1995 to  September 3, 1998 and chairman of the board since August 30,
2002, is President and a shareholder of the law firm of Mackey Price & Thompson,
which  rendered  legal services in connection  with various  corporate  matters.
Legal fees and  expenses  paid to Mackey  Price & Thompson  for the fiscal years
ended December 31, 2004 and 2003, totaled $90,000 and $97,000,  respectively. As
of December 31, 2004, we owed this firm $188,705,  which is included in accounts
payable.

                             SELLING SECURITYHOLDERS

         The following  table sets forth  information  regarding the  beneficial
ownership  of our common  stock being  registered  for resale as of December 31,
2004,  (i) by each of the  holders  of common  stock  pursuant  to  registration
rights,  and (ii) by each of the  holders of Series E and  Series F  Convertible
preferred  stock,  assuming  each  of  the  Series  E  and  Series  F  preferred
shareholders  elects to convert the  respective  Series E and Series F preferred
shares into shares of common  stock for resale;  (iii) by each of the holders of
warrants, assuming each of the warrantholders elects to exercise the warrants to
purchase  shares of common stock for resale;  and (iv) by each of the holders of
stock options, assuming each of the optionholders elects to exercise the options
to purchase  shares of common  stock for resale;  the number of shares of common
stock to be sold by each  selling  securityholder,  and the  percentage  of each
selling  securityholder  after the sale of the  common  stock  included  in this
prospectus.



                                              Shares Beneficially        Number of
                                                Owned Prior to          Shares Being       Shares Beneficially
                                                    Offering              Offered          Owned After Offering
         Shareholders                           Number     Percent                           Number      Percent
         ------------                           -------    -------                           -------      ------
                                                                                                
John T. Ablamsky(1)                              35,000        *              3,000           32,000          *
Steven J. Ablamsky(2)                            35,000        *              3,000           32,000          *
Morris Ades(3)                                   29,167        *              2,500           26,667          *
Francis Anderson(4)                               8,346        *              8,346                0          *
Joseph S. Anile II                              112,933        *            112,933                0          *
Paul L. Archambeau, M.D.(5)                     255,000      1.0%           255,000                0          *  
BNB Associates Investments LP (6)                43,750        *              3,750           40,000          *
Dr. Ronald A. and Karen Balkin(7)               155,833        *             12,500          143,333          * 
Darin Baker(8)                                    2,604        *              2,604                0          *
John H. Banzhaf(9)                                7,887        *              7,887                0          *
Jerry Bassin(10)                                 29,167        *              2,500           26,667          * 
Steven J. Bayern (11)                           112,500        *            112,500                0          * 
Alan Beinhacker(12)                                 541        *                541                0          *
Dr. Valery Berger(13)                             2,500        *              2,500                0          *
Michael Bollag(14)                                3,750        *              3,750                0          *
Dr. Richard G. Bowe, IRA(15)                     29,167        *              2,500           26,667          *  
Craig S. Brewer(16)                               5,000        *              5,000                0          *
Christopher Brothers1(17)                         2,604        *              2,604                0          *  
Roland A. Catalano, IRA(18)                      87,500        *              7,500           80,000          *
Chicago Investments, Inc. (19)                   87,500        *              7,500           80,000          *
James Corman(20)                                 29,167        *              2,500           26,667          *
Cyndel & Co., Inc. (21)                         487,500      1.9%           487,500                0          * 
Lenore Deluca(22)                                 1,234        *              1,234                0          *  
Paul Dorfman(23)                                  1,287        *              1,287                0          * 
Jack Dushey(24)                                   2,500        *              2,500                0          * 
Michael Fenton(25)                                  467        *                467                0          * 
Henry A. Fredericks Sep. Property 
  Trust dated 10/12/88 (26)                      29,167        *              2,500           26,667          *
Robert L. Frome (27)                            222,917        *            156,250           66,667          * 
Generation Capital Associates (28)               23,208        *             23,208                0          *
Richard E. Gerzof(29)                             1,250        *              1,250                0          *
John Harte(30)                                   58,333        *              5,000           53,333          *
John W. Hemmer(31)                              135,000        *            135,000                0          *
Keith D. Ignotz(32)                             200,709        *            200,000              709          *
International Bio-Immune Systems, Inc.(33)      344,000      1.3%           344,000                0          * 


                                       63



                                                                                              
Scott Jernigan(34)                                5,000        *              5,000                0          *    
Kenneth Jerome & Company, Inc.(35)              200,000        *            200,000                0          *
KSH Strategic Investment Fund I, LP (36)        237,333      1.0%            20,000          217,333          *
Frances Kehoe(37)                                 1,234        *              1,234                0          *
Terry F. King(38)                                 2,500        *              2,500                0          *
Albert F. Kinzinger, Jr.(39)                     49,220        *              4,220           45,000          * 
Albert F. Kinzinger, Sr., IRA(40)                29,167        *              2,500           26,667          *
Arthur Klansky(41)                               14,583        *              1,250           13,333          *
Helen Kohn(42)                                  139,300        *            139,300                0          *
Patrick N. Kolenik (43)                         112,500        *            112,500                0          *  
Jason Konior(44)                                    515        *                515                0          *
Nicole Kregar(45)                                 1,234        *              1,234                0          *   
James H. Levi(46)                                14,499        *              2,500           11,999          *
Joe Levine(47)                                      450        *                450                0          *
Dr. Michael B. Limberg (48)                     309,375      1.2%           309,375                0          * 
Daniel S. Lipson(49)                            250,000      1.0%           250,000                0          * 
Randall A. Mackey(50)                           475,000      1.6%           475,000                0          *
Douglas A. MacLeod, M.D.(51)                  1,418,451      5.6%         1,000,000          418,451        1.6%        
Douglas A. MacLeod, M.D. Profit 
  Sharing Trust(52)                             500,000      2.0%           500,000                0          *
Damian Maggio(53)                                   515        *                515                0          *
Thomas L. Martin(54)                              7,500        *              7,500                0          *
Lewis Mason(55)                                   3,887        *              3,887                0          *  
Frank G. Mauro(56)                              153,225        *            153,225                0          * 
Mentor Corporation (57)                         763,651      3.0%           763,651                0          *  
Mid-Lakes Profit Sharing Trust
  dated 1/1/66 (58)                              29,167        *              2,500           26,667          *
Milan Holdings, Ltd.(59)                        900,000      3.5%           900,000                0          *
James McKeever(60)                                1,000        *              1,000                0          *   
James A. Milgard(61)                            218,750        *             18,750          200,000          *
Robert Moulallem(62)                              1,000        *              1,000                0          * 
Kay Murcer(63)                                   11,667        *              1,000           10,667          *
Nancy Murdocco(64)                                1,234        *              1,234                0          *     
Bernard Musmand(65)                                 450        *                450                0          *  
Dr. Joseph R. Nemeth(66)                          9,375        *              9,375                0          *   
Jules M. Ness, Jr.(67)                           39,167        *              2,500           36,667          *
Karen Ann Orlando(68)                             1,234        *              1,234                0          *   
OTATO Limited Partnership (69)                   12,500        *             12,500                0          *
Michael Pancer Profit Sharing Plan(70)            2,500        *              2,500                0          *  
Roberto E. Parra(71)                              6,500        *              6,500                0          *
Barry Pearl(72)                                  10,000        *             10,000                0          *    
Perceptive Life Sciences Master Fund (73)        64,132        *             20,000           44,132          *
David Peterson(74)                                3,750        *              1,250            2,500          *
John Petrucco(75)                                 1,320        *              1,320                0          *
Victor Polakof(76)                                2,500        *              2,500                0          *
Polycore Optical Pte., Ltd. (77)                694,816      2.7%           694,816                0          *
Sal Vatore Ponzo(78)                              4,500        *              4,500                0          * 
Charles S. Pritchard(79)                         10,103        *             10,103                0          *
ProMed Partners, L.P.(80)                       283,728      1.1%            23,035          260,693        1.0%
ProMed Partners I (81)                           24,440        *             24,440                0          *
ProMed Partners II (82)                          29,517        *              2,530           26,987          *
Dr. Soleiman Rabanipour(83)                      14,583        *              1,250           13,333          * 
Dr. Sheldon Rabin, IRA(84)                        5,000        *              5,000                0          *
Delbert D. Reichardt(85)                          7,888        *              7,888                0          *  
Marsha and Barry Reiss(86)                        5,833        *                500            5,333          *
Rodman & Renshaw, Inc.(87)                       35,000        *             35,000                0          *  


                                       64



                                                                                                
Edwin W. and Cheryl S. Richardson(88)            29,167                       2,500           26,667          *
St. Mark's Eye Institute(89)                    250,000      1.0%           250,000                0          *
Joel Schoenfeld, IRA(90)                         29,167        *              2,500           26,667          * 
Judy Shapiro Trust dated 5/15/01(91)             58,333        *              5,000           53,333          *
Shadow Capital LLC (92)                          58,333        *              5,000           53,333          *
Dr. David M. Silver(93)                         491,666      1.6%           475,000           16,666          *
Richard C. Siskey(94)                            47,766        *             10,000           37,766          *
Mary Ellen Spedale(95)                            1,234        *              1,234                0          *
Ronit Sucoff(96)                                 93,503        *             86,800            6,703          *                  
Scott Sucoff(97)                                  5,928        *              5,928                0          *
WEC Asset Management LLC (98)                    10,000        *             10,000                0          *
White Living Trust (99)                          14,583        *              1,250           13,333          *
Jeffrey A. Wietzman(100)                         14,583        *              1,250           13,333          *
James C. Wilson(101)                             56,333        *              5,000           51,333          *
Matthew Zagon(102)                                2,833        *              2,833                0          * 
Class A Warrantholders                        1,000,000                   1,000,000                0
                                              ---------                   ---------        --------- 
      TOTAL                                  11,866,710                   9,546,437        2,320,273


-----------------
* Less than 1%

(1)      Includes the resale of 3,000 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(2)      Includes the resale of 3,000 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(3)      Includes the resale of 2,500 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(4)      Includes the resale of 8,346 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(5)      Includes the resale of 51,000 shares of common stock  issuable upon the
         exercise of warrants with an exercise price of $.25 per share.
(6)      Includes the resale of 3,750 shares of common stock  issuable  upon the
         exercise of warrants  with an  exercise  price of $4.00 per share.  The
         managing  partner of BNB Associates  Investments LP is Benjamin Bollag,
         who exercises sole voting and investment powers.
(7)      Includes the resale of 12,500 shares of common stock  issuable upon the
         exercise of warrants with an exercise price of $4.00 per share.
(8)      Includes the resale of 2,604 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(9)      Includes the resale of 7,887 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $.25 per share.
(10)     Includes the resale of 2,500 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(11)     Includes the resale of 112,500 shares of common stock issuable upon the
         exercise of stock  options  with an exercise  price of $4.00 per share.
         Mr. Bayern is a former directo of the company.
(12)     Includes  the resale of 541 shares of common  stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(13)     Includes the resale of 2,500 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(14)     Includes the resale of 3,750 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(15)     Includes the resale of 2,500 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(16)     Includes the resale of 5,000 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(17)     Includes the resale of 2,604 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(18)     Includes the resale of 7,500 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(19)     Includes the resale of 7,500 shares of common stock  issuable  upon the
         exercise of warrants  with an  exercise  price of $4.00 per share.  The
         president  of Chicago  Investments,  Inc.  is Linda  Gallenberger,  who
         exercises sole voting and investment powers.

 
                                       65



(20)     Includes the resale of 2,500 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(21)     Includes the resale of 237,000 shares of common stock issuable upon the
         exercise of warrants  with an  exercise  price of $4.00 per share,  and
         250,000  shares of common stock  issuable upon the exercise of warrants
         with an exercise price of $3.00 per share.  The chairman,  director and
         50%  shareholder  of Cyndel & Co.,  Inc.  is Stephen J.  Bayern and the
         president,  director  and 50%  shareholder  of  Cyndel  is  Patrick  N.
         Kolenik,  who together  exercise  shared voting an  investment  powers.
         Messrs. Bayern and Kolenik are each a former director o the company. On
         October  1, 1999 and April 1,  2000,  Cyndel  entered  into  consulting
         agreements with the company to perform  unspecified  investment banking
         services for the company.
(22)     Includes the resale of 1,234 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(23)     Includes the resale of 1,287 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(24)     Includes the resale of 2,500 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(25)     Includes  the resale of 467 shares of common  stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(26)     Includes the resale of 2,500 shares of common stock  issuable  upon the
         exercise of warrants  with an  exercise  price of $4.00 per share.  The
         trustee of Henry A. Fredericks  Sep.  Property Trust is James D. White,
         who exercises sole voting and investment powers.
(27)     Includes the resale of 156,250 shares of common stock issuable upon the
         exercise of stock  options  with an exercise  price of $4.00 per share.
         Mr. Frome is a former directo of the company.
(28)     Includes the resale of 23,208 shares of common stock  issuable upon the
         exercise of warrants  with an  exercise  price of $4.00 per share.  The
         general partner of Generation  Capital Associates is Frank E. Hart, who
         exercises sole voting and investment powers.
(29)     Includes the resale of 1,250 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(30)     Includes the resale of 5,000 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(31)     Includes the resale of 75,000 shares of common stock  issuable upon the
         exercise of warrants  with an  exercise  price of $7.50 per share,  and
         60,000  shares of common stock  issuable  upon the exercise of warrants
         with an  exercise  price of $5.00 per share.  Mr.  Hemmer is the former
         senior vice president of the company
(32)     Includes the resale of 75,000 shares of common stock  issuable upon the
         exercise of stock options with an exercise price of $4.00 per share and
         125,000  shares of common  stock  issuable  upon the  exercise of stock
         options  with an  exercise  price of $2.75 per share.  Mr.  Ignotz is a
         director of the company.
(33)     The president of International  Bio-Immune  Systems,  Inc. is Leslie F.
         Stern, who exercises sole voting and investment powers.
(34)     Includes the resale of 5,000 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(35)     Includes the resale of 100,000 shares of common stock issuable upon the
         exercise of warrants  with an exercise  price of $8.125 per share,  and
         100,000  shares of common stock  issuable upon the exercise of warrants
         with an exercise price of $7.50 per share.
(36)     Includes the resale of 20,000 shares of common stock  issuable upon the
         exercise of warrants  with an  exercise  price of $4.00 per share.  The
         managing  partners of KSH Strategic  Investment  Fund I, LP are Cary W.
         Sucoff and Harvey R. Kohn,  who exercise  shared voting and  investment
         powers.
(37)     Includes the resale of 1,234 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(38)     Includes the resale of 2,500 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(39)     Includes the resale of 4,220 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(40)     Includes the resale of 2,500 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(41)     Includes the resale of 1,250 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(42)     Includes the resale of 86,800 shares of common stock  issuable upon the
         exercise of warrants with an exercise price of $4.00 per share.
(43)     Includes the resale of 112,500 shares of common stock issuable upon the
         exercise of stock  options  with an exercise  price of $4.00 per share.
         Mr. Kolenik is a former director of the company.
(44)     Includes  the resale of 515 shares of common  stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(45)     Includes the resale of 1,234 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.

                                       66


(46)     Includes the resale of 2,500 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(47)     Includes  the resale of 450 shares of common  stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(48)     Includes the resale of 100,000 shares of common stock issuable upon the
         exercise of warrants with an exercise price of $4.00 per share,  50,000
         shares of common stock  issuable  upon the exercise of warrants with an
         exercise  price of $6.75 per  share,  50,000  shares  of  common  stock
         issuable upon the exercise of warrants with an exercise  price of $4.75
         per  share,  and  100,000  shares of  common  stock  issuable  upon the
         exercise of warrants  with an  exercise  price of $4.00 per share.  Dr.
         Limberg served as a consultant to the company.
(49)     Includes the resale of 50,000 shares of common stock  issuable upon the
         exercise of stock options with an exercise price of $.25 per share.
(50)     Includes the resale of 75,000 shares of common stock  issuable upon the
         exercise of stock  options  with an exercise  price of $6.00 per share,
         75,000  shares of common  stock  issuable  upon the  exercise  of stock
         options wit an exercise price of $4.00 per share, and 325,000 shares of
         common  stock  issuable  upon  the  exercise  of stock  options  wit an
         exercise  price of $2.75 per share.  Mr.  Mackey is the chairman of the
         board and secretary of the company.
(51)     Includes the resale of 200,000 shares of common stock issuable upon the
         exercise of warrants with an exercise price of $.25 per share.
(52)     Includes the resale of 100,000 shares of common stock issuable upon the
         exercise of warrants with an exercise price of $.25 per share.
(53)     Includes  the resale of 515 shares of common  stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(54)     Includes the resale of 5,000 shares of common stock  issuable  upon the
         exercise of stock  options  with an exercise  price of $5.00 per share,
         and 2,500 shares of common stock  issuable upon the exercise of options
         wit an exercise price of $2.75 per share.
(55)     Includes the resale of 3,887 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(56)     Includes the resale of 141,975 shares of common stock issuable upon the
         exercise of  warrants  with an  exercise  price of $.25 per share,  and
         11,250  shares of common stock  issuable  upon the exercise of warrants
         with an exercise price of $4.00 per share.
(57)     The  senior  vice  president  and  chief  financial  officer  of Mentor
         Corporation  is Adel Michael,  who exercises sole voting and investment
         powers.  On October 24, 1999,  Mentor  entered  into an asset  purchase
         agreement with the Company to sell Mentor's  cataract  surgery  product
         line.
(58)     Includes the resale of 2,500 shares of common stock  issuable  upon the
         exercise of warrants  with an  exercise  price of $4.00 per share.  The
         trustee of the  Mid-Lakes  Profit  Sharing  Trust dated  1/1/66 is John
         Harte, who exercises sole voting and investment powers.
(59)     Includes the resale of 180,000 shares of common stock issuable upon the
         exercise of warrants with an exercise price of $.25 per share.
(60)     Includes the resale of 1,000 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(61)     Includes the resale of 18,750 shares of common stock  issuable upon the
         exercise of warrants with an exercise price of $4.00 per share.
(62)     Includes the resale of 1,000 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(63)     Includes the resale of 1,000 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(64)     Includes the resale of 1,234 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(65)     Includes  the resale of 450 shares of common  stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(66)     Includes the resale of 9,375 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(67)     Includes the resale of 2,500 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(68)     Includes the resale of 1,234 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(69)     Includes the resale of 12,500 shares of common stock  issuable upon the
         exercise of warrants  with an  exercise  price of $4.00 per share.  The
         chief  financial  officer  of OTAT  Limited  Partnership  is  James  W.
         Santori, who exercises sole voting and investment powers.
(70)     Includes the resale of 2,500 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(71)     Includes the resale of 4,000 shares of common stock  issuable  upon the
         exercise of options wit an exercise price of $5.00 per share, and 2,500
         shares of common  stock  issuable  upon the exercise of options with an
         exercise price of $2.75 per share.


                                       67



(72)     Includes the resale of 10,000 shares of common stock  issuable upon the
         exercise of warrants with an exercise price of $4.00 per share.
(73)     Includes the resale of 20,000 shares of common stock  issuable upon the
         exercise of warrants  with an  exercise  price of $4.00 per share.  The
         director of Perceptive Life Sciences Master Fund is Joseph Adelman, who
         exercises sole voting and investment powers.
(74)     Includes the resale of 1,250 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(75)     Includes the resale of 1,320 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(76)     Includes the resale of 2,500 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(77)     The managing director of Polycore Optical Pte., Ltd. is Sammy Summargo,
         who exercises sole voting and investment powers.
(78)     Includes the resale of 4,500 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(79)     Includes the resale of 4,103 shares of common stock  issuable  upon the
         exercise of stock  options  with an exercise  price of $5.00 per share,
         and 6,000  shares of common stock  issuable  upon the exercise of stock
         options with an exercise price of $2.75 per share.
(80)     Includes the resale of 23,035 shares of common stock  issuable upon the
         exercise of warrants  with an  exercise  price of $4.00 per share.  The
         managing  directors of ProMed  Partners,  L.P.  are Barry  Kurokawa and
         David B. Muskett, who exercise sole voting and investment powers.
(81)     Includes the resale of  24,440shares  of common stock issuable upon the
         exercise of warrants  with an  exercise  price of $4.00 per share.  The
         managing directors of ProMed Partners I are Barry Kurokawa and David B.
         Muskett, who exercise shared voting and investment powers.
(82)     Includes the resale of 2,530 shares of common stock  issuable  upon the
         exercise of warrants  with an  exercise  price of $4.00 per share.  The
         managing  directors of ProMed  Partners II are Barry Kurokawa and David
         B. Muskett, who exercise shared voting and investment powers.
(83)     Includes the resale of 1,250 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(84)     Includes the resale of 5,000 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(85)     Includes the resale of 7,888 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $.25 per share.
(86)     Includes  the resale of 500 shares of common  stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(87)     Includes the resale of 35,000 shares of common stock  issuable upon the
         exercise of warrants with an exercise price of $2.00 per share.
(88)     Includes the resale of 2,500 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(89)     Includes the resale of 50,000 shares of common stock  issuable upon the
         exercise of warrants with an exercise price of $.25 per share.
(90)     Includes the resale of 2,500 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(91)     Includes the resale of 5,000 shares of common stock  issuable  upon the
         exercise of warrants  with an  exercise  price of $4.00 per share.  The
         trustees  of the Judy  Shapiro  Trust  dated  5/15/01 are Alan and Judy
         Shapiro, who exercise shared voting and investment powers.
(92)     Includes the resale of 5,000 shares of common stock  issuable  upon the
         exercise of warrants  with an  exercise  price of $4.00 per share.  The
         manager of Shadow  Capital LLC i B. Kent  Garlinghouse,  who  exercises
         sole voting and investment powers.
(93)     Includes the resale of 75,000 shares of common stock  issuable upon the
         exercise of stock  options  with an exercise  price of $6.00 per share,
         75,000  shares of common  stock  issuable  upon the  exercise  of stock
         options wit an exercise price of $4.00 per share, and 325,000 shares of
         common  stock  issuable  upon  the  exercise  of stock  options  wit an
         exercise  price of $2.75 per share.  Dr.  Silver is a  director  of the
         company.
(94)     Includes the resale of 10,000 shares of common stock  issuable upon the
         exercise of warrants with an exercise price of $4.00 per share.
(95)     Includes the resale of 1,234 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(96)     Includes the resale of 86,800 shares of common stock  issuable upon the
         exercise of warrants with an exercise price of $4.00 per share.
(97)     Includes the resale of 5,928 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(98)     Includes the resale of 10,000 shares of common stock  issuable upon the
         exercise of warrants  with an  exercise  price of $4.00 per share.  The
         managing  director of WEC Asset  Management  LLC is Daniel J. Saks, who
         exercises sole voting and investment powers.

                                       68


(99)     Includes the resale of 1,250 shares of common stock  issuable  upon the
         exercise of warrants  with an  exercise  price of $4.00 per share.  The
         trustees of the White  Living  Trust are James and Jean Ann White,  who
         exercis shared voting and investment powers.
(100)    Includes the resale of 1.250 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(101)    Includes the resale of 5,000 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.
(102)    Includes the resale of 2,833 shares of common stock  issuable  upon the
         exercise of warrants with an exercise price of $4.00 per share.


                           DESCRIPTION OF SECURITIES

         Our authorized  capital stock  consists of 80,000,000  shares of common
stock,  $.001 par value per share,  of which  25,764,868  shares were issued and
outstanding  as of December  31,  2004,  and  5,000,000  shares of  undesignated
preferred  stock,  $.001 par value per share.  We have created  seven classes of
preferred  stock,  designated  as Series A preferred  stock,  Series B preferred
stock,  Series C convertible  preferred  stock,  Series D convertible  preferred
stock,  Series E convertible  preferred  stock,  Series F convertible  preferred
stock and Series G convertible  preferred  stock.  The following is a summary of
the material terms and  provisions of our capital stock and related  securities.
Because it is a summary,  it does not  include  all of the  information  that is
included in our  certificate of  incorporation.  The text of our  certificate of
incorporation,  which is attached as an exhibit to this registration  statement,
is incorporated into this section by reference.

Common Stock

         Voting  Rights.  The holders of our common stock will have one vote per
share and are not entitled to vote  cumulatively  for the election of directors.
Generally,  all  matters to be voted on by  stockholders  must be  approved by a
majority  or, in the case of election of  directors,  by  plurality of the votes
cast at a meeting at which a quorum is present  and  voting  together  as single
class,  subject  to any  voting  rights  granted  to  the  holders  of any  then
outstanding preferred stock.

         Dividends.  Holders  of  common  stock  are  entitled  to  receive  any
dividends declared by our board of directors, subject to the preferential rights
of any  preferred  stock then  outstanding.  Dividends  consisting  of shares of
common stock may be paid to holders of shares of common stock.

         Other  Rights.  Upon our  liquidation,  dissolution  or winding up, the
holders of common stock are entitled preferential to share ratably in any assets
available for  distribution  to holders of shares of common stock. No holders of
shares  are  subject  to  redemption  or  have  preemptive  rights  to  purchase
additional shares of common stock.

Preferred Stock

         Our  certificate of  incorporation  provides that  5,000,000  shares of
preferred stock may be issued from time to time in one or more series. Our board
of directors  is  authorized  to fix the voting  rights,  if any,  designations,
powers, preferences, qualifications, limitations and restrictions, applicable to
the shares of each  series.  Our board of  directors  may,  without  stockholder
approval,  issue  preferred  stock  with  voting  and other  rights  that  could
adversely  affect the voting power and other rights of the holders of the common
stock and could have anti-takeover effects,  including preferred stock or rights
to acquire preferred stock in connection with implementing a stockholder  rights
plan.  The ability of our board of directors to issue  preferred  stock  without
stockholder approval could have the effect of delaying,  deferring or preventing
a change of control  with  respect to our  company  or the  removal of  existing
management.  As of December 31, 2004, we have created and issued shares of seven
classes of preferred stock.

Series A, B, C, D, E, F and G Preferred Stock.

         The Board of Directors has authorized the issuance of 500,000 shares of
Series A Preferred  Stock,  500,000 shares of Series B Preferred  Stock,  30,000
shares of  Series C  Preferred  Stock,  1,140,000  shares of Series D  Preferred
Stock,  50,000  shares of Series E Preferred  Stock,  50,000  shares of Series F
Preferred Stock,  and 2,000,000 shares of Series G Preferred Stock.  Each of the
shares of  preferred  stock are  convertible  into  shares of common  stock at a
different  conversion  price.  As of December  31,  2004,  there were issued and
outstanding  5,627  shares of Series A Preferred  Stock  convertible  into 6,753
shares of our common stock; 8,986 shares of Series B Preferred Stock convertible
into 10,783 shares of our common stock;  no shares of Series C Preferred  Stock;
5,000  shares of Series D Preferred  Stock;  1,000  shares of Series E Preferred
Stock convertible into 53,333 shares of common stock;  4,598.75 shares of Series
F Preferred  Stock  convertible  into 245,267  shares of our common  stock;  and
1,726,560  shares of Series G Preferred Stock  convertible into 1,726,560 shares
of our common stock The voting rights, dividends,  conversion rights, redemption
rights,  and  liquidation  rights of the Series A, Series B, Series C, Series D,
Series E, Series F and Series G Preferred Stock are more fully described below.

 
                                       69


Series A Preferred Stock

         Voting  Rights.  Except as provided  by  applicable  law,  the Series A
preferred  stockholders  have  neither  voting  power,  nor the right to receive
notice of any  meetings of our  stockholders.  Except as  required  by law,  the
consent of the Series A preferred  stockholders is not required or authorized to
take any corporate action.

         Dividends.  Our Series A preferred stock is entitled to  non-cumulative
preferred  dividends at $.24 per share per annum payable, at our option, in cash
from surplus earnings.

         Conversion.  At any time the Series A preferred stockholder may convert
each share of Series A  preferred  stock  into 1.2  shares of our common  stock,
subject to adjustment for stock splits, stock dividends,  recapitalizations  and
similar transactions involving our common stock.

         Other  Rights.   Upon  our   liquidation,   dissolution,   or  sale  of
substantially  all of our  assets,  the  Series  A  preferred  stockholders  are
entitled  to  distributions  equal to $1.00 per share,  plus  accrued and unpaid
dividends.  The shares of Series A preferred stock are subject to redemption but
have no preemptive  rights to purchase  additional  shares of Series A preferred
stock or our common stock.

Series B Preferred Stock

         Voting  Rights.  Except as provided  by  applicable  law,  the Series B
preferred  stockholders  have  neither  voting  power,  nor the right to receive
notice of any  meetings of our  stockholders.  Except as  required  by law,  the
consent of the Series B preferred  stockholders is not required or authorized to
take any corporate action.

         Dividends.  Our Series B preferred stock is entitled to  non-cumulative
preferred  dividends at $.24 per share per annum payable, at our option, in cash
from surplus earnings.

         Conversion.  At any time the Series B preferred stockholder may convert
each share of Series B  preferred  stock  into 1.2  shares of our common  stock,
subject to adjustment for stock splits, stock dividends,  recapitalizations  and
similar transactions involving our common stock.

         Other  Rights.   Upon  our   liquidation,   dissolution,   or  sale  of
substantially  all of our  assets,  the  Series  B  preferred  stockholders  are
entitled  to  distributions  equal to $4.00 per share,  plus  accrued and unpaid
dividends.  The Series B preferred  stockholders  are  entitled to  preferential
distributions  over all other  classes of  capital  stock,  other than  Series A
preferred  stock.  The  shares  of  Series B  preferred  stock  are  subject  to
redemption but have no preemptive rights to purchase additional shares of Series
B preferred stock or our common stock.

Series C Preferred Stock

         Voting  Rights.  Except as provided  by  applicable  law,  the Series C
preferred  stockholders  have  neither  voting  power,  nor the right to receive
notice of any  meetings of our  stockholders.  Except as  required  by law,  the
consent of the Series C preferred  stockholders is not required or authorized to
take any corporate action.

         Dividends.   Our  Series  C   preferred   stock  is   entitled  to  12%
non-cumulative  preferred  dividends payable,  at our option, in common stock or
cash from surplus earnings.

         Conversion.  At any time the Series C preferred stockholder may convert
each  share of Series C  preferred  stock  into  57.14  shares of common  stock,
subject to adjustment for stock splits, stock dividends,  recapitalizations  and
similar  transactions  involving  our  common  stock.  Any  shares  of  Series C
preferred stock outstanding  after January 1, 2002, are automatically  converted
into our shares to common stock at the conversion price then in effect.

         Other   Rights.   Upon  our   liquidation,   dissolution   or  sale  of
substantially  all of our  assets,  the  Series  C  preferred  stockholders  are
entitled  to   distributions   equal  to  the  greater  of  (i)  the  amount  of
distributions  such shares would have  received had such holders  converted  the
Series C preferred stock into common stock immediately prior to liquidation,  or
(ii) the stated value of $100.00 per share,  plus declared but unpaid dividends.
The Series C preferred  stockholders are entitled to preferential  distributions
over all other  classes  of  capital  stock,  other  than  Series A and Series B
preferred stock. No shares of Series C preferred stock are subject to redemption
or have preemptive  rights to purchase  additional  shares of Series C preferred
stock or our common stock.


                                       70


Series D Preferred Stock

         Voting  Rights.  Except as provided  by  applicable  law,  the Series D
preferred  stockholders  have  neither  voting  power,  nor the right to receive
notice of any  meetings of our  stockholders.  Except as  required  by law,  the
consent of the Series D preferred  stockholders is not required or authorized to
take any corporate action.

         Dividends.   Our  Series  D   preferred   stock  is   entitled   to  8%
non-cumulative  preferred  dividends payable,  at our option, in common stock or
cash from surplus earnings.

         Conversion.  At any time the Series D preferred stockholder may convert
each share of Series D preferred  stock into one share of common stock,  subject
to adjustment for stock splits, stock dividends,  recapitalizations  and similar
transactions  involving our common stock. Any shares of Series D preferred stock
outstanding after January 1, 2002, are  automatically  converted into our shares
of common stock at the conversion price then in effect.

         Other   Rights.   Upon  our   liquidation,   dissolution   or  sale  of
substantially  all of our  assets,  the  Series  D  preferred  stockholders  are
entitled  to   distributions   equal  to  the  greater  of  (i)  the  amount  of
distributions  such shares would have  received had such holders  converted  the
Series D preferred stock into common stock immediately prior to liquidation,  or
(ii) the stated value of $1.75 per share,  plus  declared but unpaid  dividends.
The Series D preferred  stockholders are entitled to preferential  distributions
over all other  classes of capital  stock,  other  than  Series A,  Series B and
Series C preferred  stock.  No shares of Series D preferred stock are subject to
redemption or have preemptive  rights to purchase  additional shares of Series D
preferred stock or our common stock.

Series E Preferred Stock

         Voting  Rights.  Except as provided  by  applicable  law,  the Series E
preferred  stockholders  have  neither  voting  power,  nor the right to receive
notice of any  meetings of our  stockholders.  Except as  required  by law,  the
consent of the Series E preferred  stockholders is not required or authorized to
take any corporate action.

         Dividends.   Our  Series  E   preferred   stock  is   entitled   to  8%
non-cumulative  preferred  dividends payable,  at our option, in common stock or
cash from surplus earnings.

         Conversion.  At any time the Series E preferred stockholder may convert
each  share of Series E  preferred  stock  into  53.33  shares of common  stock,
subject to adjustment for stock splits, stock dividends,  recapitalizations  and
similar  transactions  involving  our  common  stock.  Any  shares  of  Series E
preferred  stock  outstanding  are  automatically  converted  into shares of our
common stock (i) after January 1, 2005, or (ii) after a  registration  statement
registering  our common shares issuable upon conversion has been effective for a
least 30 days and the average  closing  price of our common stock for the 20-day
period is at least $3.50 per share.

         Other   Rights.   Upon  our   liquidation,   dissolution   or  sale  of
substantially  all of our  assets,  the  Series  E  preferred  stockholders  are
entitled  to   distributions   equal  to  the  greater  of  (i)  the  amount  of
distributions  such shares would have  received had such holders  converted  the
Series E preferred stock into common stock immediately prior to liquidation,  or
(ii) the stated value of $100.00 per share,  plus declared but unpaid dividends.
The Series E preferred  stockholders are entitled to preferential  distributions
over all other classes of capital stock, other than Series A, Series B, Series C
and Series D preferred  stock. No shares of Series E preferred stock are subject
to redemption or have preemptive rights to purchase  additional shares of Series
E preferred stock or our common stock.

Series F Preferred Stock

         Voting  Rights.  Except as provided  by  applicable  law,  the Series F
preferred  stockholders  have  neither  voting  power,  nor the right to receive
notice of any  meetings of our  stockholders.  Except as  required  by law,  the
consent of the Series F preferred  stockholders is not required or authorized to
take any corporate action.

         Dividends.   Our  Series  F   preferred   stock  is   entitled   to  8%
non-cumulative  preferred  dividends payable,  at our option, in common stock or
cash from surplus earnings.

         Conversion.  At any time the Series F preferred stockholder may convert
each  share of Series F  preferred  stock  into  53.33  shares of common  stock,
subject to adjustment for stock splits, stock dividends,  recapitalizations  and
similar  transactions  involving  our  common  stock.  Any  shares  of  Series F
preferred  stock  outstanding  are  automatically  converted  into shares of our
common stock (i) after January 1, 2005, or (ii) after a  registration  statement
registering  our common shares issuable upon conversion has been effective for a
least 30 days and the average  closing  price of our common stock for the 20-day
period is at least $3.50 per share.

         Other   Rights.   Upon  our   liquidation,   dissolution   or  sale  of
substantially  all of our  assets,  the  Series  F  preferred  stockholders  are
entitled to the  greater of (i) the amount of  distributions  such shares  would
have  received  had such  holders  converted  the Series F preferred  stock into

                                       71


common stock immediately prior to liquidation, or (ii) the stated value of $1.00
per  share,  plus  declared  but  unpaid  dividends.   The  Series  F  preferred
stockholders are entitled to preferential  distributions  over all other classes
of capital stock, other than Series A, Series B, Series C, Series D and Series E
preferred stock. No shares of Series F preferred stock are subject to redemption
or have preemptive  rights to purchase  additional  shares of Series F preferred
stock or our common stock. 

Series G Preferred Stock
  
         Voting  Rights.  Except as provided  by  applicable  law,  the Series G
preferred  stockholders  have  neither  voting  power,  nor the right to receive
notice of any  meetings of our  stockholders.  Except as  required  by law,  the
consent of the Series G preferred  stockholders is not required or authorized to
take any corporate action.
  
         Dividends.   Our  Series  G   preferred   stock  is   entitled   to  8%
non-cumulative  preferred  dividends payable,  at our option, in common stock or
cash from surplus earnings.

         Conversion.  At any time the Series G preferred stockholder may convert
each share of Series G preferred  stock into one share of common stock,  subject
to adjustment for stock splits, stock dividends,  recapitalizations  and similar
transactions  involving our common stock. Any shares of Series G preferred stock
outstanding  are  automatically  converted  into shares of our common  stock (i)
after August 1, 2005, or (ii) after a  registration  statement  registering  our
common shares  issuable upon  conversion  has been effective for a least 30 days
and the average  closing  price of our common stock for the 20-day  period is at
least $.50 per share.

         Other   Rights.   Upon  our   liquidation,   dissolution   or  sale  of
substantially  all of our  assets,  the  Series  G  preferred  stockholders  are
entitled to the  greater of (i) the amount of  distributions  such shares  would
have  received  had such  holders  converted  the Series G preferred  stock into
common stock immediately prior to liquidation,  or (ii) the stated value of $.25
per  share,  plus  declared  but  unpaid  dividends.   The  Series  G  preferred
stockholders are entitled to preferential  distributions  over all other classes
of capital  stock,  other than  Series A, Series B, Series C, Series D, Series E
and Series F preferred  stock. No shares of Series G preferred stock are subject
to redemption or have preemptive rights to purchase  additional shares of Series
G preferred stock or our common stock.

         Under the terms of the private  offering of Series G preferred  shares,
we are  required  to file a  registration  statement  with  the  Securities  and
Exchange  Commission  to  register  the common  share  issuable  to the Series G
preferred  stockholders  upon conversion of their Series G preferred  shares and
exercise of their warrants. If the registration  statement has not been declared
effective  within 120 days of the initial closing of such offering on August 29,
2003,  there is a penalty  of 2% per month  payable  to the  Series G  preferred
stockholders  in common  shares (or 39,631  common  shares per month)  until the
registration statement is declared effective.  As of September 30, 2004, we have
recorded a  liability  of $43,000  related to the  356,682  common  shares to be
issued to the Series G preferred  stockholders because a registration  statement
had not been declared effective as of that date.

Warrants

         Between  June 10, 1997 and December  31,  2004,  we issued  warrants to
individuals  and entities that are currently  outstanding to purchase a total of
4,584,182  shares of our common stock at exercise  prices  ranging from $.15 per
share to $8.125 per share. The warrants all contain  provisions that protect the
holders  against  dilution by adjustment of the exercise price per share and the
number of shares  issuable upon exercise  thereof upon the occurrence of certain
events,  including  stock  splits,  stock  dividends,  mergers,  and the sale of
substantially  all of our assets. We are not required to issue fractional shares
of common stock,  and in lieu thereof we will make a cash payment based upon the
current market value of such fractional  shares. A holder of these warrants will
not possess any rights as a  shareholder  unless and until the holder  exercises
the warrants.

         The warrants that are currently issued and have not been exercised, and
the exercise price and expiration date of such warrants are as follows:

         o    Class A Warrants to purchase  1,000,000  shares of common stock at
              an exercise price of $7.50 per share, exercisable through July 10,
              2005.

         o    Warrants  issued to Series E  preferred  stockholders  to purchase
              241,095  shares of common stock at an exercise  price of $4.00 per
              share, exercisable through May 23, 2006.

         o    Warrants  issued to Series F  preferred  stockholders  to purchase
              251,114  shares of common stock at an exercise  price of $4.00 per
              share, exercisable through August 20, 2006.

         o    Warrants  issued to Kenneth  Jerome & Company,  Inc.  to  purchase
              200,000  shares of common  stock at exercise  prices  ranging from
              $7.50 to $8.125 per share, exercisable through July 10, 2005.

         o    Warrants  issued to Cyndel & Company,  Inc.  to  purchase  475,000
              shares of common  stock at exercise  prices  ranging from $3.00 to
              $4.00 per share,  exercisable  during the period  from  August 10,
              2005 to February 7, 2006.

         o    Warrants  issued to Dr.  Michael B.  Lindberg to purchase  300,000
              shares of common  stock at exercise  prices  ranging from $4.00 to
              $6.75 per share, exercisable during the period of from December 1,
              2008 through June 1, 2011.

         o    Warrants  issued to John W.  Hemmer to purchase  75,000  shares of
              common stock at an exercise price of $7.50 per share,  exercisable
              through January 24, 2005.

                                       72


         o    Warrants  issued to Helen Kohn and Ronit Sucoff to purchase 50,000
              shares  each of  common  stock at an  exercise  price of $4.00 per
              share, exercisable through February 7, 2006.

         o    Warrants  issued to Rodman & Renshaw to purchase  35,000 shares of
              common stock at an exercise price of $2.00 per share,  exercisable
              through May 13, 2006.

         o    Warrants  issued to Innovative  Optics,  Inc, to purchase  250,000
              shares of common  stock at an  exercise  price of $5.00 per share,
              exercisable through January 31, 2005.

         o    Warrants  issued to Paul L.  Archanbeau,  M.D.,  John H.  Banzhaf,
              Daniel S. Lipson,  Douglas A. MacLeod,  M.D.,  Douglas A. MacLeod,
              M.D.  Profit  Sharing  Trust,  St.  Mark's  Eye  Institute,  Milan
              Holdings,  Inc.,  Frank G.  Mauro,  and  Delbert G.  Reichardt  to
              purchase  an  aggregate  of 788,750  shares of common  stock at an
              exercise price of $.25 per share, exercisable through September 6,
              2005.

         o    Warrants  issued  to  certain  investors  in a  private  placement
              transaction  to purchase an aggregate of 422,634  shares of common
              stock at an exercise price of $.75 per share, exerciseable through
              June 25, 2005.

         o    Warrants issued to Series G Preferred  warrantholders  to purchase
              470,589  shares of common  stock at an exercise  price of $.50 per
              share, exercisable through September 1, 2006.

         o    Warrants  issued to Alpha  Advisory  Services,  Inc.  to  purchase
              25,000  shares of common  stock at an  exercise  price of $.15 per
              share, exerciseable through September 28, 2007.

         Certain Provisions of Certificate of Incorporation.  Our Certificate of
Incorporation provides that to the fullest extent permitted by Delaware law, our
directors  shall not be liable to us and our  stockholders.  The  Certificate of
Incorporation also contains  provisions  entitling the officers and directors to
indemnification  by us to the fullest extent  permitted by the Delaware  General
Corporation Law.

         Indemnification   Agreements.  We  have  entered  into  indemnification
agreements  with our officers and  directors.  Such  indemnification  agreements
provide  that we will  indemnify  its officers and  directors  against  expenses
(including  attorneys'  fees),  judgments,  fines and amounts paid in settlement
arising out of threatened, pending or completed legal action against any officer
or director to the fullest extent  permitted by the Delaware  General  Corporate
Law.

         Transfer and Warrant  Agent.  Our transfer  agent and registrar for our
common stock and the Warrant Agent for the Class A warrants is Continental Stock
Transfer & Trust Company, New York, New York.


                                       73


                              PLAN OF DISTRIBUTION

         We may solicit the exercise of Class A warrants through a registered or
licensed  broker-dealer.  Upon  exercise of Class A warrants,  Paradigm will pay
such  soliciting  broker-dealer  a fee of 5% of the aggregate  exercise price of
Class A warrants exercised,  if: (i) the market price of the common stock on the
date the Class A warrant is exercised is greater than the then exercise price of
the Class A warrant; (ii) the exercise of the Class A warrant was solicited by a
member of the National Association of Securities Dealers,  Inc.; (iii) the Class
A  warrant  is not  held in a  discretionary  account;  (iv)  disclosure  of the
compensation  arrangements was made by delivery of this prospectus or otherwise)
both at the time of the  offering  and at the time of  exercise  of the  Class A
warrant;  and (v) the  solicitation of exercise of the Class A warrant is not in
violation of Regulation M.

         In connection with the  solicitation of the Class A warrant  exercises,
the  soliciting   broker-dealer   will  be  prohibited   from  engaging  in  any
market-making  activities  with respect to Paradigm's  securities for the period
commencing  either two or nine business  days  (depending on the market price of
the common stock) prior to any solicitation activity for the exercise of Class A
warrants until the later of (a) the termination of such  solicitation  activity,
or (b)  the  termination  (by  waiver  or  otherwise)  of any  right  which  the
soliciting  broker-dealer  may have to receive a fee for the exercise of Class A
warrants following such solicitation.  As a result, the soliciting broker-dealer
may be unable to provide a market for Paradigm's securities, should it desire to
do so,  during  certain  periods  while  the  respective  Class A  warrants  are
exercisable.

         We do not plan to solicit  Series E or Series F preferred  stockholders
regarding  the  conversion  of their Series E or Series F preferred  shares into
shares of common stock, which have been registered for resale upon conversion.

         The resale of the common  stock by the Series E and Series F  preferred
stockholders  that  elect to  convert  their  respective  shares of Series E and
Series F  preferred  stock to shares of common  stock and the holders of Class A
warrants,  Kenneth Jerome  warrants,  Cyndel warrants and warrants issued to Dr.
Michael B. Limberg,  John W. Hemmer, Helen Kohn, Ronit Sucoff, Rodman & Renshaw,
Inc., Paul L. Archambeau,  M.D., John H. Banzhaf,  Daniel S. Lipson,  Douglas A.
MacLeod,  M.D.,  Douglas A. MacLeod,  M.D. Profit Sharing Trust,  St. Mark's Eye
Institute,  Milan Holdings,  Ltd.,  Frank G. Mauro and Delbert D. Reichardt that
elect  to  exercise  their   respective   warrants  and  purchase  common  stock
(collectively, the "Selling Securityholders"), may be effected from time to time
in transactions  (which may include block  transactions by or for the account of
the Selling  Securityholders)  in the Nasdaq  SmallCap  Market or in  negotiated
transactions,  a combination of such methods of sale or otherwise.  Sales may be
made at fixed prices which may be changed,  at market  prices  prevailing at the
time of sale, or at negotiated prices.

         Selling  Securityholders  may effect such transactions by selling their
shares of common stock directly to purchasers,  through broker-dealers acting as
agents for the Selling  Securityholders  or to  broker-dealers  who may purchase
securities as principals and thereafter  sell the common stock from time to time
in the over-the-counter  market, in negotiated  transactions or otherwise.  Such
broker-dealers,  if any,  may  receive  compensation  in the form of  discounts,
concessions  or  commissions  from  the  Selling   Securityholders   and/or  the
purchasers for whom such  broker-dealers  act as agents or to whom they may sell
as principals or otherwise (which compensation as to a particular  broker-dealer
may exceed  customary  commissions).  The Selling  Securityholders  will pay all
commissions,  transfer  taxes,  and other expenses  associated  with the sale of
common stock by them.

         The  Selling  Securityholders  and  broker-dealers,  if any,  acting in
connection with such sales may be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities  Act and any commission  received by them and
any  profit  on the  resale  of the  securities  by them  might be  deemed to be
underwriting  discounts and commissions under the Securities Act. We have agreed
to indemnify the Selling  Securityholders  against certain liabilities under the
Securities Act.


                                       74


         The only Selling  Securityholders  who are affiliates of broker-dealers
are Steven J. Bayern and Patrick N. Kolenik, who are each an officer, a director
and a shareholder of Win Capital Corp. Messrs.  Bayern and Kolenik each received
stock  options as  consideration  for services as a director of Paradigm.  At no
time  has Mr.  Bayern  or Mr.  Kolenik  had any  agreements  or  understandings,
directly or  indirectly,  with any person to distribute the stock options or the
underlying  common shares to be issued in  connection  with the exercise of such
options.

         From time to time this prospectus  will be supplemented  and amended as
required  by the  Securities  Act of 1933,  as  amended.  During any time when a
supplement or amendment is so required, the Selling Securityholders are to cease
sales until the prospectus  has been  supplemented  or amended.  Pursuant to the
registration rights granted to certain of the Selling  Securityholders,  we have
agreed to update and maintain the  effectiveness of this prospectus.  Certain of
the Selling  Securityholders  also may be entitled to sell their shares  without
the use of this  prospectus,  provided that they comply with the requirements of
Rule 144 promulgated under the Securities Act.


                                     EXPERTS

         Our consolidated financial statements for years ended December 31, 2003
and  2002  included  in this  prospectus  have  been  audited  by  Tanner + Co.,
independent  auditors,  as  stated in their  report  appearing  herein.  We have
included our consolidated financial statements in this prospectus in reliance on
such report given upon their authority as experts in auditing and accounting.

                                  LEGAL MATTERS

         The  validity of the shares of common  stock in this  offering  will be
passed upon for us by Mackey Price & Thompson,  Salt Lake City, Utah. Randall A.
Mackey,  the  President,  a director and a shareholder of the law firm of Mackey
Price & Thompson  is our  Chairman  of the Board and  Secretary.  Legal fees and
expenses paid to Mackey Price  Thompson & Ostler for legal  services  during the
fiscal  years ended  December  31, 2004 and 2003  totaled  $90,000 and  $97,000,
respectively.  As of December  31,  2004,  we owed the firm  $188,705,  which is
included in the accounts payable.

 
                                       75



                       WHERE YOU CAN FIND MORE INFORMATION

         We have filed with the  Securities and Exchange  Commission,  or SEC, a
registration  statement  on Form SB-2  (including  the  exhibits  and  schedules
thereto)  under  the  Securities  Act of 1933  and  the  rules  and  regulations
promulgated thereunder, for the registration of the common stock offered hereby.
This prospectus is part of the registration statement.  This prospectus does not
contain all the information  included in the registration  statement  because we
have omitted certain parts of the registration statement as permitted by the SEC
rules and regulations.  For further  information  about us and our common stock,
you should refer to the  registration  statement.  Statements  contained in this
prospectus as to any contract,  agreement or other document  referred to are not
necessarily complete.  Where the contract or other document is an exhibit to the
registration  statement,  each  statement is qualified by the provisions of that
exhibit.

         You can inspect and copy the  registration  statement  and the exhibits
and schedules thereto at the public reference facility  maintained by the SEC at
Room 1024, 450 Fifth Street,  N.W.,  Washington,  D.C.  20549,  and at the SEC's
regional offices at 233 Broadway, New York, New York 10279, and 500 West Madison
Street,  Suite  1400,  Chicago,   Illinois  60661.  You  may  call  the  SEC  at
1-800-732-0330  for  further  information  about  the  operation  of the  public
reference rooms. Copies of all or any portion of the registration  statement can
be obtained  from the Public  Reference  Section of the SEC,  450 Fifth  Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition, the registration
statement is publicly  available  through the SEC's site on the Internet's World
Wide Web, located at http://www.sec.gov.

         We also file annual,  quarterly and current  reports,  proxy statements
and  other  information  with the  SEC.  You can also  request  copies  of these
documents,  for a copying  fee, by writing to the SEC.  Our SEC filings are also
available to the public from the SEC's website at http://www.sec.gov. We furnish
to our stockholders  annual reports containing audited financial  statements for
each fiscal year.

    
                                       76




                        PARADIGM MEDICAL INDUSTRIES, INC.
                             CONDENSED BALANCE SHEET
                                   (UNAUDITED)


                                                              September 30, 2004
                                                              ------------------

ASSETS
Current Assets
  Cash & Cash Equivalents                                     $         188,000
  Receivables, Net                                                      726,000
  Inventory                                                             770,000
  Prepaid Expenses                                                       88,000
                                                              ------------------
              Total Current Assets                                    1,772,000

Intangibles, Net                                                        679,000
Property and Equipment, Net                                             135,000
                                                              ------------------
              Total Assets                                    $       2,586,000
                                                              ==================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Trade Accounts Payable                                                653,000
  Accrued Expenses                                                      990,000
  Accrued Series G Preferred Stock 
     dividends                                                           43,000
  Current Portion of Long-term Debt                                      53,000
                                                              ------------------
              Total Current Liabilities                               1,739,000

  Long-term Debt                                                         22,000
                                                              ------------------
              Total Liabilities                                       1,761,000
                                                              ==================

Stockholders' Equity:
Preferred Stock, Authorized:
5,000,000 Shares, $.001 par value
     Series A
        Authorized:  500,000 shares; issued and
        outstanding: 5,627 shares at September 30, 2004                       -
     Series B
        Authorized:  500,000 shares; issued and
        outstanding: 8,986 shares at September 30, 2004                       -
     Series C
        Authorized:  30,000 shares; issued and
        outstanding: zero shares at September 30, 2004                        -
     Series D
        Authorized:  1,140,000 shares; issued and
        outstanding: 5,000 shares at September 30, 2004                       -
     Series E
        Authorized:  50,000; issued and
        outstanding: 1,000 at September 30, 2004                              -
     Series F
        Authorized:  50,000; issued and
        outstanding: 4,598.75 at September 30, 2004                           -
     Series G
        Authorized:  2,000,000; issued and
        outstanding: 1,981,560 at September 30, 2004                      2,000
Common Stock, Authorized:
80,000,000 Shares, $.001 par value; issued and
outstanding: 25,509,868 at September 30, 2004                            25,000
Additional paid-in-capital                                           57,427,000
Accumulated Deficit                                                 (56,629,000)
                                                              ------------------
              Total Stockholders' Equity                                825,000
                                                              ------------------
              Total Liabilities and Stockholders' Equity      $       2,586,000
                                                              ==================


                                       77

See accompanying notes to condensed financial statements





                        PARADIGM MEDICAL INDUSTRIES, INC.
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)



                                                              Nine
                                                           Months Ended
                                                           September 30,
                                                       2004           2003
                                                    ----------------------------


Sales                                               $  2,288,000   $  2,225,000

Cost of Sales                                            859,000      1,237,000
                                                    ------------   ------------
              Gross Profit                             1,429,000        988,000

Operating Expenses:
  Marketing and Selling                                  547,000        711,000
  General and Administrative                             703,000      1,867,000
  Research, development and service                      543,000        789,000
  Impairment of assets                                         -        159,000
                                                    ------------   ------------
                                                                    

              Total Operating Expenses                 1,793,000      3,526,000
                                                    ------------   ------------

Operating Income (Loss)                                 (364,000)    (2,538,000)

Other Income and (Expense):
  Interest Income                                              -          3,000
  Interest Expense                                       (40,000)       (17,000)
  Other Income (Expense)                                 592,000        247,000
                                                    ------------   ------------

              Total Other Income and (Expense)           552,000       (233,000)
                                                    ------------   ------------

Net income (loss) before provision
    for income taxes                                     188,000     (2,305,000)

Income taxes                                                   -              -
                                                    ------------   ------------

Net income (loss)                                   $    188,000   $ (2,305,000)
Series G Preferred Stock dividends                       (43,000)             -
                                                    ------------   ------------

Net income (loss) applicable to common
  shareholders                                           145,000     (2,305,000)
                                                    ============   ============

Net income (loss) Per Common Share
      - Basic and Diluted                           $       0.01   $       (.10)
                                                    ============   ============
                                                                 

Weighted Average Outstanding
    Shares - Basic                                    25,373,000     22,795,000
                                                    ============   ============

           - Diluted                                  27,675,000     22,795,000
                                                    ============   ============


See accompanying notes to condensed financial statements.


                                       78


                        PARADIGM MEDICAL INDUSTRIES, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)



                                                                    Nine Months Ended 
                                                                        September 30,
                                                                     2004            2003
                                                              ---------------------------------
                                                                 (Unaudited)
Cash Flows from Operating Activities:
-------------------------------------
                                                                                      
  Net income (loss)                                           $         188,000  $  (2,305,000)
  Adjustment to Reconcile Net Loss to Net
    Cash Used In Operating Activities:
    ----------------------------------
       Depreciation and Amortization                                    112,000        268,000
       Issuance of Stock Option/Warrant for Services                          -         83,000
       Issuance of Common Stock for Settlement
           Of potential litigation                                            -        190,000   
       Increase/decrease in Inventory Reserve                          (226,000)       382,000
       (Recovery of) provision for Losses on Receivables                (46,000)        83,000
       Impairment of Intangible and other assets                              -        159,000
       Gain on sale of investment                                      (532,000)             -
       Gain on Settlement of obligations                                (21,000)      (247,000)
       Loss on disposal of assets                                         6,000              -
(Increase) Decrease from Changes in:
       Trade Accounts Receivable                                         28,000        161,000
              Inventories                                               459,000        402,000
       Prepaid Expenses                                                  53,000       (215,000)     
Increase (Decrease) from Changes in:
       Trade Accounts Payable                                           (32,000)      (120,000)
       Accrued Expenses and Deposits                                   (429,000)       447,000
                                                              ------------------ -------------

       Net Cash Used in Operating Activities                           (440,000)      (712,000)
                                                              ------------------ -------------

Cash Flow from Investing Activities:
------------------------------------
  Purchase of Property and Equipment                                          -         (1,000)
  Disposal of Property and Equipment                                      6,000          6,000
  Proceeds from the sale of investment                                  532,000              -
                                                              ------------------ -------------

  Net Cash Provided By Investing Activities                             538,000          5,000
                                                              ------------------ -------------

Cash Flows from Financing Activities:
-------------------------------------
  Principal Payments on Notes Payable                                   (42,000)       (63,000)
  Proceeds from Short-Term Borrowing                                          -         90,000
  Sale of stock and exercise of warrants                                      -        429,000
  Sale of stock and exercise of warrants Series G                             -        270,000
                                                              ------------------ -------------

  Net Cash (Used In) Provided By Financing Activities                   (42,000)       726,000
                                                              ------------------ -------------

  Net increase in Cash and Cash Equivalents                              56,000         19,000

Cash and Cash Equivalents at Beginning of Period                        132,000        194,000
                                                              ------------------ -------------

Cash and Cash Equivalents at End of Period                    $         188,000  $     213,000
                                                              ================== ============= 

Supplemental Disclosure of Cash Flow Information:
  Cash Paid for Interest                                      $           9,000  $      17,000
                                                              ================== ============= 

  Cash Paid for Income Taxes                                  $               -  $           -
                                                              ================== ============= 



See accompanying notes to condensed financial statements

                                       79


                        PARADIGM MEDICAL INDUSTRIES, INC.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                   (UNAUDITED)



Significant Accounting Policies
-------------------------------

The  accompanying  condensed  financial  statements  of the  Company  have  been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange  Commission.  Certain  information  and  disclosures
normally included in financial statements prepared in accordance with accounting
principles  generally  accepted  in the United  States  have been  condensed  or
omitted  pursuant  to such  rules and  regulations.  These  condensed  financial
statements  reflect  all  adjustments   (consisting  only  of  normal  recurring
adjustments) that, in the opinion of management, are necessary to present fairly
the  results of  operations  of the Company  for the  periods  presented.  These
condensed financial  statements should be read in conjunction with the financial
statements  and the notes thereto  included in the Company's  Form 10KSB for the
year ended  December 31,  2003.  The results of  operations  for the nine months
ended September 30, 2004, are not necessarily indicative of the results that may
be expected for the fiscal year ending December 31, 2004.

Going Concern 
-------------

The  accompanying  financial  statements  have been  prepared on a going concern
basis,  which  contemplates  the  realization of assets and the  satisfaction of
liabilities in the normal course of business.  Historically, the Company has not
demonstrated  the ability to generate  sufficient  cash flows from operations to
satisfy its  liabilities  and sustain  operations,  and the Company has incurred
significant  losses.  These factors raise  substantial doubt about the Company's
ability to continue as a going concern.

The  Company's  continuation  as a going  concern is dependent on its ability to
generate  sufficient  income and cash flow to meet its  obligations  on a timely
basis and/or  obtain  additional  financing  as may be required.  The Company is
actively seeking options to obtain additional capital and financing.

In  addition,  the  Company  has taken  significant  steps to  reduce  costs and
increase  operating  efficiencies.  Specifically,  the Company  has  established
procedures   to   more   efficiently   manage   inventory   purchases,   reduced
administrative personnel, and significantly reduced the use of consultants,  all
of which has resulted in large decreases in expenses.  However,  the sales force
increased from three to five representatives in June, which has resulted in more
payroll,  travel and other selling  expenses.  Although  these cost savings have
significantly  reduced the Company's  losses and ongoing cash flow needs, if the
Company  is  unable  to obtain  equity  or debt  financing,  it may be unable to
continue  development  of its  products  and may be  required  to  substantially
curtail or cease operations.

Net loss Per Share 
------------------

Net loss per common share is computed on the weighted  average  number of common
and common  equivalent  shares  outstanding  during each  period.  Common  stock
equivalents  consist of convertible  preferred  stock,  common stock options and
warrants.  Common equivalent shares are excluded from the computation when their
effect is anti-dilutive.  Other common stock  equivalents  consisting of options
and warrants to purchase 6,427,000 shares of common stock at September 30, 2004,
were excluded because of the treasury stock method.

The following table is a  reconciliation  of basic and diluted  weighted average
shares  for the  three and nine  month  periods  ended  September  30,  2004 and
September 30, 2003:



                                       80


                                                          Nine Months Ended
                                                           September 30,
                                                        2004            2003
                                                    ------------   -------------

Basic weighted average shares outstanding             25,373,000     22,795,000
Common stock equivalents-convertible
   preferred stock                                     2,302,000              -
Dilutive effect of stock options                              -               - 
--------------------------------------------------------------------------------
                                                                        
Diluted weighted average shares outstanding           27,675,000     22,795,000
                                                    ============   =============
                                                                               
Preferred Stock Conversions 
---------------------------

Under the Company's Articles of Incorporation,  holders of the Company's Class A
and Class B Preferred  Stock have the right to convert such stock into shares of
the  Company's  common  stock at the rate of 1.2 shares of common stock for each
share of preferred  stock.  During the nine months ended  September 30, 2004, no
shares of Series A  Preferred  Stock and no shares of Series B  Preferred  Stock
were converted to the Company's Common Stock.

Holders of Series D Preferred  have the right to convert  such stock into shares
of the Company's  common stock at the rate of one share of common stock for each
share of preferred  stock.  During the six months ended  September  30, 2004, no
shares of Series D Preferred Stock were converted to the Company's Common stock.

Holders of Series E Preferred  have the right to convert  such stock into shares
of the  Company's  common  stock at the rate of 53.3 shares of common  stock for
each share of preferred  stock.  During the six months ended September 30, 2004,
no shares of Series E Preferred  Stock were  converted to the  Company's  Common
stock.

Holders of Series F Preferred  have the right to convert  such stock into shares
of the  Company's  common  stock at the rate of 53.3 shares of common  stock for
each share of preferred stock.  During the nine months ended September 30, 2004,
no shares of Series F Preferred  Stock were converted to shares of the Company's
Common stock.

Holders of Series G Preferred  have the right to convert  such stock into shares
of the Company's  common stock at the rate of one share of common stock for each
share of preferred  stock.  During the nine months ended  September 30, 2004, no
shares of Series G Preferred  Stock were  converted  to shares of the  Company's
Common stock.

Series G Preferred Stock Dividends
----------------------------------

         Under the terms of the private  offering of Series G preferred  shares,
the Company is required to file a registration statement with the Securities and
Exchange  Commission  to  register  the common  share  issuable  to the Series G
preferred  stockholders  upon conversion of their Series G preferred  shares and
exercise of their warrants. If the registration  statement has not been declared
effective  within 120 days of the initial closing of such offering on August 29,
2003,  there is a penalty  of 2% per month  payable  to the  Series G  preferred
stockholders  in common  shares (or 39,631  common  shares per month)  until the
registration  statement is declared  effective.  As of September  30, 2004,  the
Company had recorded a liability of $43,000 related to the 356,682 common shares
to be issued  to the  Series G  preferred  stockholders  because a  registration
statement had not been declared effective as of that date.

Stock - Based Compensation 
--------------------------

For stock  options and warrants  granted to employees,  the Company  employs the
footnote disclosure  provisions of Statement of Financial  Accounting  Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 encourages
entities to adopt a fair-value  based method of accounting  for stock options or
similar  equity  instruments.  However,  it also  allows an  entity to  continue
measuring   compensation   cost   for   stock-based   compensation   using   the
intrinsic-value  method of accounting  prescribed by Accounting Principles Board
(APB)  Opinion No. 25,  Accounting  for Stock Issued to Employees  (APB 25). The
Company has elected to  continue to apply the  provisions  of APB 25 and provide
pro forma footnote disclosures required by SFAS No. 123. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an  exercise  price equal to or greater  than the market  value of the
underlying common stock on the date of grant.

Stock options and warrants granted to  non-employees  for services are accounted
for in accordance with SFAS 123 which requires expense  recognition based on the
fair value of the  options/warrants  granted.  The Company  calculates  the fair
value of options and warrants granted by use of the Black-Scholes pricing model.
The following table  illustrates the effect on net income and earnings per share
if the  Company  had  applied  the fair  value  recognition  provisions  of FASB
Statement No. 123,  "Accounting  for Stock-Based  Compensation,"  to stock-based
employee compensation.


                                       81

                                                          Nine Months Ended
                                                           September 30,
                                                        2004            2003
                                                    ------------   -------------
 
Net income (loss) applicable to
  common shareholders - as reported                      145,000     (2,305,000)

Deduct:  total stock-based employee
compensation determined under fair value
based method for all awards, net of
related tax effects                                     (266,000)      (359,000)

Net income (loss) - pro forma                           (121,000)    (2,651,000)
                                                    ------------   -------------

Earnings per share:
     Basic and diluted - as reported                        0.01          (0.10)
     Basic and diluted - pro forma                         (0.01)         (0.12)

Related Party Transactions 
--------------------------

Payments  for legal  services to the firm of which the  chairman of the board of
directors  is a partner  were  approximately  $80,000  and  $61,000 for the nine
months ended September 30, 2004 and 2003, respectively.

Accrued Expenses 
----------------

Accrued expenses consist of the following at September 30, 2004:

        Accrued consulting and litigation reserve                  $    498,000
        Accrued payroll and employee benefits                           142,000
        Sales taxes payable                                              40,000
        Customer deposits                                                10,000
        Accrued royalties                                                17,000
        Deferred revenue                                                 73,000
        Warranty and return allowance                                   154,000
        Other accrued expenses                                           56,000
                                                                   ------------
         Total                                                     $    990,000
                                                                   ============

During the second  quarter of 2004,  the  Company  recorded a  reduction  in the
warranty  accrual of  approximately  $308,000.  This reduction was a result of a
comprehensive  analysis  by  management  regarding  historical  warranty  costs.
Historically,  the Company has recorded a monthly  warranty  expense and related
increase to the warranty  accrual;  however,  in recent periods the usage of the
warranty accrual has continued to decline. After reviewing the recent historical
data,  management  determined  that the  warranty  accrual  should be reduced by
approximately $308,000. Management will continue to closely monitor the warranty
accrual usage to ensure that the proper amount has been accrued.

Sale of Investment
------------------

In July  2004,  the  Company  sold its  investment  in  International  Bioimmune
Systems, Inc. (IBS) for $532,000 cash. Because, for book purposes, the Company's
investment in IBS had previously been reduced to $0, the full amount of $532,000
was recorded as a gain in the quarter ended September 30, 2004.


                                       82

                       PARADIGM MEDICAL INDUSTRIES, INC.
                              Financial Statements
                           December 31, 2003 and 2002




                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Index to Financial Statements

--------------------------------------------------------------------------------

                                                                          Page
                                                                          ----

Report of Tanner + Co.                                                     F-2


Balance Sheet                                                              F-3


Statement of Operations                                                    F-4


Statement of Stockholders' Equity                                          F-5


Statement of Cash Flows                                                    F-6


Notes to Financial Statements                                              F-7



--------------------------------------------------------------------------------

                                                                             F-1


                         Report of Independent Registered Public Accounting Firm





To the Board of Directors of
Paradigm Medical Industries, Inc.


We have audited the balance  sheet of Paradigm  Medical  Industries,  Inc.  (the
Company) as of December  31, 2003,  and the related  statements  of  operations,
stockholders'  equity,  and cash flows for the years ended December 31, 2003 and
2002.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of Paradigm Medical  Industries,
Inc. as of December 31,  2003,  and the results of its  operations  and its cash
flows  for the years  ended  December  31,  2003 and 2002,  in  conformity  with
accounting principles generally accepted in the United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will  continue as a going  concern.  As discussed in note 2, the Company
has incurred significant losses, and has been unable to generate cash flows from
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going  concern.  Management's  plans in regard to these matters
are also  described  in note 2. The  financial  statements  do not  include  any
adjustments that might result from the outcome of this uncertainty.


/s/TANNER + CO.

Salt Lake City, Utah
March 5, 2004

                                                                             F-2



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                                   Balance Sheet

                                                               December 31, 2003
--------------------------------------------------------------------------------

        Assets
        ------

Current assets:
  Cash                                                          $       132,000
  Receivables, net                                                      708,000
  Inventories, net                                                    1,003,000
  Prepaid and other current assets                                      141,000
                                                                ----------------

        Total current assets                                          1,984,000

Intangibles, net                                                        682,000
Property and equipment, net                                             256,000
                                                                ----------------

        Total                                                   $     2,922,000
                                                                ----------------
 
--------------------------------------------------------------------------------

        Liabilities and Stockholders' Equity
        ------------------------------------

Current liabilities:
  Accounts payable                                              $       706,000
  Accrued liabilities                                                 1,419,000
  Current portion of capital lease obligations                           56,000
                                                                ----------------

        Total current liabilities                                     2,181,000
                                                                ----------------

Capital lease obligations, net of current 
  portion                                                                61,000
                                                                ----------------

Commitments and contingencies

Stockholders' equity:
  Preferred stock $.001 par value, 
    5,000,000 shares authorized,
    2,006,770 shares issued and 
    outstanding (aggregate liquidation
    preference of $1,106,000)                                             2,000
  Common stock, $.001 par value, 80,000,000 
    shares authorized, 25,372,794, shares 
    issued and outstanding                                               25,000
  Additional paid-in capital                                         57,470,000
  Accumulated deficit                                               (56,817,000)
                                                                ----------------
 
        Total stockholders' equity                                      680,000
                                                                ----------------
 
        Total liabilities and stockholders' equity              $     2,922,000
                                                                ----------------


--------------------------------------------------------------------------------
See accompanying notes to financial statements.                              F-3




                                                          PARADIGM MEDICAL INDUSTRIES, INC.
                                                                    Statement of Operations

                                                                   Years Ended December 31,
-------------------------------------------------------------------------------------------


                                                         2003                 2002
                                                     --------------------------------------
                                                                                 
Sales                                                $        3,059,000    $     5,368,000

Cost of sales                                                (2,086,000)        (4,210,000)
                                                     --------------------------------------

        Gross profit                                            973,000          1,158,000
                                                     --------------------------------------

Operating expenses:
  General and administrative                                 (2,446,000)        (3,702,000)
  Marketing and selling                                        (920,000)        (2,795,000)
  Research, development and service                          (1,033,000)        (2,819,000)
  Impairment of assets                                         (150,000)        (2,961,000)
  Gain on settlement of liabilities                             436,000                  -
                                                     --------------------------------------
 
        Operating loss                                       (3,140,000)       (11,119,000)

Other income (expense):
  Interest income                                                 3,000             10,000
  Interest expense                                              (24,000)           (46,000)
                                                     --------------------------------------

        Total other income (expense)                             21,000            (36,000)
                                                     --------------------------------------

        Loss before provision for income taxes               (3,161,000)       (11,155,000)

Provision for income taxes                                            -                  -
                                                     --------------------------------------

        Net loss                                     $       (3,161,000)   $   (11,155,000)

Beneficial conversion feature on Series G
  preferred stock                                              (217,000)                 -

Deemed dividend from Series G preferred
  detachable warrants                                           (53,000)                 -
                                                     --------------------------------------

Net loss applicable to common shareholders           $       (3,431,000)   $   (11,155,000)
                                                     --------------------------------------

Loss per common share - basic and diluted            $            (0.14)   $         (0.63)
                                                     --------------------------------------
 
Weighted average common shares - basic and diluted           24,058,000         17,736,000
                                                     --------------------------------------

-------------------------------------------------------------------------------------------
See accompanying notes to financial statements.                                         F-4





                                                                                            PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                            Statement of Stockholders' Equity

                                                                                       Years Ended December 31, 2003 and 2002
-----------------------------------------------------------------------------------------------------------------------------


                                             Preferred                            Additional       Stock
                                               Stock      Common Stock              Paid-in      Subscription    Accumulated
                                            (see note 9)     Shares     Amount      Capital      Receivable        Deficit
                                            ----------------------------------------------------------------------------------

                                                                                                      
Balance, January 1, 2002                    $        -     15,072,531   $ 15,000   $ 52,156,000   $        -    $ (42,501,000)

Conversion of preferred stock                        -      3,132,356      3,000         (3,000)           -                -
Issuance of common stock for:
Cash                                                 -      1,262,000      2,000        560,000            -                -
Settlement of litigation                             -         75,000          -         34,000            -                -
Services                                             -        167,684          -        183,000            -                -
Assets                                               -      1,467,358      2,000      2,626,000            -                -
In process research and development                  -        477,309          -        630,000            -                -
Subscription receivable                              -        300,000          -        294,000     (294,000)               -

Issuance of stock warrants in acquisition            -              -          -        295,000            -                -

Net loss                                             -              -          -              -            -      (11,155,000)
                                            ----------------------------------------------------------------------------------

Balance, December 31, 2002                           -     21,954,238     22,000     56,775,000     (294,000)     (53,656,000)

Conversion of preferred stock                        -        115,998          -              -            -                -
Issuance of common stock for:
Cash                                                 -      1,658,032      2,000        428,000            -                -
Settlement of litigation                             -      1,562,000      1,000        258,000            -                -
Commission on sale of common stock                   -         82,526          -              -            -                -

Issuance of stock options and warrants for:
Services                                             -              -          -         35,000            -                -

Issuance of Series G preferred stock for:
Cash                                             2,000              -          -        268,000            -                -

Write off of subscription receivable                 -              -          -       (294,000)     294,000

Net loss                                             -              -          -              -            -       (3,161,000)
                                            ----------------------------------------------------------------------------------

Balance, December 31, 2003                  $    2,000     25,372,794   $ 25,000   $ 57,470,000   $        -    $ (56,817,000)
                                            ----------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.                                                                           F-5






                                                                            PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                      Statement of Cash Flows

                                                                                     Years Ended December 31,
-------------------------------------------------------------------------------------------------------------

                                                                                  2003              2002
                                                                           ----------------------------------
                                                                                                     
Cash flows from operating activities:
  Net loss                                                                 $    (3,161,000)   $   (11,155,000)
  Adjustments to reconcile net loss to net cash
  used in operating activities:
    Depreciation and amortization                                                  319,000            624,000
    Issuance of common stock for services                                                -            183,000
    Issuance of common stock for in process research and development                     -            630,000
    Issuance of stock option/warrant for services                                   35,000                  -
    Issuance of Series G preferred stock for services                                    -                  -
    Common stock issued for settlement of litigation                               259,000             34,000
    Allowance for (recovery of) bad debt expense                                   123,000            (23,000)
    Provision for losses on inventory                                              403,000          1,755,000
    Impairment of intangibles and investment                                       150,000          2,961,000
    (Gain) on settlement of liabilities                                           (436,000)                 -
    (Increase) decrease in:
      Receivables                                                                  113,000          1,473,000
      Inventories                                                                1,243,000            952,000
      Prepaid and other assets                                                     (44,000)           255,000
    Increase (decrease) in:
      Accounts payable                                                              53,000           (313,000)
      Accrued liabilities                                                          236,000           (158,000)
                                                                           ----------------------------------

        Net cash used in operating activities                                     (707,000)        (2,782,000)
                                                                           ----------------------------------
 
Cash flows from investing activities:
  Purchase of property and equipment                                                (2,000)           (28,000)
  Increase in intangibles                                                                -           (103,000)
  Proceeds from the disposal of assets                                                   -              2,000
  Net cash paid in acquisition                                                           -           (100,000)
                                                                           ----------------------------------

        Net cash used in investing activities                                       (2,000)          (229,000)
                                                                           ----------------------------------

Cash flows from financing activities:
  Proceeds from issuance of Series G preferred stock                               270,000                  -
  Principal payments on capital lease obligations                                  (53,000)           (59,000)
  Proceeds from the issuance of common stock, including
    exercise of common stock warrants and options                                  430,000            562,000
                                                                           ----------------------------------

        Net cash provided by financing activities                                  647,000            503,000
                                                                           ----------------------------------

Net change in cash                                                                 (62,000)        (2,508,000)

Cash, beginning of year                                                            194,000          2,702,000
                                                                           ----------------------------------

Cash, end of year                                                          $       132,000    $       194,000
                                                                           ----------------------------------
 
-------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.                                                           F-6



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements

                                                      December 31, 2003 and 2002
--------------------------------------------------------------------------------

1.   Organization       Organization
     and Significant    Paradigm  Medical  Industries,  Inc.  (the Company) is a
     Accounting         Delaware  Corporation  incorporated in October 1989. The
     Policies           Company   is  engaged   in  the   design,   development,
                        manufacture,  and sale of high  technology  surgical and
                        diagnostic eye care products.  Its surgical equipment is
                        designed to perform minimally  invasive cataract surgery
                        and  is  comprised  of  surgical   devices  and  related
                        instruments  and   accessories,   including   disposable
                        products.  Its diagnostic  products include a blood flow
                        analyzer,   a  pachymeter,   an  A-Scan,  an  A/B  Scan,
                        ultrasound  biomicroscopes,  a perimeter,  and a corneal
                        topographer.

                        Cash Equivalents
                        For  purposes  of the  statement  of  cash  flows,  cash
                        includes  all  cash  and   investments   with   original
                        maturities to the Company of three months or less.

                        The Company  maintains its cash in bank deposit accounts
                        which, at times,  may exceed  federally  insured limits.
                        The  Company  has not  experienced  any  losses  in such
                        account   and   believes   it  is  not  exposed  to  any
                        significant credit risk on cash and cash equivalents.

                        Inventories
                        Inventories  are  stated at the lower of cost or market,
                        cost is determined using the weighted average method.

                        Property and Equipment
                        Property  and  equipment  are  recorded  at  cost,  less
                        accumulated  depreciation.  Depreciation on property and
                        equipment is determined using the  straight-line  method
                        over the  estimated  useful lives of the assets or terms
                        of the lease.  Expenditures  for maintenance and repairs
                        are  expensed   when   incurred  and   betterments   are
                        capitalized.  Gains and losses on sale of  property  and
                        equipment are reflected in operations.


--------------------------------------------------------------------------------
                                                                             F-7



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


1.   Organization       Intangible Assets
     and Significant    As of December 31, 2003,  intangible assets consisted of
     Accounting         goodwill  related to the  purchase of Ocular Blood Flow,
     Policies           Ltd.,   product   rights,    capitalized   payments   to
     Continued          manufacturers  for  engineering  and design services and
                        patent costs.
     
                        Effective  January 1, 2002, the Company adopted SFAS No.
                        142,   "Goodwill  and  Other  Intangible   Assets."  The
                        adoption of SFAS No. 142 required an initial  impairment
                        assessment  involving a comparison  of the fair value of
                        goodwill and other intangible assets to current carrying
                        values.  The Company  performed such  impairment test on
                        its  intangible  assets as of January  1, 2002.  At that
                        date,  the  Company's  intangible  assets  consisted  of
                        product and  technology  rights with a net book value of
                        approximately  $297,000,  engineering  and design  costs
                        with a net book value of approximately $86,000,  patents
                        with a net book  value  of  approximately  $98,000,  and
                        purchase  price in excess  of net  assets  acquired  (or
                        goodwill)  with  a  net  book  value  of   approximately
                        $679,000.   The  Company's   initial   impairment   test
                        performed  on January 1, 2002  consisted  of a cash flow
                        analysis based on estimated future revenues and directly
                        related costs of products  directly  associated with the
                        intangible assets.  Based on such cash flow projections,
                        the  initial  impairment  test  did  not  result  in any
                        impairment of the  intangibles.  As disclosed in Note 3,
                        during 2002 the Company acquired the asset of Innovative
                        Optics,  Inc.  The  acquisition  originally  resulted in
                        goodwill   and   identifiable   intangible   assets   of
                        $1,949,000.  However,  due to the Company's inability to
                        cost  effectively  develop and  manufacture the products
                        acquired,  an  estimate  of future cash flows shows that
                        all of  the  assets  acquired,  including  goodwill  and
                        identifiable  intangible  assets,  were  impaired  as of
                        December 31, 2002.  Intangible assets determined to have
                        indefinite  useful lives are not amortized.  The Company
                        tests such  intangible  assets  with  indefinite  useful
                        lives for  impairment  annually  or more  frequently  if
                        events or circumstances  indicate that an asset might be
                        impaired.  Intangible assets determined to have definite
                        lives are amortized on a straight-line  basis over their
                        useful lives.  Product  rights are being  amortized over
                        five years, capitalized engineering and design costs are
                        fully amortized as of December 31, 2002, and patents are
                        being  amortized  over the life of the patents  which is
                        ten years.  The Company reviews such  intangible  assets
                        with  definite  lives for  impairment to ensure they are
                        appropriately   valued  if  conditions  exist  that  may
                        indicate the carrying value may not be recoverable.

--------------------------------------------------------------------------------
                                                                             F-8



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------

                                                   
1.   Organization       Intangible Assets - Continued
     and Significant    Such  conditions  may include an economic  downturn in a
     Accounting         geographic  market  or a  change  in the  assessment  of
     Policies           future  operations.   Goodwill  is  not  amortized.  The
     Continued          Company   performs  tests  for  impairment  of  goodwill
                        annually or more  frequently if events or  circumstances
                        indicate  it  might  be  impaired.  Such  tests  include
                        comparing  the fair value of a  reporting  unit with its
                        carrying value, including goodwill.

                        Impairment  assessments are performed using a variety of
                        methodologies,  including cash flow analysis,  estimates
                        of sales  proceeds  and  independent  appraisals.  Where
                        applicable,  an appropriate discount rate is used, based
                        on   the    Company's    cost   of   capital   rate   or
                        location-specific economic factors.

                        Evaluation of Other Long-Lived Assets
                        The  Company   evaluates  the  carrying   value  of  the
                        unamortized  balances  of  other  long-lived  assets  to
                        determine  whether any  impairment  of these  assets has
                        occurred  or  whether   any   revision  to  the  related
                        amortization  periods should be made. This evaluation is
                        based on  management's  projections of the  undiscounted
                        future  cash  flows   associated  with  each  asset.  If
                        management's   evaluation  were  to  indicate  that  the
                        carrying  values of these  assets  were  impaired,  such
                        impairment  would be  recognized  by a write down of the
                        applicable asset.

                        Income Taxes
                        Deferred income taxes are provided in amounts sufficient
                        to  give  effect  to   temporary   differences   between
                        financial and tax reporting,  principally related to net
                        operating loss carryforwards,  depreciation,  impairment
                        of intangible assets,  stock compensation  expense,  and
                        accrued liabilities.

--------------------------------------------------------------------------------
                                                                             F-9



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


1.   Organization       Stock - Based Compensation
     and Significant    For stock options and warrants  granted to employees the
     Accounting         Company  employs the footnote  disclosure  provisions of
     Policies           Statement of Financial  Accounting  Standards (SFAS) No.
     Continued          123, Accounting for Stock-Based  Compensation.  SFAS No.
                        123  encourages  entities  to adopt a  fair-value  based
                        method of accounting for stock options or similar equity
                        instruments.  However,  it  also  allows  an  entity  to
                        continue  measuring  compensation  cost for  stock-based
                        compensation   using  the   intrinsic-value   method  of
                        accounting  prescribed  by Accounting  Principles  Board
                        (APB)  Opinion No. 25,  Accounting  for Stock  Issued to
                        Employees  (APB 25). The Company has elected to continue
                        to apply the  provisions of APB 25 and provide pro forma
                        footnote  disclosures  required  by  SFAS  No.  123.  No
                        stock-based  employee  compensation cost is reflected in
                        net income, as all options granted under those plans had
                        an exercise  price  equal to or greater  than the market
                        value  of the  underlying  common  stock  on the date of
                        grant.

                        Stock options and warrants granted to non-employees  for
                        services are accounted  for in accordance  with SFAS 123
                        which  requires  expense  recognition  based on the fair
                        value  of  the  options/warrants  granted.  The  Company
                        calculates  the  fair  value  of  options  and  warrants
                        granted by use of the Black-Scholes pricing model.

                        The following table illustrates the effect on net income
                        and  earnings  per share if the  company had applied the
                        fair value recognition  provisions of FASB Statement No.
                        123,  "Accounting  for  Stock-Based   Compensation,"  to
                        stock-based employee compensation.

                                                    Years Ended December 31,
                                              -------------------------------
                                                   2003           2002
                                              -------------------------------
 
 Net loss applicable to common shareholders-
 as reported                                   $  (3,431,000) $ (11,155,000)

 Deduct:  total stock-based employee
 compen-sation determined under fair value
 based method for all awards, net of related        (595,000)      (618,000)
 tax effects
                                              -------------------------------

 Net loss applicable to common shareholders-
 pro forma                                     $  (4,026,000) $ (11,773,000)
                                              -------------------------------
 

 Earnings per share:
      Basic and diluted - as reported          $        (.14) $        (.63)
                                              -------------------------------
      Basic and diluted - pro forma            $        (.17) $        (.66)
                                              -------------------------------


--------------------------------------------------------------------------------
                                                                            F-10



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------



1.   Organization       Stock - Based Compensation - Continued
     and Significant    The fair value of each option  grant is estimated at the
     Accounting         date of grant  using the  Black-Scholes  option  pricing
     Policies           model with the following assumptions:
     Continued       
                                                  December 31,
                                     ----------------------------------------
                                             2003                2002
                                     ----------------------------------------

    Expected dividend yield            $                 - $               -
    Expected stock price
      volatility                               110% - 117%         102%-103%
    Risk-free interest rate                             4%                4%
    Expected life of options                     2-7 years         2-7 years

                        The  weighted  average  fair  value of  options  granted
                        during 2003 and 2002 are $0.16 and $1.25, respectively.

                        Stock Issued for  Services,  Litigation  Settlement  and
                        Assets
                        The Company may issue  shares of common stock as payment
                        for services,  settlement of litigation,  or purchase of
                        assets.   Stock  issued  for  services  and   litigation
                        settlement is valued based on the fair value on the date
                        the stock is issued or required  to be issued  under the
                        contract or  settlement  agreement.  Expense is measured
                        based on the value of the stock issued. Stock issued for
                        the  purchase of assets is also valued based on the date
                        the  stock is issued or  required  to be issued  per the
                        purchase agreement. The assets are recorded based on the
                        value of the stock issued.

                        Earnings Per Share
                        The  computation  of basic  earnings per common share is
                        based  on  the   weighted   average   number  of  shares
                        outstanding during each year.

                        The computation of diluted  earnings per common share is
                        based  on  the   weighted   average   number  of  shares
                        outstanding  during  the  year  plus  the  common  stock
                        equivalents,  which  would  arise from the  exercise  of
                        stock  options  and  warrants   outstanding   using  the
                        treasury  stock method and the average  market price per
                        share during the year.  Options and warrants to purchase
                        6,036,439 and 5,151,557 shares of common stock at prices
                        ranging from $0.16 to $12.98 per share were  outstanding
                        at December  31, 2003 and 2002,  respectively,  but were
                        not   included  in  the  diluted   earnings   per  share
                        calculation   because   the   effect   would  have  been
                        antidilutive.

                        Revenue Recognition
                        Revenues  for sales of products  that  require  specific
                        installation   and   acceptance   by  the  customer  are
                        recognized upon such  installation and acceptance by the
                        customer.  Revenues for sales of other surgical systems,
                        ultrasound  diagnostic devices,  and disposable products
                        are  recognized  when the product is  shipped.  A signed
                        purchase agreement and a deposit or payment in full from
                        customers  is  required  before  a  product  leaves  the
                        premises.  Title  passes  at  time of  shipment  (F.O.B.
                        shipping point).


--------------------------------------------------------------------------------
                                                                            F-11



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


1.   Organization       Research and Development
     and Significant    Costs   incurred  in   connection   with   research  and
     Accounting         development  activities are expensed as incurred.  These
     Policies           costs  consist of direct and indirect  costs  associated
     Continued          with  specific  projects as well as fees paid to various
                        entities that perform certain  research on behalf of the
                        Company.

                        Concentration of Risk
                        The  market  for  ophthalmic  lasers is subject to rapid
                        technological  change,  including  advances in laser and
                        other  technologies  and the  potential  development  of
                        alternative  surgical  techniques or new  pharmaceutical
                        products.  Development  by  others  of new  or  improved
                        products,  processes or  technologies  may make products
                        developed by the Company obsolete or less competitive.

                        The Company's high technology  product line requires the
                        Company  to  deal  with  suppliers  and   subcontractors
                        supplying  highly  specialized  parts,  operating highly
                        sophisticated   and  narrow   tolerance   equipment  and
                        performing  highly  technical  calculations  and  tasks.
                        Although  there are a limited  number of  suppliers  and
                        manufacturers  that  meet the  standards  required  of a
                        regulated medical device, management believes that other
                        suppliers  and   manufacturers   could  provide  similar
                        components and services.

                        The nature of the Company's  business exposes it to risk
                        from product  liability  claims.  The Company  maintains
                        product liability  insurance providing coverage up to $1
                        million per claim with an  aggregate  policy limit of $2
                        million. Any losses that the Company may suffer from any
                        product  liability  litigation  could  have  a  material
                        adverse effect on the Company.

                        A significant  portion of the Company's product sales is
                        in  foreign   countries.   The  economic  and  political
                        instability  of some  foreign  countries  may affect the
                        ability of medical  personnel to purchase the  Company's
                        products and the ability of the customers to pay for the
                        procedures  for which the  Company's  products are used.
                        Such circumstances could cause a possible loss of sales,
                        which would affect operating results adversely.

                        During the years ended  December  31, 2003 and 2002,  no
                        single  customer  represented  more than 10  percent  of
                        total net sales.

--------------------------------------------------------------------------------
                                                                            F-12



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------



1.   Organization       Concentration of Risk - Continued
     and Significant    Accounts  receivable are due from medical  distributors,
     Accounting         surgery    centers,    hospitals,    optometrists    and
     Policies           ophthalmologists  located  throughout  the  U.S.  and  a
     Continued          number  of  foreign   countries.   The  receivables  are
                        generally due within thirty days for domestic  customers
                        with  extended  terms  offered  for  some  international
                        customers.   The  Company  maintains  an  allowance  for
                        estimated potentially uncollectible amounts.

                        Warranty
                        The Company provides  product  warranties on the sale of
                        certain products that generally extend for one year from
                        the date of sale.  The  Company  maintains a reserve for
                        estimated warranty costs based on historical  experience
                        and management's best estimates.

                        Use  of  Estimates  in  the   Preparation  of  Financial
                        Statements
                        The  preparation  of financial  statements in conformity
                        with  accounting  principles  generally  accepted in the
                        United  States of America  requires  management  to make
                        estimates  and  assumptions  that  affect  the  reported
                        amounts  of assets and  liabilities  and  disclosure  of
                        contingent  assets  and  liabilities  at the date of the
                        financial   statements  and  the  reported   amounts  of
                        revenues  and  expenses  during  the  reporting  period.
                        Actual results could differ from those estimates.

                        Reclassifications
                        Certain  amounts in the 2002 financial  statements  have
                        been  reclassified to conform to the presentation of the
                        current year financial statements.

2.   Going              The accompanying financial statements have been prepared
     Concern            on  a  going   concernbasis,   which   contemplates  the
                        realization   of   assets   and  the   satisfaction   of
                        liabilities   in  the   normal   course   of   business.
                        Historically,  the  Company  has  not  demonstrated  the
                        ability   to   generate   sufficient   cash  flows  from
                        operations  to  satisfy  its   liabilities  and  sustain
                        operations,  and the  Company has  incurred  significant
                        losses.  These factors raise substantial doubt about the
                        Company's ability to continue as a going concern.


--------------------------------------------------------------------------------
                                                                            F-13



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


2.   Going              The  Company's   continuation  as  a  going  concern  is
     Concern            dependent on its ability to generate  sufficient  income
     Continued          and cash flow to meet its  obligations on a timely basis
                        and/or obtain  additional  financing as may be required.
                        The  Company  is  actively  seeking  options  to  obtain
                        additional capital and financing.

                        In addition,  the Company has taken significant steps to
                        reduce  costs  and  increase   operating   efficiencies.
                        Specifically,  during  the second  quarter of 2002,  the
                        Company  closed  its San  Diego  facility.  In so doing,
                        numerous   manufacturing,   accounting   and  management
                        responsibilities  were consolidated.  In addition,  such
                        closure resulted in significant  headcount reductions as
                        well as savings in rent and other  overhead  costs.  The
                        Company  has  also  significantly  reduced  the  use  of
                        consultants,  which has resulted in a large  decrease in
                        expenses,  and  reduced  the direct  sales force to five
                        representatives,  which has  resulted  in less  payroll,
                        travel and other selling  expenses.  Although these cost
                        savings have significantly  reduced the Company's losses
                        and ongoing cash flow needs, if the Company is unable to
                        obtain  equity  or debt  financing,  it may be unable to
                        continue development of its products and may be required
                        to substantially curtail or cease operations.


3.   Acquisitions       Innovative Optics, Inc.
                        On January 31, 2002, the Company  completed the purchase
                        of   certain   assets   of   Innovative   Optics,   Inc.
                        ("Innovative  Optics"),  pursuant  to the  terms  of the
                        Asset  Purchase  Agreement (the  "Agreement")  which the
                        Company entered into on January 31, 2002 with Innovative
                        Optics  and  Barton  Dietrich  Investments,   L.P.,  the
                        majority  shareholder of Innovative  Optics.  Innovative
                        Optics  is  a  Georgia   domiciled   corporation   which
                        manufactures  and sells the  Innovatome(TM),  a software
                        driven microkeratome that provides ophthalmic surgeons a
                        means of cutting a corneal flap in  refractive  surgery,
                        and microkeratome blades.


--------------------------------------------------------------------------------
                                                                            F-14



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


3.   Acquisitions       Innovative Optics, Inc. - Continued
     Continued          As  consideration  for the purchase of certain assets of
                        Innovative  Optics, the Company paid $100,000 and issued
                        an aggregate of  1,272,825  shares of its common  stock,
                        and warrants to purchase 250,000 shares of the Company's
                        common  stock at $5.00  per  share,  exercisable  over a
                        period of three years from the closing date. The Company
                        filed a  registration  statement with the Securities and
                        Exchange  Commission  to  register  the shares of common
                        stock for resale  that  Innovative  Optics  received  as
                        purchase  consideration  and the shares that  Innovative
                        Optics will receive  upon the exercise of the  warrants.
                        The assets  purchased  included  but were not limited to
                        patents,  inventory,  work in process and finished goods
                        relating to the  Innovatome(TM),  a  microkeratome,  and
                        microkeratome  blades.  Of the  1,272,825  shares of the
                        Company's  common stock issued to  Innovative  Optics at
                        closing, one-half the number of these shares, or 636,412
                        shares,  were placed in an escrow account  maintained at
                        the law firm of Mackey Price & Thompson (the "Disbursing
                        Agent") pursuant to the terms of an Escrow Agreement.

                        In  connection  with  this   acquisition,   the  Company
                        recorded the following:

                         Inventory                          $       225,000
                         Property, plant and equipment               35,000
                         Intangibles:                     
                              Patents, rights, trade name           530,000
                              Goodwill                            1,419,000
                         Equity:                          
                              Common stock issued               (1,814,000)
                              Warrants issued                     (295,000)
                                                            ----------------
                                                          
                         Net cash paid                      $       100,000
                                                            ----------------
                        
                        The  Company  was  required  to use its best  efforts to
                        implement,  within 90 days of the closing,  Phase I of a
                        Blade   Price   Reduction   Program  as  prepared  by  a
                        consultant.  Immediately  after such 90 day period,  the
                        Disbursing Agent was to distribute  three-fourths of the
                        shares held in escrow,  or 477,309 shares, to Innovative
                        Optics,  unless the  Company had  certified  that it had
                        implemented   Phase  I  of  the  Blade  Price  Reduction
                        Program.

--------------------------------------------------------------------------------
                                                                            F-15



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


3.   Acquisitions       Innovative Optics, Inc. - Continued
     Continued          Despite  best   efforts,   the  Company  was  unable  to
                        manufacture microkeratome blades at a targeted materials
                        cost  per  blade.   If  the   Company   certified   that
                        implementation  of Phase I of the Blade Price  Reduction
                        Program  resulted in  materials  cost that  exceeded the
                        target  cost per  blade and such  certification  was not
                        disputed  by  Innovative  Optics,  the  number of escrow
                        shares disbursed to Innovative  Optics was to be reduced
                        by 300 shares for every cent that the materials cost per
                        blade  exceeded  the target  cost.  The  Company was not
                        successful  in  achieving  the  blade  price  reduction.
                        Innovative  Optics  requested  that the total  number of
                        shares associated with Phase I be issued to them stating
                        that the Company did not use its best efforts to achieve
                        the target  cost and that  proper  notification  was not
                        delivered to them.  In August 2002,  the Company  issued
                        477,309  shares  of  common  stock,  which  were held in
                        escrow to Innovative Optics.

                        The  shares  were  valued at  $630,000,  based  upon the
                        market  price  per  share  at the  date  of  issue.  The
                        transaction  amount was recorded as in-process  research
                        and development costs and charged to expense in 2002.

                        The Company was also required to use its best efforts to
                        implement,  within six months after closing, Phase II of
                        the Blade Price  Reduction  Program.  Immediately  after
                        such six  month  period,  the  Disbursing  Agent  was to
                        disburse the  remaining  shares in escrow to  Innovative
                        Optics  unless  the  Company   certified   that  it  had
                        implemented  Phase  II  of  the  Blade  Price  Reduction
                        Program  and,  despite  best  efforts,   was  unable  to
                        manufacture  the   microkeratome   blades  at  a  second
                        targeted  materials cost or less per blade.  If Paradigm
                        certified that  implementation  of Phase II of the Blade
                        Price  Reduction  Program  resulted in a materials  cost
                        that  exceeded the second target cost per blade and such
                        certification was not disputed by Innovative Optics, the
                        number of escrow shares  disbursed to Innovative  Optics
                        was to be  reduced by 300 shares for every cent that the
                        materials  cost per blade  exceeded  the  second  target
                        cost.  If  Innovative   Optics  disputes  the  Company's
                        certification,   the   dispute   will  be   resolved  by
                        arbitration  by submitting  the matter for resolution to
                        the  accounting  firm of KPMG LLP.  The  Company did not
                        implement Phase II of the Blade Price Reduction  Project
                        due to the lack of success experienced in Phase I. Also,
                        the Company has not issued the remaining  shares,  which
                        remain in escrow.


--------------------------------------------------------------------------------
                                                                            F-16



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


3.   Acquisitions       Innovative Optics, Inc. - Continued
     Continued          The Company determined that it could not manufacture the
                        blades to support  its  customer  base at an  economical
                        cost. There are no blades in inventory at this time. The
                        Company  has  attempted  to sell the product and related
                        intangibles,   but  has  not  been  successful  in  such
                        efforts.  Accordingly,  due to  the  lack  of  projected
                        future cash flows,  during 2002 the Company  recorded an
                        impairment  expense of $2,082,000 for the remaining book
                        value of property and  equipment and  intangible  assets
                        purchased from Innovative Optics.

                        International Bioimmune Systems, Inc.
                        During 2002, the Company acquired  2,663,254,  or 19.9%,
                        of the  outstanding  shares of  International  Bioimmune
                        Systems,  Inc. (IBS) and warrants to purchase  1,200,000
                        shares of  common  stock of IBS at $2.50 per share for a
                        period of two years,  through the  exchange and issuance
                        of 736,945 shares of Paradigm common stock,  the lending
                        of 300,000  shares of Paradigm  common stock to IBS, and
                        the  payment  of certain  expenses  of IBS  through  the
                        issuance of an  aggregate  of 94,000  shares of Paradigm
                        common stock to IBS and its counsel.

                        The  issuance of 736,945  and 94,000  shares were valued
                        based on the market price of Paradigm's  common stock on
                        the  date  of  the   transaction   and  resulted  in  an
                        investment  in IBS of $814,000,  which  combined  with a
                        cash  investment of $65,000 made in 2000,  resulted in a
                        total  investment of $879,000.  The 300,000  shares were
                        also valued at the market  price on the date of issuance
                        and were recorded as a stock subscription  receivable of
                        $294,000  because it was  anticipated  that such  shares
                        will either be paid for or returned in the future.

                        Due to the uncertainty of future cash flows and the fact
                        that the products have not been approved by the FDA, the
                        Company  determined  that the  likelihood of recovery of
                        its  investment  was remote and  recorded an  impairment
                        expense for the investment of $879,000 in 2002. In 2003,
                        due to the  decline  in  value of the  Company's  common
                        stock  and  the  Company's   inability  to  collect  the
                        subscription  receivable,   the  Company  wrote-off  the
                        subscription  receivable of $294,000 against  additional
                        paid-in capital.

--------------------------------------------------------------------------------
                                                                            F-17



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------

                                                 
4.   Detail of             
     Certain
     Balance
     Sheet
     Accounts               
          
Receivables:
      Trade receivables                                   $       1,178,000
      Allowance for Doubtful accounts                              (470,000)
                                                          ------------------

                                                          $         708,000
                                                          ------------------
Inventories:
      Finished goods                                      $         703,000
      Raw materials                                               1,942,000
      Reserve for obsolescence                                  (1,642,000)
                                                          ------------------
 
                                                          $       1,003,000
                                                          ------------------
 Accrued liabilities:
      Payroll and employee benefits                       $         540,000
      Warranty and return allowance                                 413,000
      Customer deposits                                             207,000
      Consulting and other                                          108,000
      Deferred revenue                                               90,000
      Royalties                                                      61,000
                                                          ------------------

                                                          $       1,419,000
                                                          ------------------


5.   Intangible         Intangible  assets  consist of the following at December
     Assets             31, 2003:    


      Goodwill, net of accumulated 
         amortization of $120,000                         $         679,000
      Other intangible assets:
        Product and technology rights                               700,000
        Engineering and design costs                                482,000
        Patents                                                      92,000
                                                          ------------------
 
                                                                  1,274,000

 Accumulated amortization                                        (1,271,000)
                                                          ------------------

 Total other intangible assets                                        3,000
                                                          ------------------
 
 Net intangible assets                                    $         682,000
                                                          ------------------

                        Amortization  expense for the years ended  December  31,
                        2003 and 2002 was $79,000 and $248,000, respectively.



--------------------------------------------------------------------------------
                                                                            F-18



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------



5.   Intangible         During the year ended  December  31,  2003,  the Company
     Assets             evaluated  the  carrying  value of its  unissued  patent
     Continued          costs   and   product   and   technology    rights   for
                        recoverability.  This  analysis,  based on the estimated
                        future cash flows associated with such assets,  resulted
                        in an impairment  expense of $81,000 and $69,000 related
                        to  patents   and   product   and   technology   rights,
                        respectively.

6.   Property and       Property and equipment consists of the following: 
     Equipment           
                  Office equipment                         $        750,000
                  Computer equipment                                658,000
                  Automobile                                         53,000
                  Furniture and fixtures                            264,000
                  Leasehold improvements                            166,000
                                                           -----------------
                                                           
                                                                  1,891,000
                                                           
                  Accumulated depreciation and 
                     amortization                                (1,635,000)
                                                           -----------------
                                                           
                                                           $        256,000
                                                           -----------------

7.   Lease              During the years ended  December 31, 2003 and 2002,  the
     Obligations        Company leased certain  equipment  under  noncancellable
                        capital  leases.  These  leases  provide the Company the
                        option to purchase  the leased  assets at the end of the
                        initial lease term. Assets under capital leases included
                        in fixed assets and are as follows:

 
 Computer and other equipment                              $         291,000

 Less accumulated amortization                                     (177,000)
                                                           ------------------
 
                                                           $         114,000
                                                           ------------------

                        Amortization  expense  on assets  under  capital  leases
                        during the years  ended  December  31, 2003 and 2002 was
                        $56,000 and $46,000, respectively.


--------------------------------------------------------------------------------
                                                                            F-19



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


7.   Lease              Capital lease obligations have imputed interest rates of
     Obligations        approximately  7% to 22%.  The  leases  are  secured  by
     Continued          equipment.  Future minimum payments on the capital lease
                        obligations are as follows:

          2004                                              $         72,000
          2005                                                        54,000
          2006                                                        14,000
                                                            -----------------

                                                                     140,000

 Less amount representing interest                                  (33,000)
                                                            -----------------
 
 Present value of future minimum lease payments                      117,000

 Less current portion                                               (56,000)
                                                            -----------------
 
 Long-term portion                                          $         61,000
                                                            -----------------

                        The Company  leases office and warehouse  space under an
                        operating   lease   agreement.   Future  minimum  rental
                        payments under the noncancellable  operating lease as of
                        December 31, 2003 are approximately as follows:

 
                        Year Ending December 31,                  Amount
                                                            ------------------
                             2004                           $         115,000
                             2005                                     118,000
                                                            ------------------

                        Total future minimum 
                        rental payments                     $         233,000
                                                            ------------------

                        Rent expense related to  noncancelable  operating leases
                        was  approximately  $159,000  and $437,000 for the years
                        ended December 31, 2003 and 2002, respectively.


--------------------------------------------------------------------------------
                                                                            F-20



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------



8.   Income             The provision for income taxes is different than amounts
     Taxes              which  would  be  provided  by  applying  the  statutory
                        federal  income tax rate to loss  before  provision  for
                        income taxes for the following reasons:

                                                    Years Ended
                                                    December 31,
                                         -----------------------------------
                                               2003             2002
                                         -----------------------------------
 
 Income tax benefit at
   statutory rate                        $      1,170,000 $       4,127,000
 Expiration of research and
   development tax credit
   carryforwards                                        -           (25,000)
 Meals and entertainment                           (7,000)          (33,000)
 Other                                              2,000             1,000
 Change in valuation allowance                 (1,165,000)       (4,070,000)
                                         -----------------------------------
 
                                         $              - $               -
                                         -----------------------------------

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

 Net operating loss carryforward                           $     16,384,000
 Depreciation, amortization, and impairment                         883,000
 Allowance and reserves                                           1,122,000
 Impairment of investment in IBS                                    325,000
 Research and development tax credit
   carryforwards                                                     34,000
                                                           -----------------

                                                                 18,748,000

 Valuation allowance                                           (18,748,000)
                                                           -----------------
 
                                                           $              -
                                                           -----------------

                        A valuation  allowance has been  established for the net
                        deferred  tax  asset  due  to  the  uncertainty  of  the
                        Company's ability to realize such asset.


--------------------------------------------------------------------------------
                                                                            F-21



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------



8.   Income             At December 31, 2003, the Company had net operating loss
     Taxes              carryforwards of approximately  $44 million and research
     Continued          and    development   tax   credit    carryforwards    of
                        approximately $34,000. These carryforwards are available
                        to  offset  future  taxable  income  and  expire in 2004
                        through 2020. The  utilization of the net operating loss
                        carryforwards  is dependent  upon the tax laws in effect
                        at the time the net operating loss  carryforwards can be
                        utilized.  The  Tax  Reform  Act of  1986  significantly
                        limits  the  annual  amount  that  can be  utilized  for
                        certain of these carryforwards as a result of the change
                        in ownership.

9.   Capital            The Company has  established a series of preferred stock
     Stock              with a total of  5,000,000  authorized  shares and a par
                        value of $.001,  and one  series of common  stock with a
                        par value of $.001 and a total of 40,000,000  authorized
                        shares.

                        Series A Preferred Stock
                        On September 1, 1993,  the Company  established a series
                        of  non-voting  preferred  shares  designated  as the 6%
                        Series A Preferred  Stock,  consisting of 500,000 shares
                        with $.001 par value.  The Series A Preferred  Stock has
                        the following rights and privileges:

                        1.    The   holders  of  the  shares  are   entitled  to
                              dividends at the rate of twenty-four  cents ($.24)
                              per share  per  annum,  payable  in cash only from
                              surplus  earnings of the Company or in  additional
                              shares of Series A Preferred  Stock. The dividends
                              are non-cumulative  and therefore  deficiencies in
                              dividend  payments  from one year are not  carried
                              forward to the next year.

                        2.    Upon the  liquidation of the Company,  the holders
                              of the Series A  Preferred  Stock are  entitled to
                              receive,  prior to any  distribution of any assets
                              or  surplus  funds to the  holders  of  shares  of
                              common stock or any other  stock,  an amount equal
                              to $1.00 per share,  plus any  accrued  and unpaid
                              dividends related to the fiscal year in which such
                              liquidation occurs.  Total liquidation  preference
                              at December 31, 2003 was $6,000.

                        3.    The  shares are  convertible  at the option of the
                              holder at any time into common shares, based on an
                              initial  conversion  rate of one share of Series A
                              Preferred Stock for 1.2 common shares.

                        4.    The holders of the shares have no voting rights.



--------------------------------------------------------------------------------
                                                                            F-22



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


9.   Capital            5.    The Company may, at its option,  redeem all of the
     Stock                    then outstanding  shares of the Series A Preferred
     Continued                Stock at a price of $4.50 per share,  plus accrued
                              and unpaid dividends related to the fiscal year in
                              which such redemption occurs.
                           
                        Series B Preferred Stock
                        On May 9,  1994,  the  Company  established  a series of
                        non-voting  preferred shares  designated as 12% Series B
                        Preferred Stock, consisting of 500,000 shares with $.001
                        par  value.   The  Series  B  Preferred  Stock  has  the
                        following rights and privileges:

                        1.    The   holders  of  the  shares  are   entitled  to
                              dividends at the rate of forty-eight  cents ($.48)
                              per share  per  annum,  payable  in cash only from
                              surplus  earnings of the Company or in  additional
                              shares of Series B Preferred  Stock. The dividends
                              are non-cumulative  and therefore  deficiencies in
                              dividend  payments  from one year are not  carried
                              forward to the next year.

                        2.    Upon the  liquidation of the Company,  the holders
                              of the Series B  Preferred  Stock are  entitled to
                              receive,  prior to any  distribution of any assets
                              or  surplus  funds to the  holders  of  shares  of
                              common stock or any other  stock,  an amount equal
                              to $4.00 per share,  plus any  accrued  and unpaid
                              dividends related to the fiscal year in which such
                              liquidation  occurs.   Such  right,   however,  is
                              subordinate to the rights of the holders of Series
                              A  Preferred  Stock to receive a  distribution  of
                              $1.00 per share plus accrued and unpaid dividends.
                              Total liquidation  preference at December 31, 2003
                              was $36,000.

                        3.    The  shares are  convertible  at the option of the
                              holder at any time into common shares, based on an
                              initial  conversion  rate of one share of Series B
                              Preferred Stock for 1.2 common shares.

                        4.    The holders of the shares have no voting rights.

                        5.    The Company may, at its option,  redeem all of the
                              then  outstanding  share of the Series B Preferred
                              Stock at a price of $4.50 per share,  plus accrued
                              and unpaid dividends related to the fiscal year in
                              which such redemption occurs.


--------------------------------------------------------------------------------
                                                                            F-23



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


9.   Capital            Series C Preferred Stock
     Stock              In January 1998, the Company  authorized the issuance of
     Continued          a total of 30,000  shares of Series C  Preferred  Stock,
                        $.001 par value,  $100 stated value.  As of December 31,
                        2003 there were no Series C Preferred  Stock  issued and
                        outstanding.  The  Series  C  Preferred  Stock  have the
                        following rights and privileges:

                        1.    The   holders  of  the  shares  are   entitled  to
                              dividends  at the rate of 12% per  share per annum
                              of the aggregate  stated value.  The dividends are
                              non-cumulative  and,  therefore,  deficiencies  in
                              dividend  payments  from one year are not  carried
                              forward to the next year.

                        2.    Upon the  liquidation of the Company,  the holders
                              of the Series C  Preferred  Stock are  entitled to
                              receive an amount per share  equal to the  greater
                              of (a) the amount they would have received if they
                              had  converted  the shares  into  shares of Common
                              Stock  immediately  prior to such liquidation plus
                              declared but unpaid  dividends;  or (b) the stated
                              value, subject to adjustment.

                        3.    Each share was  convertible,  at the option of the
                              holder at any time until  January  1,  2002,  into
                              approximately  57.14  shares of common stock at an
                              initial  conversion price,  subject to adjustments
                              for stock  splits,  stock  dividends  and  certain
                              combination  or  recapitalization  of  the  common
                              stock, equal to $1.75 per share of common stock.

                        4.    The holders of the shares have no voting rights.


--------------------------------------------------------------------------------
                                                                            F-24



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


9.   Capital            Series D Preferred Stock
     Stock              In  January  1999,  the  Company's  Board  of  Directors
     Continued          authorized  the issuance of a total of 1,140,000  shares
                        of  Series D  Preferred  Stock  $.001 par  value,  $1.75
                        stated  value.  The  Series D  Preferred  Stock  has the
                        following rights and privileges:

                        1.    The   holders  of  the  shares  are   entitled  to
                              dividends  at the rate of 10% per  share per annum
                              of the aggregate  stated value.  The dividends are
                              non-cumulative  and,  therefore,  deficiencies  in
                              dividend  payments  from one year are not  carried
                              forward to the next year.

                        2.    Upon the  liquidation of the Company,  the holders
                              of the Series D  Preferred  Stock are  entitled to
                              receive an amount per share  equal to the  greater
                              of (a) the amount  they would  have  received  had
                              they   converted  the  shares  into  Common  Stock
                              immediately  prior  to such  liquidation  plus all
                              declared but unpaid  dividends;  or (b) the stated
                              value,  subject to adjustment.  Total  liquidation
                              preference at December 31, 2003 was $9,000.

                        3.    Each share was  convertible,  at the option of the
                              holder at any time until January 1, 2002, into one
                              share of  Common  Stock at an  initial  conversion
                              price,   subject  to  adjustment.   The  Series  D
                              Preferred  Stock shall be converted into one share
                              of the Common Stock subject to  adjustment  (a) on
                              January 1, 2002 or (b) upon 30 days written notice
                              by the Company to the  holders of the  Shares,  at
                              any time after (i) the 30-day  anniversary  of the
                              registration  statement  on which  the  shares  of
                              Common  Stock  issuable  upon  conversion  of  the
                              Series D Preferred  Stock were registered and (ii)
                              the average  closing price of the Common Stock for
                              the 20-day period immediately prior to the date on
                              which notice of redemption is given by the Company
                              to the holders of the Series D Preferred  Stock is
                              at least  $3.50 per  share.  The  Company  in 1999
                              recorded  $872,000  as  a  beneficial   conversion
                              feature   related  to  the   differences   in  the
                              conversion  price of the preferred stock to common
                              stock.

                        4.    The holders of the shares have no voting rights.

--------------------------------------------------------------------------------
                                                                            F-25



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------



9.   Capital            Series E Preferred Stock
     Stock              In May 2001,  the Company  authorized  the issuance of a
     Continued          total of 50,000 shares of Series E Preferred Stock $.001
                        par value,  $100  stated  value.  The Series E Preferred
                        Stock has the following rights and privileges:

                        1.    The   holders  of  the  shares  are   entitled  to
                              dividends at the rate of 8% per share per annum of
                              the  aggregate  stated  value.  The  dividends are
                              non-cumulative  and,  therefore,  deficiencies  in
                              dividend  payments  from one year are not  carried
                              forward to the next year.

                        2.    Upon the  liquidation of the Company,  the holders
                              of the Series E  Preferred  Stock are  entitled to
                              receive an amount per share  equal to the  greater
                              of (a) the amount  they would  have  received  had
                              they   converted  the  shares  into  Common  Stock
                              immediately  prior  to such  liquidation  plus all
                              declared but unpaid  dividends;  or (b) the stated
                              value,  subject to adjustment.  Total  liquidation
                              preference at December 31, 2003 was $100,000.

                        3.    Each  share is  convertible,  at the option of the
                              holder at any time until  January  1,  2005,  into
                              approximately  53.33  shares of Common Stock at an
                              initial  conversion  price,  subject to adjustment
                              for stock  splits,  stock  dividends  and  certain
                              combination  or  recapitalization  of  the  common
                              stock,  equal to $1.875 per share of common stock.
                              The Series E Preferred  Stock  shall be  converted
                              into Common  Stock  subject to  adjustment  (a) on
                              January 1, 2005 or (b) upon 30 days written notice
                              by the Company to the  holders of the  Shares,  at
                              any time after (i) the 30-day  anniversary  of the
                              registration  statement  on which  the  shares  of
                              Common  Stock  issuable  upon  conversion  of  the
                              Series E Preferred  Stock were registered and (ii)
                              the average  closing price of the Common Stock for
                              the 20-day period immediately prior to the date on
                              which notice of redemption is given by the Company
                              to the holders of the Series E Preferred  Stock is
                              at least  $3.50 per  share.  The  Company  in 2001
                              recorded  $1,482,000  as a  beneficial  conversion
                              feature   related  to  the   differences   in  the
                              conversion  price of the preferred stock to common
                              stock.

--------------------------------------------------------------------------------
                                                                            F-26



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


9.   Capital            Series E Preferred  Stock - Continued  
     Stock    
     Continued          4.    The holders of the shares have no voting rights.

                        5.    The   holders  of  the  shares  also  were  issued
                              warrants to purchase  shares of common stock equal
                              to 1,000  warrants for every 200 shares  purchased
                              at an  exercise  price of $4.00  per  share.  Each
                              warrant is exercisable until May 23, 2006.

                        Series F Preferred Stock
                        In August 2001, the Company authorized the issuance of a
                        total of 50,000 shares of Series F Preferred Stock $.001
                        par value,  $100  stated  value.  The Series F Preferred
                        Stock has the following rights and privileges:

                        1.    The   holders  of  the  shares  are   entitled  to
                              dividends at the rate of 8% per share per annum of
                              the  aggregate  stated  value.  The  dividends are
                              non-cumulative  and,  therefore,  deficiencies  in
                              dividend  payments  from one year are not  carried
                              forward to the next year.

                        2.    Upon the  liquidation of the Company,  the holders
                              of the Series F  Preferred  Stock are  entitled to
                              receive an amount per share  equal to the  greater
                              of (a) the amount  they would  have  received  had
                              they   converted  the  shares  into  Common  Stock
                              immediately  prior  to such  liquidation  plus all
                              declared but unpaid  dividends;  or (b) the stated
                              value,  subject to adjustment.  Total  liquidation
                              preference at December 31, 2003 was $460,000.

--------------------------------------------------------------------------------
                                                                            F-27



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


9.   Capital            Series F Preferred Stock - Continued
     Stock    
     Continued          3.    Each  share is  convertible,  at the option of the
                              holder at any time until  January  1,  2005,  into
                              approximately  53.33  shares of Common Stock at an
                              initial  conversion  price,  subject to adjustment
                              for stock  splits,  stock  dividends  and  certain
                              combination  or  recapitalization  of  the  common
                              stock,  equal to $1.875 per share of common stock.
                              The Series F Preferred  Stock  shall be  converted
                              into Common  Stock  subject to  adjustment  (a) on
                              January 1, 2005 or (b) upon 30 days written notice
                              by the Company to the  holders of the  Shares,  at
                              any time after (i) the 30-day  anniversary  of the
                              registration  statement  on which  the  shares  of
                              Common  Stock  issuable  upon  conversion  of  the
                              Series F Preferred  Stock were registered and (ii)
                              the average  closing price of the Common Stock for
                              the 20-day period immediately prior to the date on
                              which notice of redemption is given by the Company
                              to the holders of the Series F Preferred  Stock is
                              at least  $3.50 per  share.  The  Company  in 2001
                              recorded  $1,105,000  as a  beneficial  conversion
                              feature   related  to  the   differences   in  the
                              conversion  price of the preferred stock to common
                              stock.

                        4.    The holders of the shares have no voting rights.

                        Series G Preferred Stock
                        In August 2003, the Company authorized the issuance of a
                        total of  2,000,000  shares of Series G Preferred  Stock
                        $.001  par  value,  $1.00  stated  value.  The  Series G
                        Preferred Stock has the following rights and privileges:

                        1.    The   holders  of  the  shares  are   entitled  to
                              dividends at the rate of 7% per share per annum of
                              the  aggregate  stated  value.  The  dividends are
                              non-cumulative  and,  therefore,  deficiencies  in
                              dividend  payments  from one year are not  carried
                              forward to the next year.


--------------------------------------------------------------------------------
                                                                            F-28



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


9.   Capital            2.    Upon the  liquidation of the Company,  the holders
     Stock                    of the Series G  Preferred  Stock are  entitled to
     Continued                receive an amount per share  equal to the  greater
                              of (a) the amount  they would  have  received  had
                              they   converted  the  shares  into  Common  Stock
                              immediately  prior  to such  liquidation  plus all
                              declared but unpaid  dividends;  or (b) the stated
                              value of $.25 per share plus  declared  but unpaid
                              dividends.   Total   liquidation   preference   at
                              December 31, 2003 was $495,000.

                        3.    Each  share is  convertible,  at the option of the
                              holder at any time until  August 1,  2005,  into 1
                              share of  common  stock at an  initial  conversion
                              price, subject to adjustment for dividends,  equal
                              to one  share of common  stock  for each  share of
                              Series G Preferred  Stock.  The Series G Preferred
                              Stock shall be converted into common stock subject
                              to adjustment (a) on August 1, 2005 or (b) upon 30
                              days written  notice by the Company to the holders
                              of the  shares,  at any time  after (i) the 30-day
                              anniversary of the registration statement on which
                              the   shares  of  common   stock   issuable   upon
                              conversion  of the Series G  Preferred  Stock were
                              registered  and (ii) the average  closing price of
                              the common stock for the 15-day period immediately
                              prior to the date in which notice of redemption is
                              given by the  Company to the holders of the Series
                              G  Preferred  Stock  is at least  $.50 per  share.
                              During 2003,  the Company  recorded  $217,000 as a
                              beneficial   conversion  feature  related  to  the
                              difference  between  the  conversion  price of the
                              preferred stock and the market value of the common
                              stock.  The  Company  also  recorded  $53,000 as a
                              deemed  dividend due to the value allocated to the
                              detachable  warrants sold in  connection  with the
                              Series G Preferred Stock

                        4.    The holders of the shares have no voting rights.


--------------------------------------------------------------------------------
                                                                            F-29



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


9.   Capital            The following table summarizes  preferred stock activity
     Stock              during the years ended December 31, 2003 and 2002:
     Continued 







                         Series A         Series B         Series C          Series D           Series E            Series F     
                       Shares  Amount  Shares   Amount  Shares   Amount  Shares    Amount  Shares    Amount    Shares   Amount   
                     ------------------------------------------------------------------------------------------------------------
                                                                                             

Balance at January 
1, 2002                5,747 $     -    8,986  $     -      -    $   -     10,000  $    -    19,300       $ -   47,359       $ - 

Conversion of 
preferred stock         (120)      -        -        -      -        -     (5,000)      -   (17,800)        -  (41,087)        - 
                     ------------------------------------------------------------------------------------------------------------

Balance at December 
31, 2002               5,627       -    8,986        -      -        -      5,000       -     1,500         -    6,272         - 

Issuance of Series 
G preferred stock 
for cash                   -       -        -        -      -        -          -       -         -         -        -         - 

Issuance of Series 
G preferred stock 
for commissions            -       -        -        -      -        -          -       -         -         -        -         - 

Conversion of 
preferred stock            -       -        -        -      -        -          -       -      (500)        -   (1,675)        - 
                     ------------------------------------------------------------------------------------------------------------

Balance at December
31, 2003               5,627 $     -    8,986  $     -      -    $   -      5,000  $    -     1,000       $ -    4,597       $ - 
                     ------------------------------------------------------------------------------------------------------------

Authorized           500,000       -  500,000        - 30,000        -  1,140,000       -    50,000         -   50,000         - 
                     ------------------------------------------------------------------------------------------------------------
 
Liquidation 
preference                 - $ 6,000           $36,000           $   -             $9,000           $ 100,000          $ 460,000 
                     ------------------------------------------------------------------------------------------------------------








                                      Series G            
                                 Shares    Amount         
                                --------------------------
                                            
                                                          
Balance at January                                        
1, 2002                                 -       $ -       
                                                          
Conversion of                                             
preferred stock                         -         -       
                                ------------------------- 
                                                          
Balance at December                                       
31, 2002                                -         -       
                                                          
Issuance of Series                                        
G preferred stock                                         
for cash                        1,764,706     2,000       
                                                          
Issuance of Series                                        
G preferred stock                                         
for commissions                   216,854         -       
                                                          
Conversion of                                             
preferred stock                         -         -       
                                ------------------------- 
                                                          
Balance at December                                       
31, 2003                        1,981,560   $ 2,000       
                                ------------------------- 
                                                          
Authorized                      2,000,000         -       
                                ------------------------  
                                                          
Liquidation                                               
preference                                $ 495,000       
                                --------------------------

                                                          
--------------------------------------------------------------------------------
                                                                            F-30



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------

10.  Stock  Option      The Company has a Stock  Option Plan (the Option  Plan),
     Plan and           which  reserves  shares of the Company's  authorized but
     Warrants           unissued common stock for the granting of stock options.
                        Amendments  to the Option Plan  increased  the number of
                        shares of common stock reserved for issuance  thereunder
                        to an aggregate of 3,700,000 shares.

                        The  Option  Plan  provides  for the grant of  incentive
                        stock  options  and   non-qualified   stock  options  to
                        employees and directors of the Company.  Incentive stock
                        options  may be granted  only to  employees.  The Option
                        Plan is  administered  by the  Board of  Directors  or a
                        Compensation  Committee,  which  determines the terms of
                        options granted including the exercise price, the number
                        of shares subject to the option,  and the exercisability
                        of the option.

                        Options  were issued to employees  and  directors of the
                        Company during 2003 for 2,145,000 shares of common stock
                        with  vesting  periods  ranging  from 3 to 7 years.  The
                        exercise price of the options ranges from $0.16 to $0.25

                        The Company  granted the following  options and warrants
                        to  non-employees  during  the year ended  December  31,
                        2003:

                        o   Warrants to purchase  200,000 shares of common stock
                            at an  exercise  price of $0.16  per share in return
                            for consulting services.

                        o   Warrants to investors to purchase  422,633 shares of
                            common stock at an exercise price of $0.75.

                        o   In  connection  with the  Series G  Preferred  Stock
                            offering,  the Company issued  warrants to purchase,
                            in  aggregate  382,353  shares  of  common  stock at
                            exercise prices ranging from $0.25 to $0.50.


--------------------------------------------------------------------------------
                                                                            F-31



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


10.  Stock Option       During 2002, in connection  with the  Innovative  Optics
     Plan and           acquisition  (see note 3), Plan and the Company  granted
     Warrants           warrants to purchase  250,000  shares of common stock at
     Continued          an  Warrants  exercise  price of $5.00 per share.  These
                        warrants were nonforfeitable, vested Continued and fully
                        exercisable at the time of grant. The exercise prices of
                        these  options were not issued at a discount to the then
                        market  price  of the  common  stock.  The  options  and
                        warrants  were  valued  according  to the  Black-Scholes
                        pricing  model.  As a  result  of  these  warrants,  the
                        Company included  approximately $295,000 in the purchase
                        price  relating  to the  acquisition  of the assets from
                        Innovative Optics, Inc.

                        A schedule of the options and warrants is as follows:

                                                                   
                                     Number of                     Exercise
                                ------------------------------     Price Per
                                      Options        Warrants        Share
                                ------------------------------------------------

Outstanding at
   January 1, 2002                   3,906,776      2,315,022  $  2.00 - 12.98
Granted                                 70,000        250,000      2.00 - 5.00
Exercised                                    -              -               -
Expired                               (115,479)             -             5.00
Forfeited                           (1,374,762)             -      2.31 - 5.00
                                -----------------------------------------------
Outstanding at
  December 31, 2002                  2,486,535      2,565,022     2.00 - 12.98
Granted                              2,150,000      1,404,986      0.16 - 0.25

Exercised                                    -              -                -

Expired                                      -     (1,162,025)     5.06 - 8.12
Forfeited                           (1,008,079)             -      0.21 - 6.00
                                -----------------------------------------------
Outstanding at
  December 31, 2003                  3,628,456      2,807,983   $ 0.16 - 12.98
                                ------------------------------------------------


--------------------------------------------------------------------------------
                                                                            F-32



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


10.  Stock Option       The following table summarizes  information  about stock
     Plan and           options and warrants outstanding at December 31, 2003:
     Warrants     
     Continued   
                      Outstanding                          Exercisable
 --------------------------------------------------  -----------------------
                               Weighted                 
                                Average
                               Remaining    Weighted                 Weighted
  Range of                    Contractual   Average                   Average
  Exercise          Number       Life       Exercise      Number     Exercise
   Prices        Outstanding    (Years)      Price      Exercisable    Price
---------------------------------------------------  ------------------------

  $ 0.16 - 0.75    3,474,986     4.23   $      0.25     2,661,653   $   0.32
    2.00 - 5.00    2,660,570     2.89          3.32     2,599,154       3.75
    6.00 - 8.13      275,000     1.46          3.27       275,000       6.55
          12.98       25,883      N/A         12.98        25,883      12.98
---------------------------------------------------  ------------------------

  $ 0.16 - 12.98   6,436,439      3.5   $      1.71     5,561,689   $   2.29
---------------------------------------------------  ------------------------


11. Gain on             Due to the  Company's  ongoing  cash flow  difficulties,
    Settlement of       during 2003 most vendors and  suppliers  were  contacted
    Liabilities         with   attempts  to  negotiate   reduced   payments  and
                        settlement of outstanding  accounts payable.  While some
                        vendors  refused to negotiate  and  demanded  payment in
                        full,  some vendors were willing to settle for a reduced
                        amount.  The  accounts  payable  forgiven by vendors and
                        suppliers resulted in a gain of $436,000.               
                       
12. Related Party       Thomas F. Motter, former Chairman of the Board and Chief
    Transactions        Executive  Officer  of the  Company,  leased  his former
                        residence  to the  Company  for $2,500  per  month.  The
                        primary use of the residential  property was for housing
                        accommodations   for  the  Company's   employees  living
                        outside of Utah while they were working at the Company's
                        corporate  headquarters  in Salt Lake City.  The Company
                        obtained an  appraisal  from an  independent  appraiser,
                        which  had  concluded  that the  monthly  rate of $2,500
                        represents   the  fair   market  rate  for  leasing  the
                        residential  property.   The  Company  paid  $2,500  and
                        $14,000 in rent during 2003 and 2002. This agreement was
                        terminated on January 31, 2003.

                        The Company  entered into a consulting  agreement with a
                        former  executive  officer of the Company  commencing in
                        September  2002 and ending  February  2003.  The Company
                        paid   approximately   $1,000  and  $15,000  under  this
                        agreement during 2003 and 2002, respectively, and had an
                        accrual  of  approximately  $14,000  and  $5,000  as  of
                        December 31, 2003 and 2002, respectively.



--------------------------------------------------------------------------------
                                                                            F-33



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


12. Related Party       A law  firm,  of  which  the  chairman  of the  board of
    Transactions        directors of the Company is a shareholder,  has rendered
    Continued           legal  services to the  Company.  The Company  paid this
                        firm $97,000 and $167,000,  for the years ended December
                        31,  2003 and 2002,  respectively.  As of  December  31,
                        2003,  the  Company  owed this firm  $136,000,  which is
                        included in accounts payable.


13. Supplemental        During the year ended December 31, 2003, the Company:
    Cash Flow   
    Information         o   Granted  200,000  warrants for consulting  services,
                            which is  recorded  as an  increase  to general  and
                            administrative   expense  and   additional   paid-in
                            capital of $35,000.

                        o   Issued 1,562,000  shares of common stock,  valued at
                            $258,000  based on the trading prices on the date of
                            issuance,  as  settlement  of potential  litigation.
                            This    amount   is    included   in   general   and
                            administrative   expenses  and  additional   paid-in
                            capital.

                        o   Incurred an obligation of approximately  $46,000 for
                            the    settlement   of   accrued    liabilities   of
                            approximately  $83,000 and recorded a  corresponding
                            gain of $37,000.

                        o   Reduced   subscription   receivable  and  additional
                            paid-in capital for $294,000.



--------------------------------------------------------------------------------
                                                                            F-34



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


13. Supplemental        During the year ended December 31, 2002, the Company:
    Cash Flow   
    Information         o   Acquired certain assets of Innovative  Optics,  Inc.
    Continued               in  a  purchase   transaction   (see  note  3).  The
                            transaction  required  the payment of $100,000 and a
                            potential  issuance  of  1,272,000  shares of common
                            stock.  In  connection  with this  acquisition,  the
                            Company recorded the following:

                                Inventory                      $       225,000
                                Property, and equipment                 35,000
                                Intangibles:
                                  Patents, rights, trade name          530,000
                                  Goodwill                           1,419,000
                                Equity:
                                  Common stock issued               (1,814,000)
                                  Warrants issued                     (295,000)
                                                               ----------------
                
                                Net cash paid                  $       100,000
                                                               ----------------

                        o   Acquired  2,663,254,  or 19.9%,  of the  outstanding
                            shares  of  International  Bioimmune  Systems,  Inc.
                            (IBS) and warrants to purchase  1,200,000  shares of
                            common  stock of IBS at $2.50 per share for a period
                            of two years,  through the  exchange and issuance of
                            736,945 shares of Paradigm common stock, the lending
                            of 300,000  shares of Paradigm  common stock to IBS,
                            and the  payment of certain  expenses of IBS through
                            the  issuance of an  aggregate  of 94,000  shares of
                            Paradigm common stock to IBS and its counsel.

                        Actual amounts paid for interest and income taxes are as
                        follows:

                                                         Years Ended
                                                         December 31,
                                              --------------------------------
                                                    2003                2002
                                              --------------------------------

                                Interest      $    24,000      $       46,000
                                              --------------------------------
        
                                Income taxes  $         -      $            -
                                              --------------------------------


--------------------------------------------------------------------------------
                                                                            F-35



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


14. Export              Total sales  include  export  sales by major  geographic
    Sales               area as follows:


                                              Years Ended
                                ----------------------------------------------
                                                         December 31,
                                ----------------------------------------------
                                Geographic Area           2003     2002
                                ----------------------------------------------
                                Far East           $     272,000 $  1,171,000
                                South America              9,000      308,000
                                Middle East              228,000      337,000
                                Europe                   363,000      505,000
                                Canada                    62,000      121,000
                                Mexico                     9,000       61,000

                                ----------------------------------------------
                                                   $     943,000 $  2,503,000
                                ----------------------------------------------

          
15.  Savings Plan       In  November  1996,  the  Company  established  a 401(k)
                        Retirement  Savings Plan for the Company's  officers and
                        employees. The Plan provisions include eligibility after
                        six months of service,  a three year  vesting  provision
                        and matching  contributions at the Company's discretion.
                        During the years ended  December 31, 2003 and 2002,  the
                        Company contributed  approximately $1,000 and $64,000 to
                        the Plan, respectively.


16. Commitments         Consulting Agreements During the year ended December 31,
    and                 1999 the Company  entered a consulting  agreement with a
    Contingencies       former officer of the Company, which expires in 2004 and
                        requires  annual  payments of $25,000 through 2003 and a
                        payment of $12,500 in 2004.

                        During the year ended  December 31, 2000,  in connection
                        with the  acquisition  of OBF,  the  Company  entered  a
                        consulting agreement with the former owner of OBF, which
                        required  monthly  payments of $6,000 through June 2003.
                        As of December 31, 2003,  this  agreement was settled in
                        conjunction  with the  royalty  agreement  for the Blood
                        Flow Analyzer (see Royalty Agreements in Note 15).



--------------------------------------------------------------------------------
                                                                            F-36



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


16. Commitments         Litigation 
    and                 An action was brought  against the Company in March 2000
    Contingencies       by  George  Wiseman,  a former  employee,  in the  Third
    Continued           District  Court of Salt Lake County,  State of Utah. The
                        complaint  alleges  that the  Company  owes Mr.  Wiseman
                        6,370 shares of common stock plus costs, attorney's fees
                        and a wage penalty (equal to 1,960 additional  shares of
                        our common  stock)  pursuant to Utah law.  The action is
                        based  upon  an  extension   of  a  written   employment
                        agreement.  We  dispute  the amount  allegedly  owed and
                        intend to vigorously defend against the action.

                        An action was brought against us on March 7, 2000 in the
                        Third District Court of Salt Lake County, State of Utah,
                        by the Merrill  Corporation that alleges that we owe the
                        Merrill Corporation  approximately $20,000 together with
                        interest  thereon  at the  rate  of 10% per  annum  from
                        August 30, 1999,  plus costs and  attorney's  fees.  The
                        complaint  alleges  a breach  of  contract  relative  to
                        printing services.  We filed an answer to the complaint.
                        On August  12,  2003,  the court  dismissed  the  action
                        without prejudice.

                        An action was brought  against us on September  11, 2000
                        by   PhotoMed   International,   Inc.   and   Daniel  M.
                        Eichenbaum,  M.D.  in the Third  District  Court of Salt
                        Lake  County,  State of Utah.  The  action  involves  an
                        amount of royalties  that are allegedly due and owing to
                        PhotoMed International,  Inc. and Dr. Eichenbaum under a
                        license  agreement  dated July 7, 1993,  with respect to
                        the sale of certain equipment, plus costs and attorneys'
                        fees.  Discovery  has  taken  place  and  we  have  paid
                        royalties  of $14,736 to bring all  payments  up to date
                        through  June  30,  2001.  We  have  been  working  with
                        PhotoMed   and  Dr.   Eichenbaum   to  ensure  that  the
                        calculations  have been  correctly made on the royalties
                        paid as well as the proper method of calculation for the
                        future.



--------------------------------------------------------------------------------
                                                                            F-37



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


16. Commitments         Litigation - Continued
    and                 It is anticipated that once the parties can agree on the
    Contingencies       correct calculations on the royalties,  the legal action
    Continued           will be dismissed.  The issue in dispute  concerning the
                        method of  calculating  royalties  is whether  royalties
                        should  be paid on  returned  equipment.  Since  July 1,
                        2001, only one Photon(TM) laser system has been sold and
                        no systems returned.  Thus, the amount of royalties due,
                        according  to our  calculations,  is $600.  We intend to
                        make   payment  of  this  amount  to  PhotoMed  and  Dr.
                        Eichenbaum  and, as a result,  to have the legal  action
                        dismissed.  However,  if the parties are unable to agree
                        on a method for calculating  royalties,  there is a risk
                        that  PhotoMed  and Dr.  Eichenbaum  might  amend  their
                        complaint   to  request   termination   of  the  license
                        agreement and, if successful, we would lose our right to
                        manufacture and sell the Photon(TM) laser system.

                        We received a demand letter dated  December 9, 2002 from
                        counsel for Dan  Blacklock,  dba Danlin Corp. The letter
                        demands   payment   in  the   amount  of   $65,160   for
                        manufacturing  and  supplying  parts  for  microkeratome
                        blades. Our records show that we received  approximately
                        $34,824  in parts from the  Danlin  Corp.,  but that the
                        additional  amounts  that the Danlin Corp  contends  are
                        owed were from parts that were  received but rejected by
                        us because  they had never been  ordered.  On August 14,
                        2003,  we  agreed to make a  $13,650  payment  to Danlin
                        Corp. in  settlement of the dispute.  We have since made
                        the $13,650 payment to Danlin Corp.

                        We received a demand letter dated December 30, 2002 from
                        counsel for Thomas F.  Motter,  our former  Chairman and
                        Chief Executive Officer. Mr. Motter claims in the letter
                        that he was entitled to certain  stock  options that had
                        not been issued to him in a timely  manner.  By the time
                        the options were actually issued to him,  however,  they
                        had expired. Mr. Motter contends that if the options had
                        been issued in a timely manner,  he would have exercised
                        them in a manner that would have given him a substantial
                        benefit. Mr. Motter requests restitution for the loss of
                        the financial  opportunity.  Mr. Motter also claims that
                        he was  defrauded  by us by not being  given an extended
                        employment  agreement  when he terminated  the change of
                        control agreement that he had entered into with us.



--------------------------------------------------------------------------------
                                                                            F-38



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


16. Commitments         Litigation - Continued
    and                 Mr.  Motter is  further  claiming  payment  for  accrued
    Contingencies       vacation  time during the 13 years he had been  employed
    Continued           by the  Company,  asserting  that he only had a total of
                        four weeks of vacation during that period.  Finally, Mr.
                        Motter is  threatening a shareholder  derivative  action
                        against us because  of the board of  directors'  alleged
                        failure to conduct an investigation  into  conversations
                        that  took  place in a chat room on  Yahoo.  Mr.  Motter
                        asserts that certain  individuals  participating  in the
                        conversations  were  our  officers  or  directors  whose
                        interests  were in  conflict  with the  interest  of the
                        shareholders.  We believe that Mr.  Motter's  claims and
                        assertions  are without  merit and intend to  vigorously
                        defend  against  any legal  action  that Mr.  Motter may
                        bring.

                        On January 24,  2003,  an action was brought by Dr. John
                        Charles  Casebeer  against  us  in  the  Montana  Second
                        Judicial  District  Court,  Silver Bow County,  State of
                        Montana (Civil No. DU-0326).  The complaint alleges that
                        Dr. Casebeer entered into a personal  services  contract
                        with us  memorialized  by a letter dated April 20, 2002,
                        with it being alleged that Dr.  Casebeer fully performed
                        his  obligations.   Dr.  Casebeer  asserts  that  he  is
                        entitled to $43,750 per quarter for consultant  time and
                        as an incentive  to be granted  each  quarter  $5,000 in
                        options  issued at the fair market value.  An additional
                        purported incentive was $50,000 in shares of stock being
                        issued  at the  time  a  formalized  contract  was to be
                        signed by the parties. In the letter it is provided that
                        at its  election,  we may pay the  consideration  in the
                        form of stock or cash and  that  stock  would be  issued
                        within 30 days of the close of the quarter. Prior to the
                        litigation, we issued 43,684 shares to Dr. Casebeer. The
                        referenced  letter provides that termination may be made
                        by either  party  upon  giving 90 days  written  notice.
                        Notice  was  given  by us in  early  November  2002.  We
                        recently  filed its  answer in  defense  of the  action.
                        Issues  include   whether  or  not  Dr.  Casebeer  fully
                        performed as asserted. The case has been settled through
                        the issuance of 300,000  additional shares of our common
                        stock to Dr. Casebeer.



--------------------------------------------------------------------------------
                                                                            F-39



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


16. Commitments         Litigation - Continued
    and                 On May 14,  2003,  a  complaint  was filed in the United
    Contingencies       States  District  Court,  District  of  Utah,  captioned
    Continued           Richard Meyer,  individually and on behalf of all others
                        similarly suited v. Paradigm Medical  Industries,  Inc.,
                        Thomas  Motter,  Mark Miehle and John  Hemmer,  Case No.
                        2:03 CV00448TC.  The complaint also indicates that it is
                        a "Class  Action  Complaint  for  Violations  of Federal
                        Securities Law and  Plaintiffs  Demand a Trial by Jury."
                        We have retained  legal counsel to review the complaint,
                        which  appears  to  be  focused  on  alleged  false  and
                        misleading  statements  pertaining  to  the  Blood  Flow
                        Analyzer(TM)   and  concerning  a  purchase  order  from
                        Valdespino Associates Enterprises and Westland Financial
                        Corporation.

                        More specifically, the complaint alleges that we falsely
                        stated in our Securities and Exchange Commission filings
                        and press releases that we had received authorization to
                        use an  insurance  reimbursement  CPT code  from the CPT
                        Code Research and  Development  Division of the American
                        Medical  Association  in connection  with the Blood Flow
                        Analyzer(TM),  adding that the CPT code  provides  for a
                        reimbursement  to doctors of $57.00 per  patient for use
                        of the  Blood  Flow  Analyzer(TM).  The  complaint  also
                        alleges that on July 11, 2002, we issued a press release
                        falsely announcing that we had received a purchase order
                        from  Valdespino  Associates  Enterprises  and  Westland
                        Financial   Corporation  for  200  sets  of  our  entire
                        portfolio of products, with $70 million in systems to be
                        delivered  over a  two-year  period,  then  another  $35
                        million of orders to be completed in the third year.  As
                        a result of these  statements,  the  complaint  contends
                        that  the  price  of our  shares  of  common  stock  was
                        artificially  inflated  during the period from April 25,
                        2001 through May 14, 2003, and the persons who purchased
                        our  common   shares   during   that   period   suffered
                        substantial damages. The complaint requests judgment for
                        unspecified   damages,   together   with   interest  and
                        attorney's fees.



--------------------------------------------------------------------------------
                                                                            F-40



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


16. Commitments         Litigation - Continued
    and                 We dispute having issued false and misleading statements
    Contingencies       concerning the Blood  Analyzer(TM)  and a purchase order
    Continued           from  Valdespino  Associates  Enterprises  and  Westland
                        Financial  Corporation.  On April 25, 2001,  we issued a
                        press release that stated we had received  authorization
                        to use common  procedure  terminology or CPT code number
                        92120  for  our  Blood  Flow  Analyzer(TM).  This  press
                        release was based on a letter we  received  from the CPT
                        Editorial  Research and  Development  Department  of the
                        American Medical  Association  authorizing use of common
                        procedure  terminology  or CPT code number 92120 for our
                        Blood Flow Analyzer(TM),  for reimbursement purposes for
                        doctors using the device.

                        Currently, there is reimbursement by insurance payors to
                        doctors using the Blood Flow  Analyzer(TM)  in 22 states
                        and  partial  reimbursement  in four other  states.  The
                        amount of  reimbursement to doctors using the Blood Flow
                        Analyzer(TM)  generally ranges from $56.00 to $76.00 per
                        patient,  depending upon the insurance payor.  Insurance
                        payors  providing   reimbursement  for  the  Blood  Flow
                        Analyzer(TM)  have the  discretion to increase or reduce
                        the  amount  of  reimbursement.  We are  endeavoring  to
                        obtain reimbursement by insurance payors in other states
                        where there is currently no reimbursement being made. We
                        believe we have continued to correctly  represent in our
                        Securities and Exchange  Commission filings that we have
                        received  authorization  from the CPT Editorial Research
                        and  Development  Department  of  the  American  Medical
                        Association  to use CPT code number  92120 for our Blood
                        Flow  Analyzer(TM),   for  reimbursement   purposes  for
                        doctors using the device.



--------------------------------------------------------------------------------
                                                                            F-41



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


16. Commitments         Litigation - Continued
    and                 On July 11, 2002,  we issued a press release that stated
    Contingencies       we received a purchase order from Valdespino  Associates
    Continued           Enterprises and Westland  Financial  Corporation for 200
                        complete  sets  of  our  entire  product   portfolio  of
                        diagnostic and surgical equipment for Mexican ophthalmic
                        practitioners,  to be followed by a second  order of 100
                        sets of  equipment.  The  press  release  was based on a
                        purchase  order dated July 10, 2002 that we entered into
                        with Westland Financial  Corporation for the sale of 200
                        complete sets of our surgical and  diagnostic  equipment
                        to Mexican ophthalmic  practitioners.  The press release
                        also stated  that the initial  order was for $70 million
                        of our  equipment  to be filled  over a two-year  period
                        followed by the second order of $35 million in equipment
                        to be  completed  in the third year.  The press  release
                        further  stated that delivery would be made in traunches
                        of 25 complete  sets of our  equipment,  beginning in 30
                        days from the date of the purchase order.

                        On September 13, 2002,  the board of directors  issued a
                        press  release  updating the status of our product sales
                        to the Mexican ophthalmic  practitioners.  In that press
                        release the board stated that we had been in discussions
                        for  the  prior  nine  months  with  Westland  Financial
                        Corporation,  aimed  at  supplying  our  medical  device
                        products to the Mexican market. In the past, we have had
                        a business  relationship with Westland  Financial.  Upon
                        investigation,  the board of  directors  had  determined
                        that the purchase order  referenced in the July 11, 2002
                        press  release  was  not  of  such  a  nature  as  to be
                        enforceable   for  the   purpose  of  sales  or  revenue
                        recognition.  In addition,  we had not sent any shipment
                        of medical products to Mexican ophthalmic  practitioners
                        nor  received  payment  for those  products  pursuant to
                        those discussions.  The September 13, 2002 press release
                        also  stated  that   discussions  were  continuing  with
                        Westland  Financial   Corporation  regarding  sales  and
                        marketing  activities for our medical device products in
                        Mexico,  but we  could  not,  at the  time,  predict  or
                        provide  any  assurance  that  any  transactions   would
                        result.



--------------------------------------------------------------------------------
                                                                            F-42



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


16. Commitments         Litigation - Continued
    and                 On June 2,  2003,  a  complaint  was filed in the United
    Contingencies       States  District  Court  captioned  Michael  Marrone  v.
    Continued           Paradigm Medical  Industries,  Inc., Thomas Motter, Mark
                        Miehle and John Hemmer, Case No. 2:03 CV00513 PGC. On or
                        about June 11, 2003,  a complaint  was filed in the same
                        United  States  District  Court   captioned   Milian  v.
                        Paradigm Medical  Industries,  Inc., Thomas Motter, Mark
                        Miehle and John Hemmer,  Case No. 2:03 CV00617PGC.  Both
                        complaints  seek class  action  status.  These cases are
                        substantially  similar  in  nature  to the  Meyer  case,
                        including the  contention  that as a result of allegedly
                        false statements  regarding the Blood Flow  Analyzer(TM)
                        and  the  purchase  order  from  Valdespino   Associates
                        Enterprises  and  Westland  Financial  Corporation,  the
                        price of our common stock was artificially  inflated and
                        the persons who  purchased  our common shares during the
                        class period  suffered  substantial  damages.  The cases
                        request judgment for unspecified damages,  together with
                        interest and attorneys'  fees. These cases have now been
                        consolidated  with the Meyer case into a single  action.
                        We believe the consolidated  cases are without merit and
                        intend to vigorously defend and protect our interests in
                        the said cases.

                        We were issued a Directors  and Officers  Liability  and
                        Company  Reimbursement  Policy  by  United  States  Fire
                        Insurance  Company  for the period from July 10, 2002 to
                        July  10,  2003  that  contains  a  $5,000,000  limit of
                        liability,  which is excess of a $250,000 retention. The
                        officers and directors named in the  consolidated  cases
                        have requested  coverage under the policy.  U.S. Fire is
                        currently  investigating  whether it may have a right to
                        deny  coverage  for the  consolidated  cases  based upon
                        policy terms,  conditions  and  exclusions or to rescind
                        the policy  based upon  misrepresentations  contained in
                        our application for insurance.



--------------------------------------------------------------------------------
                                                                            F-43



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------

16. Commitments         Litigation - Continued
    and                 We have not paid any amounts toward  satisfaction of any
    Contingencies       part of the $250,000 retention that is applicable to the
    Continued           consolidated  cases.  We have advised U.S.  Fire that we
                        cannot pay the  $250,000  retention  due to our  current
                        financial circumstances. As a consequence, on January 8,
                        2004, we entered into a non-waiver  agreement  with U.S.
                        Fire in which U.S.  Fire  agreed to fund and advance our
                        retention  obligation in consideration for which we have
                        agreed to reimburse U.S. Fire the sum of $5,000 a month,
                        for a  period  of six  months,  with  the  first of such
                        payments   due  on  February   15,   2004.   Thereafter,
                        commencing on August 15, 2004, we are currently required
                        to  reimburse  U.S.  Fire the sum of  $10,000  per month
                        until the entire amount of $250,000 has been  reimbursed
                        to U.S. Fire.

                        In the event U.S. Fire  determines that we or the former
                        officers and directors named in the  consolidated  cases
                        are not entitled to coverage  under the policy,  or that
                        it is entitled  to rescind  the policy,  or should we be
                        declared in default under the non-waiver agreement, then
                        we agree to pay U.S. Fire, on demand, the full amount of
                        all  costs  advanced  by U.S.  Fire,  except  for  those
                        amounts  that  we  may  have  reimbursed  to  U.S.  Fire
                        pursuant   to  the  monthly   payments   due  under  the
                        non-waiver agreement.

                        We will be in default under the non-waiver  agreement if
                        we fail to make any payment due to U.S. Fire  thereunder
                        when such payment is due, or institute proceedings to be
                        adjudicated  as  bankrupt  or  insolvent.   U.S.  Fire's
                        obligation to advance  defense costs under the agreement
                        will terminate in the event that the  $5,000,000  policy
                        limit of liability  is  exhausted.  If U.S.  Fire denies
                        coverage for the consolidated cases under the policy and
                        we are not  successful in defending and  protecting  our
                        interests in the cases,  resulting in a judgment against
                        us for substantial  damages, we would not be able to pay
                        such liability and, as a result, would be forced to seek
                        bankruptcy protection.



--------------------------------------------------------------------------------
                                                                            F-44



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


16. Commitments         Litigation - Continued
    and                 On July 10,  2003,  an action  was  filed in the  United
    Contingencies       States District  Court,  District of Utah, by Innovative
    Continued           Optics,  Inc.  and  Barton  Dietrich  Investments,  L.P.
                        Defendants  include us, Thomas  Motter,  Mark Miehle and
                        John  Hemmer,   former  officers  of  the  company.  The
                        complaint claims that Innovative and Barton entered into
                        an asset purchase agreement with us on January 31, 2002,
                        in  which  we  agreed  to  purchase  all the  assets  of
                        Innovative   in   consideration   for  the  issuance  of
                        1,310,000  shares  of  the  Company's  common  stock  to
                        Innovative.  The complaint  claims we breached the asset
                        purchase  agreement.  The complaint  also claims that we
                        allegedly   made   false   and   misleading   statements
                        pertaining to the Blood Flow Analyzer(TM) and concerning
                        a purchase order from Valdespino Associates  Enterprises
                        and Westland Financial Corporation. The purpose of these
                        statements,  according to the  complaint,  was to induce
                        Innovative to sell its assets and purchase the shares of
                        our common stock at  artificially  inflated prices while
                        simultaneously  deceiving  Innovative  and  Barton  into
                        believing that the Company's shares were worth more than
                        they actually  were. Had Innovative and Barton known the
                        truth, the complaint contends,  they would not have sold
                        Innovative to us, would not have purchased our stock for
                        the assets of  Innovative,  or would not have  purchased
                        the stock at the  inflated  prices  that were paid.  The
                        complaint  further  contends  that as a result  of these
                        statements,  Innovative and Barton suffered  substantial
                        damages in an amount to be proven at trial.

                        The complaint  also claims that 491,250 of the shares to
                        be  issued   to   Innovative   in  the  asset   purchase
                        transaction  were not  issued  on a timely  basis and we
                        also  did not  file a  registration  statement  with the
                        Securities and Exchange Commission within five months of
                        the closing date of the asset purchase transaction. As a
                        result,  the  complaint  alleges  that the  value of the
                        shares of our common stock issued to  Innovative  in the
                        transaction declined, and Innovative and Barton suffered
                        damages in an amount to be proven at trial.  We filed an
                        answer to the  complaint  and also  filed  counterclaims
                        against Innovative and Barton for breach of contract. We
                        believe  the  complaint  is without  merit and intend to
                        vigorously  defend  and  protect  our  interests  in the
                        action.



--------------------------------------------------------------------------------
                                                                            F-45



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


16. Commitments         Litigation - Continued
    and                 If we are not successful in defending and protecting our
    Contingencies       interests  in  this  action,  resulting  in  a  judgment
    Continued           against us for substantial damages, and U.S. Fire denies
                        coverage  in the  litigation  under  the  Directors  and
                        Officers Liability and Company  Reimbursement Policy, we
                        would  not be  able  to pay  such  liability  and,  as a
                        result, would be forced to seek bankruptcy protection.

                        On October  14,  2003,  an action was filed in the Third
                        Judicial  District  Court,  Salt Lake  County,  State of
                        Utah, captioned Albert Kinzinger,  Jr., individually and
                        on behalf of all others similarly  situated vs. Paradigm
                        Medical  Industries,  Inc., Thomas Motter,  Mark Miehle,
                        Randall A. Mackey, and John Hemmer,  Case No. 030922608.
                        The complaint  also indicates that it is a "Class Action
                        Complaint  for  Violations of Utah  Securities  Laws and
                        Plaintiffs  Demand a Trial by  Jury."  We have  retained
                        legal counsel to review the complaint,  which appears to
                        be  focused on alleged  false or  misleading  statements
                        pertaining   to  the  Blood  Flow   Analyzer(TM).   More
                        specifically,  the  complaint  alleges  that we  falsely
                        stated in Securities and Exchange Commission filings and
                        press releases that we had received authorization to use
                        an  insurance  reimbursement  CPT code from the CPT Code
                        Research  and  Development   Division  of  the  American
                        Medical  Association  in connection  with the Blood Flow
                        Analyzer(TM),  adding that the CPT code  provides  for a
                        reimbursement  to doctors of $57.00 per  patient for the
                        Blood Flow Analyzer(TM).

--------------------------------------------------------------------------------
                                                                            F-46



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


16. Commitments         Litigation - Continued
    and                 The  purpose  of  these  statements,  according  to  the
    Contingencies       complaint, was to induce investors to purchase shares of
    Continued           our  Series E  preferred  stock in a  private  placement
                        transaction  at  artificially   inflated   prices.   The
                        complaint contends that as a result of these statements,
                        the  investors  that  purchased  shares of our  Series E
                        preferred  stock  in  the  private   offering   suffered
                        substantial damages to be proven at trial. The complaint
                        also  alleges  that we sold  Series E  preferred  shares
                        without registering the sale of such shares or obtaining
                        an exemption from  registration.  The complaint requests
                        rescission,  compensatory  damages  and treble  damages,
                        including  interest  and  attorneys'  fees.  We filed an
                        answer to the  complaint.  We believe the  complaint  is
                        without  merit  and  intend  to  vigorously  defend  our
                        interests  in the action.  If we are not  successful  in
                        defending  and  protecting  our interests in the action,
                        resulting  in a  judgment  against  us  for  substantial
                        damages, and U.S. Fire denies coverage in the litigation
                        under the Directors  and Officers  Liability and Company
                        Reimbursement  Policy,  we would not be able to pay such
                        liability  and,  as a  result,  would be  forced to seek
                        bankruptcy protection.

                        An  action  was  filed on June 20,  2003,  in the  Third
                        Judicial District Court, Salt Lake County, State of Utah
                        (Civil No. 030914195) by CitiCorp Vendor Finance,  Inc.,
                        formerly  known as Copelco  Capital,  Inc. The complaint
                        claims that $49,626 plus interest is due for the leasing
                        of two copy  machines  that were  delivered  to our Salt
                        Lake  City  facilities  on or about  April of 2000.  The
                        action also seeks an award of attorney's  fees and costs
                        incurred  in the  collection.  We  dispute  the  amounts
                        allegedly owed, asserting that the equipment we returned
                        to  the  leasing  company  did  not  work  properly.   A
                        responsive  pleading  has not  yet  been  filed.  We are
                        currently   engaged  in  settlement   discussions   with
                        CitiCorp.

                        An action was filed in June,  2003 in the Third Judicial
                        District Court,  Salt Lake County,  State of Utah (Civil
                        No.  030914719)  by Franklin  Funding,  Inc. in which it
                        alleges that we had entered into a lease  agreement  for
                        the lease of certain equipment for which payment is due.
                        It is claimed that there is due and owing  approximately
                        $89,988 after accruing late fees, interest, repossession
                        costs,  collection  costs and attorneys' fees. On August
                        28,  2003,  we agreed to a  settlement  of the case with
                        Franklin Funding by agreeing to make 24 monthly payments
                        of $2,300 to Franklin  Funding,  with the first  monthly
                        payment due on August 29, 2003.


--------------------------------------------------------------------------------
                                                                            F-47



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


16. Commitments         Litigation - Continued
    and                 We  received  demand  letters  and dated July 18,  2003,
    Contingencies       September 26, 2003 and November  Contingencies  10, 2003
    Continued           from counsel for Douglas A. MacLeod,  M.D.,  Continued a
                        shareholder of the company. In the July 18, 2003 letter,
                        Dr.  MacLeod  demands that he and certain  entities with
                        which he is involved or controls,  namely the Douglas A.
                        MacLeod,  M.D.  Profit  Sharing  Trust,  St.  Marks' Eye
                        Institute and Milan Holdings, Ltd., be issued a total of
                        2,296,667  shares of our common  stock and  warrants  to
                        purchase  1,192,500  shares  of our  common  stock at an
                        exercise  price of $.25 per share.  Dr.  MacLeod  claims
                        that these  common  shares and warrants are owing to him
                        and the  related  entities  under  the terms of a mutual
                        release dated January 16, 2003, which he and the related
                        entities  entered into with us. Dr. MacLeod  renewed his
                        request for these additional  common shares and warrants
                        in the  September  26, 2003 and November 10, 2003 demand
                        letters.  We  believe  that  Dr.  MacLeod's  claims  and
                        assertions are without merit and that neither he nor the
                        related  entities are entitled to any additional  shares
                        of our common stock or any additional warrants under the
                        terms of the  mutual  release.  We intend to  vigorously
                        defend  against any legal  action  that Dr.  MacLeod may
                        bring.

                        On August 3, 2003, a complaint  was filed  against us by
                        Corinne Powell, a former employee, in the Third Judicial
                        District Court,  Salt Lake County,  State of Utah (Civil
                        No.  030918364).  Defendants  consist of the Company and
                        Randall  A.  Mackey,  Dr.  David M.  Silver and Keith D.
                        Ignotz,  directors of the company. The complaint alleges
                        that at the time we laid  off Ms.  Powell  on March  25,
                        2003, she was owed $2,030 for business expenses, $11,063
                        for   accrued   vacation   days,   $12,818   for  unpaid
                        commissions,  the  fair  market  value of  50,000  stock
                        options  exercisable  at $5.00 per share that she claims
                        she was prevented from exercising, attorney's fees and a
                        continuing  wage penalty  under Utah law. We dispute the
                        amounts  allegedly owed and intend to vigorously  defend
                        and protect our interests in the action.



--------------------------------------------------------------------------------
                                                                            F-48



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


16. Commitments         Litigation - Continued
    and                 On September 10, 2003, an action was filed against us by
    Contingencies       Larry Hicks in the Third Judicial  District Court,  Salt
    Continued           Lake County,  State of Utah, (Civil No. 030922220),  for
                        payments due under a consulting  agreement  with us. The
                        complaint claims that monthly payments of $3,083 are due
                        for the months of October  2002 to October  2003 under a
                        consulting   agreement   and,   if  the   agreement   is
                        terminated,  for the sum of $110,000  minus  whatever we
                        have  paid Mr.  Hicks  prior to such  termination,  plus
                        costs,  attorney's  fees and a wage penalty  pursuant to
                        Utah law.  We  dispute  the  amount  allegedly  owed and
                        intend to vigorously defend against such action.

                        We  are  not  a  party  to  any  other   material  legal
                        proceedings  outside the ordinary course of its business
                        or to any other legal  proceedings  which,  if adversely
                        determined,  would have a material adverse effect on our
                        financial condition or results of operations.

                        The   Company   may   become  or  is  subject  to  other
                        investigations,   claims  or  lawsuits  ensuing  out  of
                        conduct  of its  business,  including  those  related to
                        environmental  safety  and  health,  product  liability,
                        commercial  transactions  etc.  The Company is currently
                        not aware of any other  such  items,  which it  believes
                        could have a material  adverse  effect on the  financial
                        statements.

                        Royalty Agreements
                        The Company had a royalty  agreement  with the president
                        of OBF.  The  agreement  provided for the payment of 10%
                        royalty  of the net  sales  related  to the  Blood  Flow
                        Analyzer.

                        During 2003, a settlement was reached with the president
                        of OBF whereby the royalty  payments were  forfeited and
                        no  longer  are  an  obligation  of  the  Company.   The
                        over-accrued amount of $147,000 was reversed during 2003
                        to reflect the settlement agreement.

                        The  Company  has an amended  exclusive  patent  license
                        agreement  with a company  which owns the patent for the
                        laser-probe  used on the Photon  machine.  The agreement
                        provides  for the  payment  of a 1% royalty on all sales
                        proceeds related  directly or indirectly,  to the Photon
                        machine.  The  agreement  expires when the United States
                        patent rights expire in September 2004. Through December
                        31, 2003, no significant  royalties have been paid under
                        this agreement.


--------------------------------------------------------------------------------
                                                                            F-49



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


16. Commitments         Royalty Agreements - Continued
    and                 The Company has a royalty agreement with another company
    Contingencies       that developed a promotional CD for the Company. Through
    Continued           the  promotion of the CD, the Company  hopes to increase
                        sales in the  Autoperimiter and assist doctors currently
                        using the unit with the interpretation of visual fields.
                        The royalty base is 50% each until the  Company's  share
                        equals the  production  costs related to  development of
                        the disk. Thereafter, the developer will receive 70% and
                        the  Company  will  receive  30%  of the  royalty  base.
                        Royalties   paid  during  the  year   relating  to  this
                        agreement were not significant.


17. Fair Value          The  Company's  financial  instruments  consist of cash,
    of Financial        receivables,  payables,  and notes payable. The carrying
    Instruments         amount of cash,  receivables  and payables  approximates
                        fair  value  because of the  short-term  nature of these
                        items.   The  carrying   amount  of  the  notes  payable
                        approximates  fair  value as the  individual  borrowings
                        bear interest at market interest rates.


18. Recent              In November  2002, the EITF reached a consensus on Issue
    Accounting          No.00-21,    Revenue    Arrangements    with    Multiple
    Pronouncements      Deliverables.  EITF Issue No. 00-21 provides guidance on
                        how to account for certain arrangements that involve the
                        delivery or performance of multiple  products,  services
                        and/or  rights to use  assets.  The  provisions  of EITF
                        Issue  No.  00-21  will  apply to  revenue  arrangements
                        entered into in fiscal periods  beginning after June 15,
                        2003.  The adoption of EITF Issue No. 00-21 did not have
                        a material  impact on  operating  results  or  financial
                        condition  of the  Company as the Company  followed  the
                        provisions  of  Statement  of  Position   ("SOP")  97-2,
                        Software Revenue  Recognition,  as modified by SOP 98-9,
                        Modification   of  SOP  97-2  with  Respect  to  Certain
                        Transactions,   which   provide   guidance  for  revenue
                        recognition of arrangements with multiple deliverables.



--------------------------------------------------------------------------------
                                                                            F-50



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


18. Recent              In December 2003, the FASB issued  Interpretation No. 46
    Accounting          ("FIN 46R") (revised  December 2003),  Consolidation  of
    Pronouncements      Variable   Interest   Entities,   an  Interpretation  of
    Continued           Accounting  Research  Bulletin No. 51 ("ARB 51"),  which
                        addresses  how a  business  enterprise  should  evaluate
                        whether  it  has a  controlling  interest  in an  entity
                        though  means other than voting  rights and  accordingly
                        should  consolidate  the entity.  FIN 46R replaces  FASB
                        Interpretation  No.  46 (FIN 46),  which  was  issued in
                        January 2003.  Before  concluding that it is appropriate
                        to apply ARB 51 voting interest  consolidation  model to
                        an entity,  an enterprise  must first determine that the
                        entity is not a variable  interest  entity (VIE).  As of
                        the  effective  date  of FIN  46R,  an  enterprise  must
                        evaluate  its  involvement  with all  entities  or legal
                        structures created before February 1, 2003, to determine
                        whether  consolidation  requirements of FIN 46R apply to
                        those entities.  There is no  grandfathering of existing
                        entities.  Public  companies must apply either FIN 46 or
                        FIN 46R  immediately  to entities  created after January
                        31,  2003  and no  later  than  the  end  of  the  first
                        reporting  period that ends after December 15, 2004. The
                        adoption  of  FIN  46 had  no  effect  on the  Company's
                        consolidated  financial position,  results of operations
                        or cash flows.

                        In April 2003,  FASB issued SFAS No. 149,  Amendment  of
                        Statement  133 on  Derivative  Instruments  and  Hedging
                        Activities. SFAS 149 amends and clarifies accounting for
                        derivative  instruments,  including  certain  derivative
                        instruments  embedded in other contracts and for hedging
                        activities  under SFAS 133,  Accounting for  Derivatives
                        and Hedging Activities.  SFAS 149 is generally effective
                        for   derivative   instruments,   including   derivative
                        instruments embedded in certain contracts,  entered into
                        or modified  after June 30,  2003.  The adoption of SFAS
                        149 did not  have a  material  impact  on the  operating
                        results or financial condition of the Company.



--------------------------------------------------------------------------------
                                                                            F-51



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------


18. Recent              In May 2003,  the FASB issued SFAS 150,  Accounting  for
    Accounting          Certain Financial  Instruments with  Characteristics  of
    Pronouncements      Both  Liabilities  and Equity.  SFAS 150  clarifies  the
    Continued           accounting  for  certain   financial   instruments  with
                        characteristics  of  both  liabilities  and  equity  and
                        requires  that  those   instruments   be  classified  as
                        liabilities   in  statements   of  financial   position.
                        Previously,  many of those  financial  instruments  were
                        classified   as  equity.   SFAS  150  is  effective  for
                        financial instruments entered into or modified after May
                        31, 2003 and  otherwise is effective at the beginning of
                        the first interim period  beginning after June 15, 2003.
                        On  November  7,  2003,  FASB Staff  Position  150-3 was
                        issued,  which indefinitely  deferred the effective date
                        of   SFAS   150   for   certain   mandatory   redeemable
                        non-controlling  interests. As the Company does not have
                        any of these financial instruments, the adoption of SFAS
                        150  did  not  have   any   impact   on  the   Company's
                        consolidated financial statements.

                        In December 2003, the Securities and Exchange Commission
                        (SEC) issued Staff  Accounting  Bulletin  (SAB) No. 104,
                        Revenue   Recognition.   SAB  104  revises  or  rescinds
                        portions of the interpretive  guidance included in Topic
                        13 of the codification of staff accounting  bulletins in
                        order to make this interpretive guidance consistent with
                        current  authoritative  accounting and auditing guidance
                        and SEC rules and  regulations.  The adoption of SAB 104
                        did not have a material effect on the Company's  results
                        of operations or financial position.



--------------------------------------------------------------------------------
                                                                            F-52







No dealer,  salesperson  or other person
is authorized to give any information or
to represent  anything not  contained in
this  prospectus.  This prospectus is an       9,546,437 Shares of Common Stock 
offer to sell  only the  shares  offered                                        
hereby, but only under circumstances and                                        
in  jurisdictions  where it is lawful to                                        
do so. The information contained in this       PARADIGM MEDICAL INDUSTRIES, INC.
prospectus  is  current  only  as of its                                        
date.                                                                           
                                                     -----------------          
       ---------------------                                                    
                                                        PROSPECTUS              
        TABLE OF CONTENTS                                                       
                                    Page             -----------------          
                                                                                
Prospectus Summary......................                                        
Risk Factors  ..........................                                        
Use of Proceeds.........................              January __, 2005          
Dividend Policy.........................                                        
Capitalization..........................       
Market for Common Equity and
   Related Shareholder Matters..........
Selected Financial Data.................
Management's Discussion and Analysis
   of Plan of Operation.................
Business ...............................
Management .............................
Security Ownership of Certain
   Beneficial Owners and Management ....
Certain Transactions....................
Selling Securityholders.................
Description of Securities...............
Plan of Distribution....................
Experts.................................
Legal Matters...........................
Where You Can Find More Information.....




                                      



                                     PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

Item 24. Indemnification of Directors and Officers

         Section  145 of the  General  Corporation  Law of the State of Delaware
(the "Delaware Law") empowers a Delaware corporation to indemnify any person who
is, or is threatened to be made, a party to any threatened, pending or completed
legal action, suit or proceedings,  whether civil,  criminal,  administrative or
investigative  (other  than action by or in the right of such  corporation),  by
reason  of the  fact  that  such  person  was an  officer  or  director  of such
corporation,  or is or was  serving  at the  request  of such  corporation  as a
director,  officer, employee or agent of another corporation or enterprise.  The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement  actually and  reasonably  incurred by such person in
connection with such action,  suit or proceeding,  provided that such officer or
director acted in good faith and in a manner he or she reasonably believed to be
in or not  opposed  to the  corporation's  best  interests,  and,  for  criminal
proceedings,  had no reasonable cause to believe his or her conduct was illegal.
A Delaware  corporation may indemnify  officers and directors in an action by or
in the  right of the  corporation  under  the same  conditions,  except  that no
indemnification  is  permitted  without  judicial  approval  if the  officer  or
director is adjudged to be liable to the  corporation in the  performance of his
or her duty.  Where an  officer  or  director  is  successful  on the  merits or
otherwise in the defense of any action referred to above,  the corporation  must
indemnify  him or her  against  the  expenses  which such  officer  or  director
actually and reasonably incurred.

         In accordance with the Delaware Law, the  Certificate of  Incorporation
of the  Company  contains a provision  to limit the  personal  liability  of the
directors of the Company for violations of their  fiduciary duty. This provision
eliminates each director's  liability to the Registrant or its  stockholders for
monetary  damages except (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional  misconduct or a knowing violation of law, (iii) under
Section 174 of the  Delaware  Law  providing  for  liability  of  directors  for
unlawful  payment of dividends or unlawful stock  purchases or  redemptions,  or
(iv) for any  transaction  from which a director  derived an  improper  personal
benefit.  The effect of this provision is to eliminate the personal liability of
directors for monetary damages for actions involving a breach of their fiduciary
duty of care, including any such actions involving gross negligence.

         The Company may not indemnify an  individual  unless  authorized  and a
determination  is  made  in  the  specific  case  that  indemnification  of  the
individual is permissible in the circumstances because his or her conduct was in
good faith, he or she reasonably believed that his or her conduct was in, or not
opposed  to, the  Company's  best  interests  and,  in the case of any  criminal
proceeding,  he or she had no reasonable cause to believe his or her conduct was
unlawful.  The  Company may not advance  expenses to an  individual  to whom the
Company may ultimately be responsible for  indemnification  unless authorized in
the specific case after the individual furnishes the following to the Company: a
written  affirmation of his or her good faith belief that his or her conduct was
in good faith,  that he or she  reasonably  believed that his or her conduct was
in, or not  opposed to, the  Company's  best  interests  and, in the case of any
criminal  proceeding,  he or she had no  reasonable  cause to believe his or her
conduct was unlawful and (2) the  individual  furnishes to the Company a written
undertaking,  executed  personally or on his or her behalf, to repay the advance
if it is  ultimately  determined  that he or she did not  meet the  standard  of
conduct  referenced in part (1) of this sentence.  In addition to the individual
furnishing the aforementioned written affirmation and undertaking,  in order for
the  Company to advance  expenses,  a  determination  must also be made that the
facts  then-  known  to  those  making  the  determination  would  not  preclude
indemnification.

         All determinations relative to indemnification must be made as follows:
(1) by the Board of Directors of the Company by a majority vote of those present
at a meeting at which a quorum is present,  and only those directors not parties
to the proceeding shall be counted in satisfying the quorum requirement;  or (2)
if a quorum cannot be obtained as contemplated in part (1) of this sentence,  by
a majority vote of a committee of the Board of Directors designated by the Board
of  Directors  of the  Company,  which  committee  shall  consist of two or more
directors not parties to the  proceeding,  except that directors who are parties
to the  proceeding  may  participate  in the  designation  of directors  for the
committee; or (3) by special legal counsel selected by the Board of Directors or
its committee in the manner  prescribed in part (1) or part (2) of this sentence
(however,  if a quorum of the Board of Directors  cannot be obtained  under part
(1) of this sentence and a committee cannot be designated under part (2) of this
sentence,  then a special  legal counsel shall be selected by a majority vote of
the full board of directors, in which selection directors who are parties to the
proceeding may participate);  or (4) by the  shareholders,  by a majority of the
votes entitled to be cast by holders of qualified shares present in person or by
proxy at a meeting.

         The Company has also entered into  Indemnification  Agreements with its
executive  officers  and  directors.   These   Indemnification   Agreements  are
substantially  similar  in  effect  to the  Bylaws  and  the  provisions  of our
Certificate  of  Incorporation  relative  to  providing  indemnification  to the
maximum extent and in the manner permitted by the Delaware  General  Corporation
Law.  Additionally,  such  Indemnification  Agreements  contractually  bind  the
Company  with  respect to  indemnification  and contain  certain  exceptions  to
indemnification,  but do not limit the indemnification available pursuant to our
Bylaws,  our Certificate of Incorporation  or the Delaware  General  Corporation
Law.

                                      II-1



Item 25.  Other Expenses of Issuance and Distribution

         The following  table sets forth the expenses  payable by the Company in
connection with the issuance and distribution of the securities being registered
(all  amounts  except the  Securities  and  Exchange  Commission  filing fee are
estimated):


Filing fee -- Securities and Exchange Commission............. $       0
Printing and engraving expenses..............................       250
Legal fees and disbursements.................................     5,000
Accounting fees and disbursements............................     3,000
Blue Sky fees and expenses (including legal fees)............         0
Transfer agent and registrar fees and expenses...............       250
Miscellaneous................................................       500
                                                               --------
Total expenses...............................................    $9,000

Item 26.  Recent Sales of Unregistered Securities

         The following  information is furnished with regard to all issuances of
unregistered  shares of our common  stock  during the past  three  years.  These
shares were issued, unless otherwise indicated, without registration in reliance
upon the exemption  provided by Section 4(2) of the  Securities  Act of 1933, as
amended or, in the case of the exercise of warrants,  the shares were registered
pursuant  to a  registration  statement  in  effect  at the time of the  warrant
exercise.

I.    Common Stock

         On July 14, 2000,  the Company  issued 75,758 shares of common stock to
Triton West Group, Inc., an accredited investor,  as defined in Section 2(15) of
the Securities  Act of 1933 and Rule 501 of Regulation D thereunder,  for a cash
investment  in the amount of $300,000,  or a purchase  price of $3.96 per share.
These shares were issued without  registration  in reliance upon Section 4(2) of
the Securities Act of 1933 and Rule 506 of Regulation D thereunder.

         On July 20, 2000,  the Company  issued 12,350 shares of common stock to
John W. Hemmer for a cash  investment  in the amount of $61,750  pursuant to the
exercise of warrants at an exercise price of $5.00 per share.

         On July 24,  2000,  the  Company  issued 300 shares of common  stock to
Gabriel  Plaut  for a cash  investment  in the  amount of $807  pursuant  to the
exercise of warrants at an exercise price of $2.69 per share.

         On August 30,  2000,  the  Company  sold a total of  500,000  shares of
common  stock to 34  accredited  investors,  as defined in section 2 (15) of the
Securities  Act of 1933 and Rule  501 of  Regulation  D  thereunder,  through  a
private  placement under Section 4(2) of the Securities Act of 1933 and Rule 506
of Regulation D thereunder at a price of $3.625 per share.  The Company received
$1,812,500  in cash as a result of the private  placement  transaction  and paid
$133,125 in commissions and expenses.

         On August 31, 2000, the Company issued 85,175 shares of common stock to
Triton West Group, Inc., an accredited investor,  as defined in Section 2(15) of
the Securities  Act of 1933 and Rule 501 of Regulation D thereunder,  for a cash
investment  in the  amount of  $308,759,  or at a  purchase  price of $3.625 per
share.  These shares were issued without  registration  in reliance upon Section
4(2) of the Securities Act of 1933 and Rule 506 of Regulation D thereunder.

         On September 6, 2000,  the Company  issued 5,384 shares of common stock
to Randall A. Mackey for  services  as a director  of the Company  from July 10,
1996 to September 3, 1998.

         On September 6, 2000, the Company issued 200,000 shares of common stock
to two accredited  investors,  as defined in Section 2(15) of the Securities Act
of 1933 and Rule 501 of  Regulation D  thereunder,  through a private  placement
under Section 4(2) under the Securities Act of 1933 and Rule 506 of Regulation D
thereunder at a price of $3.625 per share. The Company received $725,000 in cash
as a result of the private placement transaction and paid $65,250 in commissions
and expenses.

         On September 9, 2000,  the Company issued 19,000 shares of common stock
to the  Estate of Albert  J.  Barbara  for a cash  investment  in the  amount of
$57,000  pursuant to the exercise of warrants at an exercise  price of $3.00 per
share.

         On September 25, 2000,  the Company issued 1,115 shares of common stock
to Christopher Brothers pursuant to the cashless exercise of warrants.

                                      II-2



         On October 18, 2000,  the Company  issued 83,000 shares of common stock
to Triton West Group, Inc., an accredited investor,  as defined in Section 2(15)
of the  Securities  Act of 1933 and Rule 501 of Regulation D  thereunder,  for a
cash  investment in the amount of $260,205,  or at a purchase price of $3.14 per
share.  These shares were issued without  registration  in reliance upon Section
4(2) of the Securities Act of 1933 and Rule 506 of Regulation D thereunder.

         On November 28, 2000,  the Company  issued 1,870 shares of common stock
to Michael P. Fenten pursuant to the cashless exercise of warrants.

         On February 20, 2001, the Company issued 150,000 shares of common stock
to Triton West Group,  Inc., an accredited  investor as defined in Section 2(15)
of the  Securities  Act of 1933 and Rule 501 of Regulation D  thereunder,  for a
cash  investment in the amount of $300,000,  or at a purchase price of $2.00 per
share.  These shares were issued without  registration  in reliance upon Section
4(2) of the Securities Act of 1933 and Rule 506 of Regulation D thereunder.

         On March 14, 2001,  the Company issued 49,716 shares of common stock to
Triton West Group,  Inc., an accredited  investor as defined in Section 2(15) of
the Securities  Act of 1933 and Rule 501 of Regulation D thereunder,  for a cash
investment in the amount of $87,500,  or at a purchase price of $1.76 per share.
These shares were issued without  registration  in reliance upon Section 4(2) of
the Securities Act of 1933 and Rules 506 of Regulation D thereunder.

         On May 22, 2001,  the Company  issued  40,440 shares of common stock to
Triton West Group,  Inc., an accredited  investor as defined in Section 2(15) of
the Securities  Act of 1933 and Rule 501 of Regulation D thereunder,  for a cash
investment in the amount of $100,000, or at a purchase price of $2.47 per share.
These shares were issued without  registration  in reliance upon Section 4(2) of
the Securities Act of 1933 and Rules 506 of Regulation D thereunder.

         On May 30, 2001,  the Company  issued  37,381 shares of Common stock to
Triton West Group,  Inc., an accredited  investor as defined in Section 2(15) of
the Securities  Act of 1933 and Rule 501 of Regulation D thereunder,  for a cash
investment in the amount of $100,000, or at a purchase price of $1.95 per share.
These shares were issued without  registration  in reliance upon Section 4(2) of
the Securities Act of 1933 and Rules 506 of Regulation D thereunder.

         On June 26, 2001,  the Company  issued 51,188 shares of common stock to
Triton West Group,  Inc., an accredited  investor as defined in Section 2(15) of
the Securities  Act of 1933 and Rule 501 of Regulation D thereunder,  for a cash
investment in the amount of $100,000, or at a purchase price of $1.95 per share.
These shares were issued without  registration  in reliance upon Section 4(2) of
the Securities Act of 1933 and Rules 506 of Regulation D thereunder.

         On August 22, 2001,  the Company  issued 350,000 shares of common stock
to Mentor  Corporation  pursuant to a  settlement  agreement  dated July 2, 2001
regarding  the   settlement  of  a  dispute   between  the  Company  and  Mentor
Corporation.  The dispute  involved  whether the 485,751 shares of the Company's
common  stock  issued  to  Mentor  Corporation  pursuant  to an  asset  purchase
transaction were required to have been registered in the Company's  registration
statement declared  effective on January 5, 2000. This settlement  resulted in a
litigation  settlement  expense of  $812,000  based on the  market  price of the
Company's common stock on the date of settlement.

         On January 31,  2002,  the Company  issued  1,272,825  shares of common
stock and warrants to purchase  250,000 shares of the Company's  Common Stock at
$5.00 per share to  Innovative  Optics,  Inc. as  consideration  pursuant to the
completion  of a  transaction  involving  the  purchase  of all of the assets of
Innovative Optics, Inc. One-half of these common shares, or 636,412 shares, were
delivered  to  Innovative  Optics at  closing,  and the other  half were held in
escrow  pending  completion of the blade cost  reduction  project.  On August 2,
2002,  477,309 of the shares held in escrow were delivered to Innovative Optics.
The remainder of the shares, or 159,103 shares,  remains in escrow because phase
2 of the  blade  cost  reduction  project  has not been  completed.  The  assets
purchased  from  Innovative  Optics  included  raw  materials,  work in process,
finished goods inventories, equipment, patents, rights, trade name and goodwill,
which were recorded as $2,209,000 on the financial statements of the Company.

         On January 31, 2002,  the Company  issued 50,000 shares of common stock
to  Dr.  Scott  S.  Bair  as  consideration  pursuant  to  the  completion  of a
transaction involving the purchase of all the assets of Innovative Optics, Inc.

         On June 19, 2002,  the Company  issued 17,007 shares of common stock to
John  Charles  Casebeer,  M.D.  for  services  rendered to the  Company  under a
consulting  agreement.  The shares  represent  the  payment of $50,000 in common
stock in  consideration  for  assisting  the  Company to develop and promote its
Innovatome(TM)  microkeratome  during the period  from April 1, 2002 to June 30,
2002.

         On July 9, 2002,  the Company  issued  35,000 shares of common stock to
Michael W. Stelzer  pursuant to the  Severance  Agreement  and General  Release,
which the Company entered into with Mr. Stelzer on January 21, 2000.

                                      II-3



         On July 29, 2002,  the Company  issued 26,677 shares of common stock to
John  Charles  Casebeer,  M.D.  for  services  rendered to the  Company  under a
consulting  agreement.  The shares  represent  the  payment of $50,000 in common
stock in  consideration  for  assisting  the  Company to develop and promote the
Innovatome(TM)  microkeratome  during the period from July 1, 2002 to  September
30, 2002.

         On July 30, 2002,  the Company  issued 50,000 shares of common stock to
each of Peter  Kristensen  and F. Briton  McConkie for services  rendered to the
Company under a Major Account Facilitator Contract in which Messrs. McConkie and
Kristensen  served as  intermediaries  between the Company and an  international
agent in an effort to sell 150 Photon(TM) laser systems in Asia.

         On August 2, 2002,  the Company issued 48,000 shares of common stock to
Michael B. Lindberg,  M.D. for services  rendered  under a consulting  agreement
(24,000  shares for  services  rendered in 2001 and 24,000  shares for  services
rendered in 2002).  The shares issued to Dr. Lindberg  represent the payment for
assisting the Company in evaluating new technologies and instruments  during the
period from December 1, 2000 to November 30, 2002.

         On September 26, 2002,  the Company issued a total of 736,945 shares of
its on stock to 34 shareholders of  International  Bio- Immune Systems,  Inc. or
IBS  in  connection  with  a  transaction  with  IBS  to  acquire  19.9%  of the
outstanding  shares of IBS common stock through the exchange and issuance of the
736,945 shares of its common stock for 2,663,254  shares of common stock of IBS.
In addition, as part of the transaction,  the Company lent 300,000 shares of its
common stock to IBS and, as consideration for the payment of certain expenses of
IBS in the  transaction,  issued  44,000  shares of its common  stock to IBS and
50,000  shares of its common  stock to Joseph S. Anile,  II.  These  shares were
issued without  registration in reliance upon Section 4(2) of the Securities Act
of 1933 and Rule 506 of Regulation D thereunder.

         On September 30, 2002, the Company issued 40,000 shares of common stock
to Michael W. Stelzer  pursuant to a Severance  Agreement  and General  Release,
which the Company entered into with Mr. Stelzer on September 27, 2002.

         On January 22, 2003, the Company issued a total of 2,524,000  shares of
common stock to six  accredited  investors,  as defined in Section  2(15) of the
Securities  Act of 1933 and Rule  501 of  Regulation  D  thereunder,  through  a
private  placement under Section 4(2) of the Securities Act of 1933 and Rule 506
of Regulation D thereunder at a price of $.25 per share.  The Company received a
total of $631,000 in cash in the private placement  transaction and paid $69,410
in  commissions  and  expenses.  In  addition,  the Company  issued  warrants to
purchase  157,750  shares of common stock at an exercise price of $.25 per share
for commissions and expenses. The accredited investors also received warrants to
purchase a total of 631,000  shares of common stock at an exercise price of $.25
per share.

         On March 26, 2003, the Company issued 695,991 shares of common stock to
Triton West Group, Inc., an accredited investor,  as defined in Section 2(15) of
the Securities  Act of 1933 and Rule 501 of Regulation D thereunder,  for a cash
investment in the amount of $85,746,  or at a purchase  price of $.12 per share.
These shares were issued without  registration  in reliance upon Section 4(2) of
the Securities Act of 1933 and Rule 506 of Regulation D thereunder.

         On June 13, 2003,  the Company  issued 50,000 shares of common stock to
Frank G. Mauro for a cash  investment  of $12,500  pursuant  to the  exercise of
warrants at an exercise price of $.25 per share.

         On June 13,  2003,  the Company  issued 7,888 shares of common stock to
Delbert G. Reichardt for a cash  investment in the amount of $1,972  pursuant to
the exercise of warrants at an exercise price of $.25 per share.

         On June 13,  2003,  the Company  issued 7,887 shares of common stock to
John H. Banzhaf for a cash investment in the amount of $1,971.25 pursuant to the
exercise of warrants at an exercise price of $.25 per share.

         On June 26, 2003,  the Company  issued 51,000 shares of common stock to
Paul L. Archambeau, M.D. for a cash investment in the amount of $12,750 pursuant
to the exercise of warrants at an exercise price of $.25 per share.

         On June 30, 2003,  the Company  completed the sale of 845,266 shares of
common  stock to 14  accredited  investors,  as defined in Section  2(15) of the
Securities  Act of 1933 and Rule  501 of  Regulation  D  thereunder,  through  a
private  placement under Section 4(2) of the Securities Act of 1933 and Rule 506
of Regulation D thereunder at a price of $.375 per share. The Company received a
total of $316,975 in cash in the private placement transaction and issued 82,526
shares of common stock in commissions  and expenses.  The  accredited  investors
also received warrants to purchase 422,634 shares of common stock at an exercise
price of $.75 per share.

         On October 9, 2003,  the Company  issued 300,000 shares of common stock
to John Charles  Casebeer,  M.D. in  settlement  of a lawsuit that Dr.  Casebeer
brought  against the Company for services  performed  under a personal  services
contract.

II.   Series E Preferred Stock

                                      II-4



         During the period  from May 31,  2001 to August 20,  2001,  the Company
sold a total of  46,219  shares of Series E  convertible  preferred  Stock to 44
accredited investors,  as defined in Section 2(15) of the Securities Act of 1933
and Rule 501 of  Regulation  D  thereunder,  through a private  placement  under
Regulation D promulgated  under the Securities Act of 1933 at a price of $100.00
per share.  The Company  received  $4,621,900 in cash as a result of the private
placement transaction and paid $369,752 in commissions and expenses.  The Series
E convertible  preferred  stock is convertible  into shares of common stock at a
conversion price of $1.875 per share of common stock.  The accredited  investors
also received  warrants to purchase a total of 231,095 shares of common stock at
an  exercise  price of  $4.00  per  share.  These  shares  were  issued  without
registration  in reliance  upon Section 4(2) of the  Securities  Act of 1933 and
Rule 506 of Regulation D promulgated thereunder.

III.   Series F Preferred

         During the period  from  August 20,  2001 to  November  21,  2001,  the
Company sold a total of 48,597.20 shares of Series F convertible preferred stock
to 58 accredited investors, as defined in Section 2(15) of the Securities Act of
1933 and Rule 501 of Regulation D thereunder,  through a private placement under
Regulation D promulgated  under the Securities Act of 1933 at a price of $100.00
per share.  The Company  received  $4,859,720 in cash as a result of the private
placement transaction and paid $388,788 in commissions and expenses.  The Series
F convertible  preferred  stock is convertible  into shares of common stock at a
conversion  price  equal to $1.875  per share of common  stock.  The  accredited
investors also received warrants to purchase a total of 242,986 shares of common
stock at an exercise price of $4.00 per share.  These shares were issued without
registration  in reliance  upon Section 4(2) of the  Securities  Act of 1933 and
Rule 506 of Regulation D promulgated thereunder.

IV.    Series G Preferred

         During the period from  August 24,  2003 to  September  15,  2003,  the
Company sold a total of 1,981,560 shares of Series G convertible preferred stock
to two accredited  investors,  as defined in Section 2(15) of the Securities Act
of 1933 and Rule 501 of  Regulation D  thereunder,  through a private  placement
under  Regulation D promulgated  under the  Securities Act of 1933 at a price of
$.17 per share. The Company received $300,000 in cash as a result of the private
placement transaction and paid $30,000 in commissions and expenses. In addition,
the Company  issued  warrants to purchase  88,236  shares of common  stock at an
exercise  price of $.50 per share for  commissions  and  expenses.  The Series G
convertible  preferred  stock is  convertible  into shares of common  stock at a
conversion  price  equal  to $.17 per  share of  common  stock.  The  accredited
investors also received warrants to purchase a total of 382,353 shares of common
stock at an exercise  price of $.50 per share.  These shares were issued without
registration  in reliance  upon Section 4(2) of the  Securities  Act of 1933 and
Rule 506 of  Regulation  D  promulgated  thereunder.  Moreover,  the  Company is
obligated  to  issue  an  additional  475,574  shares  of  common  stock  to the
investors.  Under the terms of the private offering,  the Company is required to
file a registration  statement  with the  Securities and Exchange  Commission to
register the common shares issuable to the Series G preferred  stockholders upon
conversion of their Series G preferred shares and exercise of their warrants. If
the  registration  statement has not been declared  effective within 120 days of
the initial closing of the offering on August 29, 2003, there is a penalty of 2%
per month payable to the investors in common shares (or 39,631 common shares per
month) until the registration statement is declared effective.

Item 27.  Exhibits

     (a) Exhibits

         The  following  Exhibits  are filed  herewith  pursuant  to Rule 601 of
Regulation S-B or are incorporated by reference to previous filings.

Exhibit
  No.                      Document Description
-------                    -------------------- 

2.1           Amended  Agreement  and Plan of Merger  between  Paradigm  Medical
              Industries,  Inc., a California  corporation and Paradigm  Medical
              Industries, Inc., a Delaware corporation(1)
3.1           Certificate of Incorporation(1)
3.2           Amended Certificate of Incorporation(10)
3.3           Bylaws(1)
4.1           Warrant Agency Agreement with  Continental  Stock Transfer & Trust
              Company(3)
4.2           Specimen Common Stock Certificate(2)
4.3           Specimen Class A Warrant Certificate(2)
4.4           Form of Class A Warrant Agreement(2)
4.5           Underwriter's Warrant with Kenneth Jerome & Co., Inc.(3)
4.6           Warrant  to  Purchase  Common  Stock  with Note  Holders re bridge
              financing (1)
4.7           Specimen Series C Convertible Preferred Stock Certificate(4)
4.8           Certificate of the Designations, Powers, Preferences and Rights of
              the Series C Convertible Preferred Stock(4)
4.9           Specimen Series D Convertible Preferred Stock Certificate (6)

                                      II-5



4.10          Certificate of the Designations, Powers, Preferences and Rights of
              the Series D Convertible Preferred Stock (7)
4.11          Warrant to Purchase Common Stock with Cyndel & Co. (6)
4.12          Warrant to Purchase  Common Stock with R.F.  Lafferty & Co.,  Inc.
              (6)
4.13          Warrant to Purchase Common Stock with Dr. Michael B. Limberg (7)
4.14          Warrant to Purchase Common Stock with John W. Hemmer (7)
4.15          Stock Purchase Warrant with Triton West Group, Inc.(9)
4.16          Warrant  to  Purchase  Common  Stock  with KSH  Investment  Group,
              Inc.(9)
4.17          Warrant to Purchase  Common Stock with  Consulting  for  Strategic
              Growth, Ltd.(9)
4.18          Certificate of Designations, Powers, Preferences and Rights of the
              Series G Convertible Preferred Stock (14)
5.1           Opinion of Mackey Price & Thompson
10.1          Exclusive Patent License Agreement with PhotoMed(1)
10.2          Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3          1995 Stock Option Plan (1)
10.4          Employment Agreement with Thomas F. Motter (5)
10.5          Stock Purchase  Agreement with Ocular Blood Flow, Ltd. and Malcolm
              Redman (7)
10.6          Consulting Agreement with Malcolm Redman (7)
10.7          Royalty Agreement with Malcolm Redman (7)
10.8          Registration Rights with Malcolm Redman (7)
10.9          Employment Agreement with Mark R. Miehle (8)
10.10         Agreements with Steven J. Bayern and Patrick M. Kolenik (8)
10.11         Private  Equity Line of Credit  Agreement  with Triton West Group,
              Inc. (9)
10.12         Asset Purchase Agreement with Innovative  Optics,  Inc. and Barton
              Dietrich Investments, L.P.(10)
10.13         Escrow  Agreement with Innovative  Optics,  Inc.,  Barton Dietrich
              Investments, L.P. (10)
10.14         Assignment  and  Assumption   Agreement  with  Innovative  Optics,
              Inc.(10)
10.15         General  Assignment  and  Bill of  Sale  with  Innovative  Optics,
              Inc.(10)
10.16         Non-Competition  and  Confidentiality   Agreement  with  Mario  F.
              Barton(10)
10.17         Termination of Employment Agreement with Mark R. Miehle(12)
10.18         Consulting Agreement with Mark R. Miehle(12)
10.19         Employment Agreement with Jeffrey F. Poore (13)
10.20         License Agreement with Sunnybrook Health Science Center(15)
10.21         Major Account Facilitator Contract(15)
10.22         Mutual Release with Douglas A. MacLeod, M.D. and others(15)
10.23         Purchase Agreement with American Optisurgical, Inc.(15)
10.24         Purchase Order with Westland Financial Corporation(16)
10.25         Non-Waiver Agreement with United States Fire Insurance Company(16)
10.26         Employment Agreement with John Y. Yoon(17)
10.27         Consulting Agreement with Dr. John Charles Casebeer (18)
10.28         Consulting Agreement with Kinexsys Corporation (18)
10.29         Stock Purchase and Sale Agreement with William Ungar (19)
10.30         Employment Agreement with Aziz A. Mohabbat (20)
10.31         Investment  Banking Agreement with Alpha Advisory  Services,  Inc.
              (21)
10.32         Manufacturing and Distribution Agreement with E-Technologies, Inc.
              (21)
23.1          Consent of Mackey Price & Thompson
23.2          Consent of Tanner & Co.

-----------------

(1)           Incorporated  by  reference  from  Registration  Statement on Form
              SB-2, as filed on March 19, 1996.
(2)           Incorporated  by reference  from  Amendment No. 1 to  Registration
              Statement on Form SB-2, as filed on May 14, 1996.
(3)           Incorporated  by reference  from  Amendment No. 2 to  Registration
              Statement on Form SB-2, as filed on June 13, 1996.
(4)           Incorporated  by reference  from Annual Report on Form 10-KSB,  as
              filed on April 16, 1998.
(5)           Incorporated by reference from Quarterly Report on Form 10-QSB, as
              filed on November 12, 1998.
(6)           Incorporated  by  reference  from  Registration  Statement on Form
              SB-2, as filed on April 29, 1999.
(7)           Incorporated by reference from Quarterly Report on Form 10-QSB, as
              filed on August 16, 2000.
(8)           Incorporated by reference from Quarterly Report on Form 10-QSB, as
              filed on November 1, 2000.
(9)           Incorporated by reference from Quarterly Report on Form 10-KSB, as
              filed on April 16, 2001.
(10)          Incorporated  by  reference  from  Current  Report on Form 8-K, as
              filed on March 5, 2002.
(11)          Incorporated  by reference  from  Amendment No. 1 to  Registration
              Statement on Form S-3, as filed on March 20, 2002.
(12)          Incorporated by reference from Quarterly Report on Form 10-QSB, as
              filed on November 18, 2002.
(13)          Incorporated  by  reference  from  Registration  Statement on Form
              SB-2, as filed on July 7, 2003.
(14)          Incorporated by reference from Quarterly Report on Form 10-QSB, as
              filed on November 14, 2003.
(15)          Incorporated  by reference  from  Amendment No. 2 to  Registration
              Statement on Form SB-2, as filed on December 15, 2003.
(16)          Incorporated  by reference  from  Amendment No. 3 to  Registration
              Statement on Form SB-2, as filed on February 27, 2004.

                                      II-6



(17)          Incorporated  by  reference  from  Current  Report on Form 8-K, as
              filed on March 23, 2004.
(18)          Incorporated  by reference  from Annual Report on Form 10-KSB,  as
              filed on April 14, 2004.
(19)          Incorporated by reference from Quarterly Report on Form 10-QSB, as
              filed on August 16, 2004.
(20)          Incorporated  by reference  from  Amendment No. 6 to  Registration
              Statement on Form SB-2, as filed on October 20, 2004.
(21)          Incorporated by reference from Report on Form 10-QSB,  as filed on
              November 15, 2004.

     (b)  Reports on Form 8-K

         No reports were filed by the Company  during the quarter ended December
31, 2004.

Item 28. Undertakings

         (a) The undersigned registrant hereby undertakes:

              (1) To  file,  during  any  period  in which  it  offers  or sells
securities, a post -effective amendment to this registration statement:

                     (i) To include any prospectus  required by Section 10(a)(3)
of the Securities Act of 1933 (the "Securities Act");

                     (ii) To  reflect  in the  prospectus  any  facts or  events
which,  individually  or  together,   represent  a  fundamental  change  in  the
information in the registration  statement.  Notwithstanding the foregoing,  any
increase or decrease in volume of securities  offered (if the total dollar value
of  securities  offered  would not  exceed  that which was  registered)  and any
deviation from the low or high end of the estimated  maximum  offering range may
be reflected in the form of  prospectus  filed with the  Commission  pursuant to
Rule 424(b) if, in the aggregate,  the changes in volume and price  represent no
more than 20% change in the maximum  aggregate  offering  price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and

                     (iii)  To  include  any  additional  or  changed   material
information on the plan of distribution.

              (2) That, for  determining  liability  under the  Securities  Act,
treat each  post-effective  amendment  as a new  registration  statement  of the
securities  offered,  and the offering of the  securities at that time to be the
initial bona fide offering.

              (3) To file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.

         (b)  Insofar  as  indemnification  for  liabilities  arising  under the
Securities Act may be permitted to directors,  officers and controlling  persons
of the  registrant  pursuant to the  foregoing  provisions,  or  otherwise,  the
registrant  has been advised that in the opinion of the  Securities and Exchange
Commission  such  indemnification  is against  public policy as expressed in the
Securities Act and is, therefore,  unenforceable.  In the event that a claim for
indemnification  against  such  liabilities  (other  than  the  payment  by  the
registrant of expenses  incurred or paid by a director,  officer or  controlling
person of the  registrant  in the  successful  defense  of any  action,  suit or
preceding)  is  asserted  by such  director,  officer or  controlling  person in
connection with the securities being registered,  the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit  to a  court  of  appropriate  jurisdiction  the  question  whether  such
indemnification  by it is against  policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.

         The undersigned registrant also undertakes that:

              (1) For purposes of determining any liability under the Securities
Act, treat the information  omitted from the form of prospectus filed as part of
this  registration  statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1), or (4) or Rule
497(h) under the Securities Act shall be deemed to be part of this  registration
statement as of the time it was declared effective.

              (2) For the  purposes  of  determining  any  liability  under  the
Securities  Act,  treat each  post-effective  amendment  that contains a form of
prospectus as a new  registration  statement for the  securities  offered in the
registration  statement,  and the offering of the securities at that time as the
initial bona fide offering of those securities.


                                      II-7


                                   SIGNATURES

         In accordance with the  requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has duly caused this registration
statement  to be signed on its  behalf by the  undersigned,  in Salt Lake  City,
State of Utah, this 10th day of January, 2005.

                                        PARADIGM MEDICAL INDUSTRIES, INC.



                                        By:/s/ John Y. Yoon    
                                           ----------------------------------
                                           John Y. Yoon

                                           Its: President and Chief Executive 
                                           Officer

         Pursuant  to the  requirements  of the  Securities  Act of  1933,  this
registration  statement has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated:

         Signature              Title                                     Date

 /s/ John Y. Yoon           President and Chief Executive       January 10, 2005
------------------------    Officer (Principal Executive 
John Y. Yoon                Officer)



 /s/ Randall A. Mackey      Chairman of the Board and           January 10, 2005
------------------------    Secretary 
Randall A. Mackey



 /s/ David M. Silver*       Director                            January 10, 2005
------------------------
David M. Silver



 /s/ Keith D. Ignotz*       Director                            January 10, 2005
------------------------
Keith D. Ignotz



 /s/ John C. Pingree*       Director                            January 10, 2005
------------------------
John C. Pingree



 /s/ Luis A. Mostacero      Controller (Principal               January 10, 2005
------------------------    Financial and Accounting
Luis A. Mostacero           Officer)     


*By: /s/ John Y. Yoon      
     -------------------
        John Y. Yoon as
      Attorney-in-Fact




                                      II-8