UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-KSB
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
    of 1934

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934

                          Commission File No. 0-28498


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

          DELAWARE                                               87-0459536
(State or other jurisdiction                                 IRS Identification
of incorporation or organization)                                  Number

1127 West 2320 South, Suite A, Salt Lake City, Utah                 84119
  (Address of principal executive offices)                        (Zip Code)

       Registrant's telephone number, including Area Code (801) 977-8970
         Securities registered under Section 12(b) of the Exchange Act:

                                                   Name of each exchange on
       Title of each class                             which registered
       -------------------                             ----------------
              (None)                                         (None)             
         
         Securities registered under Section 12(g) of the Exchange Act:

                   Common Stock, par value $.001 per share                     
                                (Title of class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days
Yes [X]  No [ ]

Indicated by check mark if disclosure of delinquent  filers pursuant to Item 405
of Regulation S-B is not contained in herein, and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [ ]

Registrant's  revenues  for  the  fiscal  year  ended  December  31,  1998  were
$1,258,170

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant  as of March  25,  1999 was  approximately  $19,157,908  based on the
closing price on that date on the Nasdaq SmallCap Market.

As of March 25, 1999,  Registrant  had  outstanding  5,894,741  shares of Common
Stock,   8,119  shares of Series A Preferred  Stock,  31,236  shares of Series B
Preferred  Stock,  1,400 shares of Series C Preferred Stock and 1,140,000 shares
of Series D Preferred Stock

                       DOCUMENTS INCORPORTED BY REFERENCE:

Additional documents set forth in Part IV hereof are incorporated by reference.


   Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]

<PAGE>
                                     PART I

Item 1. Description of Business
-------------------------------

General

         The  Company  develops,   manufactures,   sources,  markets  and  sells
ophthalmic  surgical  and  diagnostic  equipment,  instrumentation  and  related
accessories,  including disposable products. The Company's surgical equipment is
designed for minimally  invasive  cataract  treatment.  The Company  markets two
ultrasound  cataract surgery systems with related  instruments,  accessories and
disposable  products.  One of the ultrasound  systems,  the Precisionist  Thirty
Thousand(TM),  is  manufactured  as the base  surgery  system for the  Company's
Precisionist  Thirty  Thousand(TM)  Ophthalmic  Surgical  Workstation(TM).   The
Company is currently developing a laser cataract surgery system as an adjunct to
its ultrasound cataract surgery equipment.  This product is currently undergoing
investigational  trials in the United  States.  If  successfully  developed  and
approved  for medical  uses,  the Company  plans to market the laser system as a
plug-in  module for its  Workstation(TM).  The Company's  ultrasound  diagnostic
products include a pachymeter,  an A-Scan, an A/B Scan and a biomicroscope,  the
technology  for which was acquired from  Humphrey  Systems in 1998. In addition,
the  Company  markets  its Blood  Flow  AnalyzerTM.  This  product is a portable
computerized  system for which the Company has secured a license granting it the
right to market the product in the United  States.  This product is designed for
the measurement of intraocular  pressure and pulsatile  ocular blood flow volume
for  detection and  treatment of glaucoma.  The Company is currently  developing
additional applications for all of its diagnostic products.

         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  2  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.

         The Company  manufactures and sells two phaco systems with instruments,
accessories and disposable  products.  The Precisionist 3000 Plus(TM) system was
introduced in 1992 and is a low-cost portable system intended  primarily for the
international  market. At the present time, the Company does not plan to produce
the 3000 PlusTM in 1999. The  Precisionist  Thirty  Thousand(TM)  Ocular Surgery
Workstation(TM)  is the Company's newest generation system which is the base for
its  expandable  surgical  "workstation"  platform.  The Company's  Precisionist
Thirty  Thousand model  includes a 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
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 asperation
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

                                        1

<PAGE>



damage.

      Current  phaco systems can be difficult  for many  ophthalmic  surgeons to
master and are limited in their ability to be the most minimally invasive method
possible.  The Company is developing its  proprietary  patented laser system and
unique patented probe for laser cataract  removal which the Company believes can
address the  difficulties  associated with phaco systems.  The laser system is a
plug-in module for its Workstation(TM) which will be available as an up-grade if
and when cleared for market by the FDA. The  development  of the laser  cataract
system is being  done in  cooperation  with  ophthalmic  surgeons  in the United
States.  Additionally,  research and development  work is being conducted by the
Company's  engineering  group and with MEOS Photonics  through the University of
Utah Laser Laboratory.

         The Company  believes that in certain  surgical  conditions,  its laser
system will be easier to use and safer than  present  phaco  systems.  The probe
will be smaller than typical  probes which employ an ultrasonic  needle and will
deliver  laser energy  directly to the desired  tissue area by means of a smooth
blunt end. The laser probe has been shown to eliminate high-frequency vibrations
in the  eye  and to  significantly  reduce  heat  build-up  which  is one of the
complications  associated with ultrasound  phaco. In 1996, the Company  received
FDA approval to conduct clinical trials in the United States with the Photon(TM)
laser system.  During these Phase I clinical trials the Company  discovered that
the Photon(TM)  laser system was effective in removing  softer grade  cataracts.
The Company also discovered that the Photon(TM) laser System may not effectively
remove harder grade  cataract,  although hard cataracts can be removed using the
already  existing  ultrasound  capability  of the  Workstation(TM).  The Company
completed its Phase I clinical  trials in 1997, and has received FDA approval to
proceed to an expanded Phase II clinical trial to refine the laser system and to
provide the statistical data required to approve the Photon(TM) laser system for
laser cataract removal.  There is no assurance,  however,  that the Company will
successfully complete the Phase II clinical trials or be successful in improving
the laser system,  or that  additional  disadvantages  or problems unique to the
Photon(TM)  laser  system  will not be  discovered  during the Phase II clinical
trials or following FDA approval of the system.

         In  addition  to  cataract  surgery,  the  Company  believes  that  its
Photon(TM) laser system is capable of being configured with specialty probes for
use in other ophthalmic surgical procedures.  These potential applications could
represent  substantial  growth  opportunities   including  additional  sales  of
equipment,  instruments,  accessories and disposables.  However, there can be no
assurance that these  applications will be developed or approved.  Further there
is no guarantee that the laser will be accepted by the ophthalmic surgery market
in this capacity.

         In June 1997,  the Company  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.  The Company's  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.  The Company has
secured a license granting it the exclusive right to private label,  package and
market the  product  in the United  States,  with full  international  marketing
rights.

         On June 26, 1998, the Company entered into a Co-Distribution  Agreement
with   Pharmacia  &  Upjohn  Company  and  National   Healthcare   Manufacturing
Corporation which provides for the

                                        2

<PAGE>

marketing  and sale of a range of  ophthalmic  products.  Under the terms of the
Co-Distribution   Agreement,  the  Company,  Pharmacia  &  Upjohn  and  National
Healthcare will offer a comprehensive  package of products to cataract surgeons,
including cataract surgical  equipment,  intraocular lens implants,  intraocular
pharmaceuticals,  surgical instruments and sterile procedural packs. The Company
will provide the Precisionist ThirtyThousand(TM) for distribution and sale under
the  Co-  Distribution  Agreement.   The  Pharmacia  &  Upjohn  products  to  be
distributed as part of the Co- Distribution  Agreement include the Healon(R) and
Healon-GV(R)  viscoelastic  solution  and  the  CeeOn  line of  foldable,  small
intraocular  lens implants,  designed to replace the natural lens removed during
cataract surgery.

         On July 23, 1998,  the Company  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 180,000  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.

         The rights to the  ophthalmic  diagnostic  instruments  which have been
purchased  from  Humphrey  Systems  under  the  Agreement  complement  both  the
Company's  cataract surgical  equipment and its ocular Blood Flow  Analyzer(TM).
The Ultrasonic  Biometer calculates the prescription for the intraocular lens to
be implanted during cataract surgery. The Ultrasound Pachymeter measures corneal
thickness for the new refractive  surgical  applications that eliminate the need
for eyeglasses and for optometric  applications including contact lense fitting.
The A/B Scan System combines the Ultrasonic  Biometer and ultrasound imaging for
advanced  diagnostic testing throughout the eye and is a viable tool for retinal
specialists.   The  Ultrasound   Biomicroscope   utilizes   microscopic  digital
ultrasound resolution for detection of tumors and improved glaucoma management.

Background

         Corporate  History.  The Company's  business  originated  with Paradigm
Medical,  Inc., a California  corporation  formed in October 1989  ("PMI").  PMI
developed  the  Company's  present  ophthalmic  business and was operated by its
founders Thomas F. Motter and Robert W. Millar. In May 1993, PMI merged with and
into the Company.  At the time of the merger,  the Company was a dormant  public
shell existing under the name French Bar Industries, Inc. ("French Bar"). French
Bar had operated a mining and tourist  business in Montana.  Prior to its merger
with PMI 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,  the Company caused a 1-for-7.96  reverse stock
split of its shares of Common Stock. The Company then acquired all of the issued
and  outstanding  shares of Common  Stock of PMI using  shares of its own Common
Stock as consideration. As part of the merger, the Company changed its name from
French Bar  Industries,  Inc.  to  Paradigm  Medical  Industries,  Inc.  and the
management  of PMI assumed  control of the Company.  In April 1994,  the Company
caused a 1-for-5 reverse stock split of its shares of Common Stock. In February
1996, the Company redomesticated to Delaware pursuant to a reorganization.


                                        3

<PAGE>



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 can 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 ultrasound in  ophthalmology is limited to treatment of
cataractous lenses in the eye through a procedure called  phacoemulsification or
"phaco."  A primary  objective  of  cataract  surgeries  is the  removal  of the
opacified  (cataractous)  lens through an incision that is as small as possible.
The opacified lens is then replaced by a new synthetic lens intraocular  implant
("IOL").  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 cataractous  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 lens,  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.  Industry sources indicate that
phaco cataract treatment is the technology for cataract removal used in over 80%
of surgeries in the United States and over 20% of all foreign surgeries.

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

                                        4

<PAGE>



procedures since the 1960's.  Lasers emit photons of light 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  tissue.  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 was recently
tested in clinical  trials for limited use 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 cyclophotocoqulation).  Argon, Nd:YAG
and excimer lasers are primarily used for one or two clinical applications each.
In contrast to these conventional laser systems,  the Company's Photon(TM) laser
cataract  system is designed to be used for  multiple  ophthalmic  applications,
including  certain new applications that may be made possible with the Company's
proprietary  technology.  Such new  applications,  however,  must be  tested  in
clinical trials and be approved by the FDA.

Products

         The Company's  principal  surgical product is an ultrasonic  system for
use by  ophthalmologists  to perform  surgical  treatment  procedures  to remove
cataracts.  In 1990,  the Company  received  clearance  from the FDA pursuant to
Section  510(k)  of the Food,  Drug and  Cosmetics  Act (the  "FDC  Act") on its
Precisionist  3000(TM)  phaco  system for  cataract  surgery,  which  system was
upgraded to the  Precisionist  3000 Plus(TM) in 1994. The Company also completed
its  preclinical in vitro and in vivo (animal)  testing of its Photon(TM)  laser
cataract  surgical system and submitted a Section 510(k) Premarket  Notification
to the FDA for the Photon(TM)  laser cataract  system in September  1993, with a
follow-up  Investigational  Device Exemption  ("IDE")  application  submitted in
October 1994 to provide additional  clinical data through human cases to support
its earlier  filing.  The IDE was approved in May 1995.  Phase I clinical trials
were begun in April 1996 with  surgeries  completed  in December  1996.  Patient
follow-up examinations as mandated by the FDA study were completed in July 1997,
and the Company  submitted  its final report to the FDA  thereafter.  During the
Phase I  clinical  trials the  Company  discovered  that the Nd:YAG  (Neodymium:
Yttrium-Aluminum-Garnet)  laser system is most effective on soft cataracts. Hard
cataracts can be removed using the already existing ultrasound capability of the
Workstation(TM). The FDA approved Phase II trials on soft cataracts in May 1998.
Seven laser  systems are now  installed in the United  States and  surgeries are
being performed with trial

                                        5

<PAGE>



completion expected in the first half of 1999.

         Precisionist  3000  Plus(TM)  System.  The  Precisionist  3000 Plus(TM)
system (the "3000  Plus(TM)") is the Company's  first cataract  surgery  system,
having  been  developed  in 1992 and  enhanced  in 1994.  The system is compact,
portable  and simple to operate  with a very low  operating  cost.  The  primary
market for the 3000 Plus(TM) is in foreign  countries where phaco  technology is
emerging and  price-points  are relatively low. The 3000 Plus(TM) is also a good
when used as a back-up system. The system features a simple analog  presentation
of the ultrasound phaco equipment,  irrigation and aspiration fluidics. The 3000
Plus(TM)  provides  the basic  standard  features for phaco  surgery  including:
automated  priming and tuning,  error detection of ultrasound  handpiece and tip
functions,  audible vacuum feedback tones, ultrasound energy metering, pneumatic
high-speed anterior vitrectomy and bipolar electrosurgery coagulation.

         Precisionist Thirty Thousand(TM).  The Precisionist Thirty Thousand(TM)
(the "Thirty  Thousand(TM)") is the Company's core phaco surgical technology and
the  base  system  for  its  Precisionist  Thirty  Thousand(TM)  Ocular  Surgery
Workstation(TM).  The Thirty Thousand(TM) was placed into production and sale in
1997.  As a phaco  cataract  surgery  system,  the Company  believes  the Thirty
Thousand(TM)  with its new  fluidics  panel is equal or  superior to the present
competitive  systems in the United States.  The system  features a graphic color
display and unique  proprietary  on-board  computer and graphic  user  interface
linked to 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 Thirty Thousand(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
Thirty Thousand(TM)  features the Company's 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
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 asperation
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.

         Photon(TM) Workstation(TM). The Precisionist Thirty Thousand(TM) Ocular
Surgery  Workstation(TM)  which  comprises the base system for the  Precisionist
Thirty  Thousand(TM)  is the first  system  known by the Company  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  computer  developed for the Company.  The
computer is controlled by a proprietary software system developed by the Company
that  interfaces  with  all  components  of  the  system:  ultrasound,  fluidics
(irrigation),   aspiration,   venting,   coagulation  and  anterior   vitrectomy
(pneumatic).  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  hardware such as the Company's  Photon(TM) laser
system,  when  approved  by  the  FDA,  and  hardware  for  additional  surgical
applications are easily

                                        6

<PAGE>



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   equipment.   However,   there   is  no   guarantee   that   the
Workstation(TM) will be accepted in the market place.

         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 the  Company's  Precisionist  Thirty  Thousand(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 the Company.  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  Photofragmentation   Probe(TM)  (the
"LCP(TM)").  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.
The Company's  Phase I clinical trials  demonstrated  that this probe can 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  which  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 Workstation(TM).
The  Company  intends to refine  the laser  delivery  system and laser  cataract
surgical technique used on soft cataracts through expanded research and clinical
studies.  As far as the  Company  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 plasmatize  cataract tissue
at a  precise  location  inside  the eye  while  simultaneously  irrigating  and
aspirating the site.

         The Company's  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  present  risk of  complication  both during and after
surgery.  In  contrast,   the  Company's  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-cataractous  tissues
within the eye, the  Company's  Photon(TM)  laser  cataract  system  should only
affect tissues it comes into direct contact with.

         Surgical Instruments,  Accessories and Disposables.  In addition to the
cataract surgery equipment, the Company is aggressively pursuing development and
product   introductions  for  a  range  of  cataract  surgery   instruments  and
accessories  that  will be sold  with  its  surgical  systems  and to fit  other
competitive  systems. In January 1998, the Company received FDA 510(k) clearance
for a line of proprietary  titanium  ultrasonic phaco needles it produces at its
Salt Lake City  facility.  The needles  were  released for sale in May 1998 in a
sterile Phaco PAK(TM).  In May 1998, the Company  received FDA 510(k)  clearance
for a line of irrigation/aspiration probes and tips. Product release occurred in

                                        7

<PAGE>



October 1998. These products and additional  instruments were previously sourced
from  third-party  vendors.  The Company  believes  that by  developing  its own
instruments  and  accessories  it can  improve  product  performance,  introduce
innovative  differentiation  and improve sales margins.  The Company's  surgical
systems utilize or will utilize accessory  instruments and disposables,  some of
which are proprietary to the Company. These include replacement ultrasound tips,
sleeves,  tubing sets and fluidics packs,  instrument  drapes and laser cataract
probes.  The Company intends to expand its disposable  accessories as it further
penetrates the cataract  surgery  market and expands the treatment  applications
for its Workstation(TM).

         Diagnostic  Eyecare Products.  Glaucoma is a leading cause of 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 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.  Several  companies produce color Doppler equipment
in the $150,000 price range intended to provide measurement of ocular blood flow
activity in order to diagnose and treat glaucoma at an earlier stage.

         In June 1997,  the Company  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.  The Company's  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.  The
Company has secured a license  granting it the exclusive right to private label,
package and market the  product in the United  States,  with full  international
marketing rights.

         Blood Flow Analyzer(TM). This is the Company's first diagnostic eyecare
device.  The device is manufactured for the Company and is being marketed by the
Company pursuant to a license agreement. The device is a portable desktop system
that  utilizes  a  proprietary   patented  pneumatic  Air  Membrane  Applanation
Probe(TM)  (the  "AMAP(TM)")   which  is  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 wave form profile which can
be  correlated  to blood flow  volume  within the eye.  The blood flow volume is
calculated by a  proprietary  software  algorithm  developed by David M. Silver,
Ph.D, at Johns Hopkins.  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.  The Company  markets the Blood Flow  Analyzer(TM)  as a stand-alone
Model 100 SE unit, and packaged with a custom built computer system as the Model
100 LE. The Blood Flow Analyzer(TM)  utilizes a single- use disposable cover for
its AMAP(TM)  corneal probe which is shipped in sterile  packages.  The AMAP(TM)
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 the Company
commenced selling the system in September 1997. In addition to the Humphrey

                                        8

<PAGE>



products,  this diagnostic  product will permit the Company to expand its market
to  approximately  35,000  optometric  practitioners  in the  United  States  in
addition to the  approximately  18,000  ophthalmic  practitioners  who currently
perform eye surgeries and are  candidates  for the Company's  surgical  systems.
International  sales of the Blood Flow  Analyzer(TM) will be further expanded in
1999.

         Pachymetric Analyzer.  Paradigm produces the Ultrasonic Pachymeter used
for measurement of corneal  thickness.  The Company  anticipates  steady monthly
sales with the  positioning  of this  product  for use in  conjunction  with the
popular LASIK  (refractive laser surgery)  procedure.  Delivery of the Company's
backlog of the first eight units began December 1998.

         Ultrasonic A Scan.  The  Ultrasonic A Scan was and remains the industry
standard for axial length eye  measurement,  which is a  prerequisite  procedure
reimbursed by Medicare and is performed before every cataract  surgery.  Product
shipments began in January  1999.  Over 5,000 Humphrey model A-Scan systems have
been  installed in the  worldwide  market,  representing  a  substantial  market
opportunity for software upgrades and extended warranty contract sales.

         Ultrasonic A/B Scan. 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.

         Ultrasonic  Biomicroscope  ("UBM").  The UBM was  developed by Humphrey
Systems in conjunction  with the New York Eye and Ear Infirmary in Manhattan and
the University of Toronto.  The UBM creates a high-resolution  computer image of
the unseen parts of the eye that is a "map" for the glaucoma surgeon. The UBM is
an  "enabling   technology"  for  the  ophthalmologist   that  the  Company  has
repositioned  for  broader  market  sales  penetration.  Formerly  sold  only to
glaucoma sub- specialty  practitioners,  the Company  reintroduced  the UBM at a
price-point (Retail List $39,500) targeted for the average  practitioner seeking
to add glaucoma  filtering  surgical  procedures and income to his/her  cataract
surgical  practice.  The UBM related  surgical  filtering  procedures  are fully
reimbursable  by Medicare  and  insurance  providers.  This  untapped new market
positions the Company as a leader in the rapidly expanding  glaucoma imaging and
treatment   segment.   The  UBM  was  introduced  at  the  American  Academy  of
Ophthalmology  meeting in November 1998 and secured eight system sales with cash
deposits  from  domestic  and  foreign  customers.  At  the  time  these  orders
represented  the  Company's  total  projected  unit sales for fiscal 1999.  As a
result,  and based on recently  submitted  foreign dealer sales  forecasts,  the
Company  has revised  its UBM unit sales  projections  upward and plans to begin
1999 shipments  earlier than projected to meet a potential  steady- state demand
of five systems per month.

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 they

                                       9

<PAGE>



can offer this procedure to their 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 uncertainty and 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.

         Current Market  Acceptance and Potential.  As of December 31, 1998, the
Company  had  distributed  over 60  Precisionist  3000 and 3000  Plus(TM)  phaco
systems since the introduction of the systems,  fourteen of the new Precisionist
Thirty  Thousand(TM)  Workstation(TM)s  and eleven  Photon(TM)  Laser  Phaco(TM)
Workstation(TM). The principal purchasers have been ophthalmologists and clinics
in many countries throughout the world. The Company believes that the market for
its  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, (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 the Company's laser
system.

         Marketing    Organization.    The   Company    markets   its   products
internationally  through a network of dealers and  domestically  through  direct
sales  representatives  and manufacturer's  representatives.  As of December 31,
1998,  the  Company  had  six  direct  domestic  sales  representatives  and one
manufacturer's  representative  in the  United  States  and  twenty-one  foreign
dealers.  This  is  in  addition  to  the  fifty-three  ParadigmPharmacia&Upjohn
Alliance  representatives  domestically.  All of these sales representatives are
assigned exclusive  territories and have entered into contracts with the Company
that contain  performance  quotas.  The Company also plans to continue to market
its products by identifying  customers  through internal market research,  trade
shows and  direct  marketing  programs.  The  Company  also  utilizes 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 the Company's products.

      The Company, when marketing its surgical  Workstation(TM),  will emphasize
the expandable features of the Workstation(TM). The Company's marketing approach
will be to focus on the upgradeability of the Workstation(TM) and to develop the
image  of the  Workstation(TM)  as the  most  versatile,  upgradeable  and  cost
effective surgical equipment  available.  The Company will continue to focus its
sales  efforts  towards  ophthalmic  hospital  and  surgical  center  facilities
specializing in cataract surgery. However, as systems are installed, the Company
will  expand  its focus to provide  additional  ophthalmic  and non-  ophthalmic
surgical  applications  as  part  of its  Workstation(TM).  Additional  surgical
applications  will  expand  the  market  for  the  Workstation(TM)  as  well  as
associated sales of disposable surgical products.

      The Company  disseminated  the  innovative  capabilities  of its  products
through advertisement and

                                       10

<PAGE>



printed  materials at the Company's  annual  exhibition at the annual meeting of
the American  Academy of  Ophthalmology  in New  Orleans,  Louisiana in November
1998.  The  theme  of  the  Company's   advertisement  for  its  Ocular  Surgery
Workstation(TM)  was "The Future of Phaco is the Future of Ophthalmic  Surgery."
The  Company  will  expand  upon  the  concept  of  the  "Workstation(TM)"  with
additional  advanced  laser and  surgical  capabilities.  The  Company  has also
launched a campaign for the Blood Flow  Analyzer.  The product was introduced to
the ophthalmic  marketplace at the American Academy of Ophthalmology  meeting in
October 1997 and to the  Optometric  marketplace  at the  California  Optometric
Association  and Vision Expo Easy New York meetings.  The theme of the Company's
advertisement  for its Blood Flow Analyzer was "Don't Miss Half of Your Glaucoma
Patients... A Fast, Clinically Proven Test For Ocular Blood Flow".

      Product  advertising is focused in the three  industry  trade  newspapers,
Ocular Surgery News, Ophthalmology Times and the American Optometric Association
News. 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 the Company's  technology  and products,  as
evidenced by several recent front page articles in these publications.

      Manufacturing  and  Raw  Materials.  Currently,  the  Company  has a small
manufacturing and warehousing facility located in Salt Lake City. All components
and  the  finished  surgical  systems  are  manufactured  under   subcontracting
arrangements.  None of these companies  manufactures  products that compete with
the Company's  products.  All component and systems  manufacturing  is performed
under  a  system  of  quality  control  and  testing.  As a  condition  to  such
contracting,  each subcontractor's  manufacturing  facilities and personnel must
comply with the Good Manufacturing Practices (GMP) guidelines established by the
FDA, as well as similar guidelines established by foreign governments, including
CE Mark and IS0-9001.

      The Company  currently  subcontracts  the manufacture of its  Precisionist
Thirty Thousand(TM) system to one of its stockholders, Zevex International, Inc.
("Zevex"),  which is located in Salt Lake City,  Utah.  The remaining  operating
elements  of  the  Photon(TM)   laser  cataract   system  are  resident  in  the
Precisionist Thirty Thousand(TM) system supplied by Zevex.  Although substantial
reliance is currently  placed with Zevex,  the Company believes it would be able
to find alternative  manufacturers  for its products  currently  manufactured by
these two sources,  including in-house manufacturing by the Company. The Company
also believes that there are multiple  sources of raw materials that are used or
could be used in its products. See "Certain Transactions."

      The laser cavity,  optical train and power source for the Photon(TM) laser
cataract  system  are  supplied  by  Sunrise  Technologies,   Inc.  in  Fremont,
California  ("Sunrise").  The Company has established an internal laser cataract
probe  manufacturing  facility and plans to have all probe production take place
in Salt Lake City.  The remaining  operating  elements of the  Photon(TM)  laser
cataract  system,  the  computer  controller,  fluidics and  ancillary  surgical
modalities,  are  developed  through  Zevex.  Although  substantial  reliance is
currently  placed with Zevex and Sunrise,  the Company believes it would be able
to find alternative  manufacturers  for its products  currently  manufactured by
these two sources.  The Company also believes that there are multiple sources of
raw materials that could be used in its products.

      The  Company  subcontracts  the  manufacturing  of some  of its  ancillary
instruments, accessories and disposables through specified vendors in the United
States. These products are contracted in quantities

                                       11

<PAGE>



and at costs consistent with the Company's financial purchasing capabilities and
pricing  needs.  The Company  manufactures  the LCP(TM) laser cataract probe and
some of its surgical instruments,  accessories and fluidics surgical tubing sets
at its facility in Salt Lake City.

      The Blood Flow  Analyzer(TM)  is manufactured by OBF Labs. The analyzer is
repackaged  by the Company  using a module cover  designed by the Company and is
also being  marketed  under the  Company's  trade name and mark.  The  Company's
License and Manufacturing Agreement with OBF Labs continues through December 31,
2000 and is  automatically  renewable for successive one year additional  terms,
unless  either  party gives  written  notice to the other party at least 90 days
prior to the  expiration  of the term.  Service  for the  Company's  products is
overseen  from its Salt Lake City,  Utah  headquarters  and is  augmented by its
international  dealer network,  which dealers also provide technical service and
repair.  Installation,  on-site  training  and  a 12 to 18  month  warranty  are
included as the standard terms of sale. The Company provides  distributors  with
replacement  parts at no charge during the warranty period. To date, the Company
has  incurred  minimal  expenses  under  this  warranty  program.  International
distributors are responsible for installation, repair and other customer service
to  installed  systems  in  their  territory.   All  system  parts  are  modular
sub-components  that are easily removed and replaced.  The Company  maintains an
adequate parts inventory and provides 24 hour replacement  parts shipment to its
dealers.  After the warranty period expires, the Company offers one year service
contracts  to its  domestic  customers  and  will  continue  to  sell  parts  to
international  dealers  who in turn create  their own  service  plans with their
customers.  As of  December  31,  1998,  the  Company  has not sold any one year
service contracts.

      Product  Service  and  Support.  Service  for the  Company's  products  is
overseen  from its Salt Lake City,  Utah  headquarters  and is  augmented by its
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. The Company provides  distributors  with replacement
parts at no charge during the warranty period. To date, the Company has incurred
minimal  expenses under this warranty  program.  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.  The  Company  maintains  an  adequate  parts
inventory  and provides  overnight  replacement  parts  shipment to its dealers.
After the warranty  period  expires,  the Company offers one year and three year
service  contracts to its domestic  customers and will continue to sell parts to
international  dealers  who in turn create  their own  service  plans with their
customers.  As of  December  31,  1998,  the  Company  has not sold any  service
contracts.

      Third-Party Reimbursement. It is expected that the Company's laser systems
and  diagnostic  systems will  generally be  purchased by  ophthalmologists  and
hospitals as well as optometrists who will then bill various  third-party payors
for the health care services  provided to their  patients.  These payors include
Medicare, Medicaid and private insurers. Government agencies generally reimburse
at a  fixed  rate  based  on the  procedure  performed.  Some  of the  potential
procedures for which the Photon(TM)  laser cataract  systems may be used, may be
determined to be elective in nature,  and third-party  reimbursement  may not be
available  for  such  procedures,  even if  approved  by the FDA.  In  addition,
third-party  payors may deny  reimbursement if they determine that the procedure
was unnecessary,  inappropriate, not cost-effective,  experimental or used for a
non-approved  indication.  There can be no  assurance  that  reimbursement  from
third-party payors will be available,  or if available,  that reimbursement will
not be  limited,  thereby  having a  material  adverse  effect on the  Company's
ability to develop new products on a profitable basis, its operating results and
financial

                                       12

<PAGE>



condition.

      Co-Distribution  Agreement  with  Pharmacia & Upjohn  Company and National
Healthcare   Manufacturing   Corporation.   The  Company  has  entered   into  a
Co-Distribution  Agreement as of June 26, 1998 with  Pharmacia & Upjohn  Company
and  National  Healthcare  Manufacturing  Corporation,  which  provides  for the
marketing  and sale of a range of  ophthalmic  products.  Under the terms of the
Co-Distribution   Agreement,  the  Company,  Pharmacia  &  Upjohn  and  National
Healthcare will offer a comprehensive  package of products to cataract surgeons,
including cataract surgical  equipment,  intraocular lens implants,  intraocular
pharmaceuticals,  surgical instruments and sterile procedural packs. The Company
will provide the Precisionist ThirtyThousand(TM) for distribution and sale under
the Co-Distribution Agreement. The Pharmacia & Upjohn products to be distributed
as part of the Co-  Distribution  Agreement  include  Healon(R) and  HealonGV(R)
viscoelastic  solution and the CeeOn line of foldable,  small  intraocular  lens
implants,  designed to replace the natural lens removed during cataract surgery.
It is too soon to determine the full effect of these  agreements on the Company.
However,  some possible  benefits may be lower marketing costs for the Company's
products and a greater  appeal of the Company's  products to hospitals and other
buyers who prefer a comprehensive and more cost-effective package.

Research and Development

      The  Company's  primary  market for its surgical  products is the cataract
surgery  market.  However,  the  Company  believes  that its laser  systems  may
potentially  have broader  ophthalmic  applications.  Consequently,  the Company
believes that a strong research and development  capability is important for the
Company's  future.  The Company has enlisted  several  recognized  and respected
consultants  and other  technical  personnel  to act in  technical  and  medical
advisory  capacities.  Several  of  these  consultants  serve  on the  Company's
Clinical  Advisory Board to provide expert and technical support for current and
proposed  products,  programs  and services of the  Company.  In  addition,  the
Company is conducting  research in conjunction  with MEOS Photonics  through the
University of Utah Medical Laser Laboratory.  The research is aimed at improving
the laser system's  performance  for cataract  surgery and exploring  additional
surgical applications.

      The Company believes its research and development  capabilities provide it
with the ability to respond to regulatory developments,  including new products,
new  product  features  devised  from its  users  and new  applications  for its
products on a timely and  proprietary  basis.  The  Company  intends to continue
investing in research and  development  and to strengthen its ability to enhance
existing  products  and develop new  products.  The  Company  spent  $288,854 on
research  development in fiscal year ended  September 30, 1996,  $480,584 in the
three months ended December 31, 1996, $540,148 in fiscal year ended December 31,
1997 and $298,187 in the year ended December 31, 1998

Competition

      General.  The Company is subject to  competition  in the  cataract and the
glaucoma surgery markets,  and the glaucoma diagnostic market 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.  The surgical equipment
industry is dominated by 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

                                       13

<PAGE>



lines. The Company believes that the combined sales of five entities account for
over 90% of the ophthalmic  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.  Presently,  products  currently in
use are  offered by the major  manufacturers  utilizing  ultrasonic  technology.
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,  the Company  anticipates 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.  The  Company's
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 the Company with the
quality control and income capability of cassette sales.

      The typical list price of a competitive  advanced ultrasonic system ranges
from approximately $60,000 to $100,000.  Lower cost models generally have a list
price  ranging  from  approximately  $30,000 to $60,000.  The list price for the
Precisionist Thirty Thousand(TM) ocular surgery system is $89,900. The Company's
Photon(TM)  Laser Phaco(TM) will be sold at a price of  approximately  $129,000.
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 has provided a niche for
the emerging smaller companies discussed above.

      Ultrasound  Equipment  Manufacturers.  As a relatively recent entrant into
the cataract surgical  equipment market with a newer equipment line, the Company
is  establishing  itself and, as yet, does not hold a  significant  share of the
market. The Company currently recognizes Bausch & Lombe, Alcon Laboratories, and
Allergan  Medical  Optics as its primary  competitors  in the  ultrasound  phaco
cataract equipment market.

      Laser  Equipment  Manufacturers.  To the  Company's  knowledge,  there are
several  other  companies  attempting  to develop  laser  equipment for cataract
surgery.  Based on the  information  currently  available to the Company,  these
competitive laser companies appear to offer a less viable

                                       14

<PAGE>



means of treating  cataracts using laser  technology.  The Company believes that
there is presently no directly competing Nd:YAG laser-assisted cataract surgical
system  available in the market.  The Company also  believes that its 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, the Company is seeking to exploit these
opportunities.  Depending upon further developments,  the Company may ultimately
exploit  those  opportunities  through a merger with a stronger  entity  already
established or one that desires to enter the medical industry.

      The Company believes that its ability to compete  successfully will depend
on  its  capability  to  create  and  maintain  advanced   technology,   develop
proprietary products, attract and retain scientific personnel,  obtain patent or
other proprietary protection for its 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 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 near sighted. The Glaucoma Research Foundation recommends
that these high risk  individuals  be tested once every two years 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.

      The Company is 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 the Company believes account for the majority of
diagnostic equipment sales. The Company expects to derive revenues from the sale
of its newly acquired 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.  The blood flow analyzer has a list price  ranging from  approximately
$13,500 and $20,000.  Other  ophthalmic  diagnostic  devices which do not detect
glaucoma  in the early  stages of the  disease  as does the  Company's  analyzer
retail at  comparable  prices.  The Company thus believes that it can compete in
the diagnostic  market place based upon the lower price and improved  diagnostic
functions of the analyzer.

      The Glaucoma  Surgery  Market.  The glaucoma  surgery market is similar in
composition to the retinal diagnostic market. The market is dominated by several
large companies.  Because there are existing glaucoma and laser surgery products
in the  market,  the  Company  hopes to be able to enter the  market  relatively
quickly  through FDA Section  510(k)  clearance of its new systems and products.
The Company believes that it can compete in this established  marketplace  since
it  will  be  offering  its  glaucoma   surgery  system  as  an  add-on  to  its
Workstation(TM).  The Company  believes that its  Workstation(TM)  will give the
Company a competitive advantage to gain a position in the marketplace.

                                       15

<PAGE>




Intellectual Property Protection

      The  Company's  cataract  surgical  products  are  proprietary  in design,
engineering and  performance.  The Company's  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.

      The Photon(TM)  laser  cataract  probe is protected  under a United States
patent issued in 1987 to Daniel M. Eichenbaum, M.D. and subsequently assigned by
Photomed  International,  Inc. ("Photomed") and a Japanese patent issued in 1997
to the Company for the utility  and methods of laser  ablation,  aspiration  and
irrigation of tissue through a hand-held  probe of a unique design.  The Company
secured the exclusive  worldwide  right to this patent  shortly after its issue,
and to the  international  patents pending,  from Photomed by means of a license
agreement  (the  "License  Agreement").  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 sub-specialties other than
ophthalmology  for which the Company would receive royalty  payments equal to 1%
of the  proceeds  from the net  sales of  products  utilizing  the  patent.  See
"Management" and "Certain Relationships and Related Transactions."

      OBF Labs, the manufacturer of the Blood Flow Analyzer(TM) that the Company
markets in the United States under a non-exclusive  license agreement,  has been
granted a patent in the European  Economic  Community  and the United States and
has a patent pending in Japan.

      Although the Company's trademarks are important to its business, it is not
the  Company's  policy  to pursue  trademark  registrations  for its  trademarks
associated  with its products.  Consequently,  the Company  relies on common law
trademark  rights to protect its  unregistered  trademarks,  although common law
trademark rights do not provide the Company 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.

      The Company also relies on trade secret law to protect some aspects of its
intellectual  property.  All of the Company's  key  employees,  consultants  and
advisors  are  required  to  enter  into a  confidentiality  agreement  with the
Company.  Most of the Company's  third-party  manufacturers  and formulators are
also bound by confidentiality agreements with the Company.

Regulation

      The  Company's  surgical and  diagnostic  systems are regulated as medical
devices by the FDA under the FDC Act. 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
the Company to show reasonable  assurance of safety and effectiveness  regarding
its  products.  Pursuant  to the FDC 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

                                       16

<PAGE>



approval for devices, recommendations by the FDA that the Company not be allowed
to enter into government contracts, and criminal prosecution.

      Following the enactment of the Medical Device Amendments to the FDC 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,  Premarket  notification and
adherence to the FDA's Good  Manufacturing  Practice ("GMP")  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  Premarket  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 Premarket  notification  filing under
Section  510(k) of the FDC 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 PMA, the  manufacturer  or
distributor  may seek FDA Section 510(k)  Premarket  clearance for the device by
filing a Section 510(k) Premarket 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  IDE  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 Premarket  clearance for the device.  There can be no
assurance that the Company will obtain Section  510(k)  Premarket  clearance for
any of the future devices for which the Company seeks such  clearance  including
the Photon(TM) Laser.

      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 PMA,  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 the Company's
market  introduction of its products and could have a material adverse effect on
the Company's business, operating results and financial condition.

      The alternate method to seek approval is to obtain Premarket 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 Premarket
approval for the proposed device.  A PMA 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 IDE
application with the

                                       17

<PAGE>



FDA prior to commencing  human  clinical  trials.  The IDE  application  must be
supported  by data,  typically  including  the results of animal and  mechanical
testing. If the IDE 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 IDE clinical trial can be
divided  into  several  parts or Phases.  Sometimes,  a company  will  conduct a
feasibility study to confirm that a device functions according to its design and
operating parameters.  This is 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
PMA 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 IDE, the Premarket  approval  procedure is
more complex and time consuming.

      Upon  receipt  of  the  PMA   application,   the  FDA  makes  a  threshold
determination  whether  the  application  is  sufficiently  complete to permit a
substantive review. If the FDA determines that the PMA 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 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 GMP requirements prior to approval of a PMA.
While the FDA has responded to PMA applications within the allotted time period,
PMA reviews  generally take  approximately 12 to 18 months or more from the date
of filing to approval.  The PMA process is lengthy and expensive,  and there can
be no assurance  that such  approval  will be obtained for any of the  Company's
products determined to be subject to such requirements.  A number of devices for
which PMA approval has been sought by other  companies  have never been approved
for marketing.

      Any products  manufactured  or  distributed  by the Company  pursuant to a
premarket clearance  notification or PMA are or will be subject to pervasive and
continuing  regulation  by the FDA. The FDC Act also requires that the Company's
products be manufactured in registered establishments and in accordance with GMP
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 the Company's  products may be regulated by
various state agencies.

      All lasers  manufactured  for the  Company  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

                                       18

<PAGE>



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  the Company  believes  that it and its  manufacturers  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 the Company.
In addition to the foregoing,  the Company is 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 substance.  There can be no assurance that the
Company 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 the Company's ability to conduct business.

      The  Company  and  the  manufacturers  of the  Company's  products  may be
inspected  on a  routine  basis  by  both  the  FDA and  individual  states  for
compliance with current GMP 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,  the Company
cannot predict the content of any federal health care program,  if any is passed
by Congress, or its effect on Company and its business.  Some measures that have
been suggested as possible  elements of a new program,  such as government price
ceilings on nonreimbursable procedures and spending limitations on hospitals and
other  healthcare  providers for new equipment,  could have an adverse effect on
the Company's 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 the  Company's
business could result in volatility of the market price of the Company's  Common
Stock.

      Furthermore,  the  introduction  of  the  Company's  products  in  foreign
countries may require the Company to obtain foreign regulatory  clearances.  The
Company believes that only a limited number of foreign  countries have extensive
regulatory  requirements,  including France,  Germany, Korea 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 PMA, Section 510(k)
or approved IDE 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.  The  Company's  two  ultrasound  systems,  the
Photon(TM)  laser cataract system the Company is 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
effectiveness  of the Company in obtaining  the necessary  approvals.  Having an
approved IDE allows the Company to export a product to qualified

                                       19

<PAGE>



investigational sites.

Regulatory Status of Products

      The Precisionist  3000 Plus(TM) and the Precisionist  Thirty  Thousand(TM)
Systems.  Pursuant  to Section  510(k) of the FDC Act,  the FDA  granted  market
clearance for the  commercialization of the Precisionist 3000 Plus(TM) system in
1990 and the Precisionist  Thirty  Thousand(TM) system in 1995, thereby allowing
the Company to sell these devices in the United States for their intended use as
cataract  surgical  systems.  That  clearance,  in turn, has allowed for similar
approvals in several foreign  countries,  allowing sales to be undertaken in all
of those  countries.  Because  no  approvals  are  required  in many  developing
countries,  including  several  countries in the Middle East and Latin  America,
those areas are potentially viable markets.

      Applications for approval in other western  countries,  including  Germany
and France, are currently pending. Under present  circumstances,  although there
is no assurance,  approval of the German application is expected. Because France
places substantial credence in German approvals, it is expected that approval in
France  will follow  sometime  thereafter.  In Japan and Korea,  the Company has
provided the  Precisionist(TM)  system to established  dealers that have applied
for approval in those respective countries.

      The Photon(TM) Laser Cataract System. The Company acquired permission from
the FDA to  manufacture  the  device  and  approval  to export  it to  qualified
investigator  sites  outside the United  States under an open IDE granted by the
FDA in May 1995.  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 the Company 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
the Company's belief that the surgical treatment method used with the Photon(TM)
laser cataract is similar to the current ultrasound  cataract treatment employed
by ophthalmologists. The Company thus believes that it can obtain Section 510(k)
clearance for the Photon(TM) laser cataract system sometime in 1999.

      The Company submitted its Premarket  Notification  under Section 510(k) of
the FDC Act for the Photon(TM)  laser cataract system in September 1993. The FDA
requested  clinical support data for claims made in the Section 510(k) Premarket
Notification,  and in October 1994 the Company  submitted an IDE  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 IDE in May 1995. The Company began human clinical  trials in April 1996 and
completed the clinical  surgeries in December 1996.  Through the clinical trials
the  Company  discovered  that the  Photon(TM)  laser  cataract  system  may not
effectively  remove harder grade cataracts.  Hard cataracts can be removed using
the already existing ultrasound  capability of the Workstation(TM).  The Company
has requested and received FDA approval to conduct Phase II clinical  studies at
seven sites in hopes of refining the laser system and surgical  method to remove
cataracts and provide the  statistical  data required to approve the  Photon(TM)
laser system for laser cataract removal.  There is no guarantee,  however,  that
the Company will be  successful  in improving  the laser system to remove harder
grade cataracts.

      Blood  Flow  Analyzer(TM)  (Paradigm  BFA(TM)).  The  FDA  granted  market
clearance pursuant to Section

                                       20

<PAGE>



510(k)  of the FDC Act,  for the  commercial  sale of the  Paradigm  Blood  Flow
Analyzer in June 1997 for the intended use and claims of  applanation  tonometry
and blood flow analysis.  The clearance allows immediate marketing in the United
States for this new product  and allows the  Company to expand its product  base
into the ophthalmic office and optometric office with a diagnostic system.

Employees

      As of December 31,  1998,  the Company had 20  full-time  employees.  This
number does not include the  Company's  manufacturer's  representatives  who are
independent  contractors rather than employees of the Company.  The Company also
utilizes  several  consultants and advisors.  There can be no assurance that the
Company will be successful in recruiting or retaining key personnel. None of the
Company's  employees  is a member  of a labor  union and the  Company  has never
experienced any business interruption as a result of any labor disputes.

Item 2. Description of Property
-------------------------------

      The Company's  executive  offices are currently  located at 1127 West 2320
South,  Suite A, Salt Lake City,  Utah. This facility  consists of approximately
4,397  square  feet of leased  office  space  under a three year lease that will
expire on December 31, 2000 with an  additional  three year renewal  option.  An
additional 3700 square feet were added in October, 1998 in the building adjacent
to its current facility,  which is owned by the same landlord.  These facilities
are leased from Eden Roc, a  California  partnership,  at a base monthly rate of
$6,315 plus a variable  monthly  common  maintenance  area fee. The base monthly
rent increases to $6,415 and $6,518 for the second and third years of the lease,
respectively.  Pursuant  to the  lease,  the  Company  pays all real  estate and
personal  property  taxes and the insurance  costs on the premises.  The Company
believes  that these  facilities  are  adequate  and  satisfy  its needs for the
foreseeable future.

Item 3. Legal Proceedings
-------------------------

      The Company is not a party to any material  legal  proceedings  and is not
aware of any threatened legal proceedings which may be brought against it.

Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
      None.

                                     PART II
                                     -------

Item 5. Market for Common Equity and related Stockholder Matters
----------------------------------------------------------------

      The Authorized  capital stock of the Company consists of 20,000,000 shares
of Common Stock,  $.001 par value per share,  and 5,000,000  shares of Preferred
Stock,  $.001 par value per share.  The  Company  has  created  four  classes of
Preferred  Stock,  designated  as Series A Preferred  Stock,  Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock.

      The  Company's  Common  Stock and  Class A  Warrants  trade on The  Nasdaq
SmallCap  Market under the  respective  symbols of "PMED" and "PMEDW."  Prior to
July 22, 1996,  there was no public market for the Common Stock. As of March 25,
1999 the closing sale prices of the Common

                                       21

<PAGE>



Stock and  Class A  Warrants  were  $3.250  per  share  and  $.531 per  warrant,
respectively.  The  following  are the high and low sales  prices for the Common
Stock and Class A Warrants by quarter as reported by Nasdaq since July 22, 1996.

<TABLE>
<CAPTION>

                                                         Common Stock                         Class A Warrants
                                                          Price Range                            Price Range
          Period (Calendar Year)            High                Low                        High                 Low
<S>                                         <C>                 <C>                       <C>                   <C>
1996
  Third Quarter (since July 22, 1996).....  6                   2                         1-3/16                1/8
  Fourth Quarter..........................  5-5/8               2-7/8                     1-7/16                7/16

1997
  First Quarter...........................  6-3/8               3                         1-9/16                3/4
  Second Quarter..........................  5-3/4               3                         1                     1/2
  Third Quarter...........................  6                   1-9/16                    1-3/8                 1/8
  Fourth Quarter..........................  4-5/8               2-7/16                    7/8                   1/4

1998
  First Quarter...........................  4-11/16             2-7/8                     15/16                 1/4
  Second Quarter..........................  6-1/2               3-13/16                   1-5/16                1/4
  Third Quarter...........................  4-9/16              2-1/2                     11/16                 7/16
  Fourth Quarter..........................  3                   1-9/16                    1-3/16                7/16

</TABLE>

      The  Company's  Series A Preferred  Stock,  Series B  Preferred  Stock,
Series C Preferred  Stock and Series D Preferred Stock are not publicly traded.
As of March  25,1999,  there were 653 record  holders of Common Stock,  8 record
holders of Series A  Preferred  Stock,  6 record  holders of Series B  Preferred
Stock,  3 record  holders of Series C Preferred  Stock and 72 record  holders of
Series D Preferred Stock.

      The Company has never paid any cash dividends on its Common Stock and does
not anticipate  paying any cash dividends on its Common Stock in the foreseeable
future.  The  Company  must  pay  cash  dividends  to  holders  of its  Series A
Preferred,  Series B Preferred,  Series C Preferred and Series D Preferred Stock
before it can pay any cash  dividend to holders of its Common  Stock.  Dividends
paid in cash pursuant to outstanding shares of the Company's Series A, Series B,
Series C and Series D Preferred Stock are only payable from surplus  earnings of
the Company and are  non-cumulative  and therefore,  no deficiencies in dividend
payments  from one  year  will be  carried  forward  to the  next.  The  Company
currently intends to retain future earnings, if any, to fund the development and
growth of the Company's  proposed  business and operations.  Any payment of cash
dividends in the future on the Common Stock will be dependent upon the Company's
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 the  Company's  Board of Directors
deems  relevant.  The Company  issued 6,764 shares of its Series A Preferred and
6,017 shares of its Series B Preferred on January 8, 1996 as a stock dividend to
Series A and Series B shareholders of record as of December 31, 1994.

Item 6. Management's Discussion and Analysis or Plan of Operation
-----------------------------------------------------------------

General

      The following Management's  Discussion and Analysis of Financial Condition
and Results of Operations,  contains  forward looking  statements  which involve
risks and uncertainty. The Company's actual results could differ materially from
those anticipated in these forward looking statements as a

                                       22

<PAGE>



result of certain factors discussed in this section. The Company has changed its
fiscal year to the period from January 1 to and including December 31.

      The Company is engaged in the design, development, manufacture and sale of
high technology eye care products.  The Company's surgical equipment is designed
to perform  minimally  invasive  cataract  surgery and is  comprised of surgical
devices and related instruments and accessories,  including disposable products.
The Company's ultrasound diagnostic products include a pachymeter, an A-Scan, an
A/B Scan and a  biomicroscope,  the  technology  for  which  was  acquired  from
Humphrey  Systms in 1998.  In  addition,  the  Company  markets  its Blood  Flow
AnalyzerTM.  Paradigm's activities for the twelve months ended December 31, 1998
include domestic and international sales of the Precisionist Thirty Thousand(TM)
Ocular  Surgery  Workstation(TM)   cataract  surgery  systems,  the  Blood  Flow
Analyzer(TM)  , the  Humphrey  Systems  ultrasound  diagnostic  equipment  , and
research and development on the Photon(TM)  laser cataract  removal system which
received FDA approval for expansion to Phase II Clinical Trials on May 19, 1998.

      In July 1998,  the Company  announced  the  acquisition  of the  exclusive
manufacturing rights to four FDA-approved ophthalmic diagnostic instruments from
Humphrey Sysems,  a division of Carl Zeiss,  Inc. which complement the Company's
cataract surgical equipment and its Blood Flow AnylyzerTM. The Company commenced
delivery of the  Pachymetric  Analyzer,  which measures  corneal  thickness,  in
December, 1998 and the Ultrasound A-Scan, which measures the axial length of the
eye, in March,  1999. The Company  expects to begin  shipments of the Ultrasound
A/B Scan, which is used by retinal specialists to identify foreign bodies in the
posterior  chamber of the eye and in evaluating the structural  integrity of the
retina,  in the second quarter of 1999. The  Ultrasonic  Biomicroscope  ("UBM"),
which creates a  high-resolution  computer  image of the unseen parts of the eye
providing a map for the glaucoma surgeon, should commence shipments in the third
quarter of 1999. In summary,  management  expects all four  instruments to be in
production in the third quarter of 1999.

Results of Operations

      Fiscal year Ended December 31, 1998 Compared to Fiscal year Ended December
31, 1997.

      Sales increased by $794,000,  or 171%, to $1,258,000 for the twelve months
ended  December 31, 1998 from $464,000 for the  comparable  period in 1997.  The
higher  level of  sales  in  fiscal  1998  was  primarily  due to the sale of 21
Precisionist  Thirty  ThousandTM  and 17 Blood Flow  Analyzers  compared  with 8
Precisionist  Thirty ThousandTM and 3 Blood Flow Analyzers in fiscal 1997. Sales
of  products  in the  surgery  equipment  market are  contingent  upon  customer
evaluation and  acceptance.  In 1998,  two  Precisionist  Thirty  Thousands were
returned compared with five in 1997 when certain software and hardware revisions
were identified and corrected.  With the  introduction of teh new fluidic system
in March 1999 for the Precisionist Thirty Thousand  WorkstationTM,  coupled with
the  shippment  of the four new  ophthalmic  diagnostic  intruments,  management
anticipates a significant improvement in sales.

 The cost of sales increased $480,000 or 144%, to $813,000 for the twelve months
ended December 31, 1998,  from $333,000 for the  comparable  period in 1997. The
gross margin for the twelve  months ended  December 31, 1998 of 35.4%,  was 7.2%
higher  than the gross  margin  for the  comparable  period  in 1997,  of 28.2%,
primarily as a result of the amortization of capitalized  engineering and design
charges.  If the amortization of capitalized  engineering and design charges,  a
non-cash expense,

                                       23

<PAGE>



is excluded, the gross margin for 1998 was 41.3% or slightly less than the gross
margin of 41.4% for 1997.

      Marketing  and  selling  expenses  increased  by  $430,000,  or 72.8%,  to
$1,021,000 for the twelve months ended December 31, 1998,  from $591,000 for the
comparable  period in 1997.  The increase  was a result of the Company  adding a
sales  manager  and  two  additional  sales  representatives,   an  increase  in
advertising  promotional  activities  associated  with  trade  shows  and  laser
seminars for ophthalmic surgeons in conjunction with launching the Photon Ocular
Surgery SystemTM, and service problems due to software and hardware revisions to
the Precisionist ThirtyThousand(TM) Ocular Surgery Workstation(TM).

      General and administrative  expenses  increased $39,000  from$1,802,000 in
1997 or 2.2% to  $1,841,000  for the twelve  months  ended  December  31,  1998,
primarily  due to  higher  costs  associated  with the  implementation  of a new
computer network and accounting, manufacturing and inventory control system.

      Research and development expenses decreased by $242,000,  or 44.8% for the
year ended December 31, 1998,to $298,000 from $540,000 for the comparable period
in  1997.  The  decrease  was  primarily  the  result  of  the  completion  of a
substantial  part of the  engineering  and design  changes  on the  Precisionist
ThirtyThousand (TM) Ocular Surgery Workstation(TM).

      Other  expenses  decreased  by  $164,000  to  $44,000  for the year  ended
December  31,1998,  compared  to $208,000  for the same period in 1997.  This is
primarily due to the conversion of promissory notes into  convertible  preferred
stock.

     The  Company  had a net loss of  $2,759,000  or $.69 per share for the year
ended  December  31, 1998 as compared  to a net loss of  $3,010,000  or $.82 per
share for the year ended December 31, 1997, a decrease of $251,000. The decrease
was a result of increased sales and decreased research and development  expenses
offset by increased costs of sales, marketing, and selling expenses.

Upgrades

      To garner sales, the Company offers the ultrasonic Precisionist(TM) system
with an  unconditional  arrangement  under which the customer may trade in their
Precisionist(TM)  system to upgrade to a Precisionist Thirty Thousand(TM) Ocular
Surgery  System(TM).  Under this arrangement,  the customer receives full credit
for the trade in purchase price of the Precisionist(TM) system against the price
of the new Precisionist Thirty  Thousand(TM)  Ocular Surgery  System(TM).  As of
December 31, 1998, the Company has distributed approximately 51 Precisionist(TM)
systems  under this  provision.  The gross  margin on these  original  sales was
approximately  $295,000 or 32%. If all of these customers were to exercise their
upgrade privilege,  the Company would exchange the  Precisionist(TM)  system for
the Company's new Precisionist Thirty Thousand(TM) Ocular Surgery System(TM) and
refurbish  the  ultrasonic   Precisionist(TM)  systems  and  sell  them  in  the
international market. Any losses on the sale of the refurbished Precisionist(TM)
systems, which are not expected to be significant, would reduce the gross margin
on the Precisionist  Thirty  Thousand(TM)  Ocular Surgery  System(TM) sales. The
total gross margin on the upgrade  sales is estimated to be  $1,677,000  or 41%.
During the fiscal year ended December 31, 1998, there were two trade-in sales of
units totaling  $76,000  compared to two trade in sales totaling $94,000 for the
like period in 1997.

Liquidity and Capital Resources

      The Company used cash in operating activities of $2,414,000 for the twelve
months ended  December 31, 1998  compared to  $2,624,000  for the twelve  months
ended December 31, 1997. The

                                       24

<PAGE>



decrease of cash used by operating activities in 1998 is primarily  attributable
to a lower net loss. The Company used cash from investing  activities of $92,000
for the twelve  months ended  December 31, 1998  compared to cash  received from
investing  activities  of  $98,000  in fiscal  1997.  The net cash  provided  by
financing  activities  for  the  twelve  months  ended  December  31,  1998  was
$1,733,000 compared with $944,000 for the similar period in 1997. In March 1998,
the  Company  completed  the  private  placement  of  20,030  shares of Series C
Preferred  Stock at $100 per share  resulting in net proceeds of $1,739,000.  In
addition, the Company exchanged $995,000 of promissory notes for 9,950 shares of
Series C Preferred  Stock at $100 per share and the conversion of a $75,000 note
into common stock.

      In March 1999,  the Company  completed a private  placement  of  1,140,000
shares of Series D Convertible  Preferred  Stock at $1.75 per share with the net
proceeds to the Company  approximating  $1.6  million.  On a pro-forma  basis to
reflect  the  March  1999   equity  financing  as  of  December  31,1998,  total
stockholders  equity would be about $3.3 million with cash and cash  equivalents
of $1.7 million.  Based on the  Company's  1999 budget and the net proceeds from
the 1999 Preferred Stock offering, management believes that funds are sufficient
to continue  operations through December 31, 1999. However, no assurances can be
given that management's plan will be successful in achieving  positive cash flow
or profitability.

      The Company  will seek  funding to meet its working  capital  requirements
through  collaborative  arrangements and strategic alliances,  additional public
offerings and/or private placements of its securities or bank borrowings.  There
can be no  assurance,  however,  that  additional  funds,  if required,  will be
available from any of the foregoing or other sources on favorable  terms,  if at
all.

      The  Company's  ratio of  inventory  to sales for the twelve  month period
ended December 31, 1998 was .57 compared with 1.80 for a similar period in 1997.
With  the  launching  of two new  products  within  the  past  eighteen  months,
management has had to build inventory in anticipation of sales. As a result, the
ratio of inventory to sales,  particularly computed on the basis of inventory to
quarerly sales,  tends to fluctuate widely  depending on the Company's  purchase
orders with the manufacturers,  the time lags between cusomer's purchase orders,
delivery and sales, the number of demonstration units in the field, the accuracy
of the sales forecast and seasonal factors.

      At December 31, 1998,  the Company had net  operating  loss  carryforwards
(NOLs) of  approximately  $9,600,000  and  research and  development  tax credit
carryforwards of approximately  $34,000.  These  carryforwards  are available to
offset future taxable income,  if any, and begin to expire in the year 2006. The
Company's  ability to use its NOLs to offset future income is dependant upon the
tax laws in effect at the time the NOL's can be utilized.  The Tax Reform Act of
1996 significantly  limits the annual amount that can be utilized for certain of
these carry forwards as a result of change of ownership.

Effect of Inflation and Foreign Currency Exchange

      The Company  has not  realized a  reduction  in the  selling  price of the
Precisionist phaco system as a result of domestic inflation. Nor has the Company
experienced  unfavorable profit reductions due to currency exchange fluctuations
or inflation with its foreign customers.


                                       25

<PAGE>



Impact of New Accounting Pronouncements

      In June 1998,  the FASB issued SFAS No. 133,  "Accounting  for  Derivative
Instruments and Hedging Activities".  This statement establishes  accounting and
reporting standards for derivative  instruments and requires  recognition of all
derivatives as assets or liabilities in the statement of financial  position and
measurement of those  instruments at fair value.  The statement is effective for
fiscal  years  beginning  after June 15,  1999.  The Company  believes  that the
adoption  of SFAS  133  will  not have  any  material  effect  on the  financial
statements of the Company.

      The Company has reviewed all other recently issued accounting standards in
order to  determine  their  effects,  if any,  on the results of  operations  or
financial  position of the Company.  Based on that review,  the Company believes
that none of these  pronouncements  will have a significant effect on current or
future earnings or operations.

Year 2000

      The year 2000 issue is the result of computer programs being written using
two digits  rather than four to define the  applicable  year.  Management of the
Company does not anticipate that any significant  modification or replacement of
the Company's  software  will be necessary for its computer  systems to properly
utilize  dates  beyond  December  31,  1999  or  that  the  Company  will  incur
significant  operating  expenses to make any such computer system  improvements.
The Company is not able to  determine,  however,  whether any of its  suppliers,
lenders, or service providers will need to make any such software  modifications
or  replacements or whether the failure to make such software  corrections  will
have an effect on the Company's operations or financial condition.

Item 7.  Financial Statements

Report of Independent Accountants                                            F-2

Balance Sheet                                                                F-3

Statement  of Operations                                                     F-4

Statement  of Changes in Stockholders' Equity                         F-5 to F-7

Statement  of Cash Flows                                                     F-8

Notes to Financial Statements                                        F-9 to F-28

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                    INDEPENDENT AUDITORS' REPORT



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, 1998,  and the related  statements  of  operations,
stockholders'  equity,  and cash flows for the years ended December 31, 1998 and
1997.  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  generally   accepted  auditing
standards.  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,  1998,  and the results of its  operations  and its cash
flows  for the years  ended  December  31,  1998 and 1997,  in  conformity  with
generally accepted accounting principles.






                                             TANNER + Co.



Salt Lake City, Utah
March 5, 1999

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

                                                                             F-2

<PAGE>

<TABLE>
<CAPTION>

                                                                         PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                             Balance Sheet

                                                                                         December 31, 1998
----------------------------------------------------------------------------------------------------------



              Assets

Current assets:
<S>                                                                                     <C>               
     Cash                                                                               $          114,000
     Receivables, net                                                                              566,000
     Inventories                                                                                   720,000
     Prepaid expenses                                                                               15,000
                                                                                        ------------------
                  Total current assets                                                           1,415,000

Capitalized engineering and design charges, net                                                    235,000
Property and equipment, net                                                                        547,000
Other                                                                                               44,000
                                                                                        ------------------

                  Total assets                                                          $        2,241,000
                                                                                        ------------------

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

Current liabilities:
     Payables                                                                           $          316,000
     Accrued liabilities                                                                           163,000
     Current portion of long-term debt                                                              13,000
                                                                                        ------------------
                  Total current liabilities                                                        492,000
                                                                                        ------------------

Long-term debt                                                                                      33,000
                                                                                        ------------------

Commitments                                                                                              -

Stockholders' equity:
     Preferred stock, $.001 par value:
         Series A, 500,000 shares authorized, 34,619 shares
           issued and outstanding (aggregate liquidation
           preference of $34,619)                                                                        -
         Series B, 500,000 shares authorized; 31,236 shares
           issued and outstanding (aggregate liquidation
           preference of $124,944)                                                                       -
         Series C, 30,000 shares authorized, 6,900 shares
           issued and outstanding                                                                        -
     Common stock, $.001 par value, 20,000,000 shares
       5,500,306  shares issued and outstanding                                                      5,000
Additional paid-in capital                                                                      17,704,000
Treasury stock, at cost                                                                             (4,000)
Unearned compensation                                                                              (94,000)
Stock subscription receivable                                                                       (8,000)
Accumulated deficit                                                                            (15,887,000)
                                                                                        ------------------
                  Total stockholders' equity                                                     1,716,000
                                                                                        ------------------

                  Total liabilities and stockholders' equity                            $        2,241,000
                                                                                        ------------------

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

See accompanying notes to financial statements.
                                                                                                       F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                         PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                   Statement of Operations

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




                                                                              1998             1997
                                                                       -----------------------------------

<S>                                                                    <C>                <C>             
Sales                                                                  $       1,258,000  $        464,000
                                                                       -----------------------------------

Cost of sales                                                                    739,000           272,000
Amortization of capitalized engineering and design changes                        74,000            61,000
                                                                       -----------------------------------

                                                                                 813,000           333,000
                                                                       -----------------------------------

         Gross profit                                                            445,000           131,000
                                                                       -----------------------------------

Operating expenses:
     Marketing and selling                                                     1,021,000           591,000
     General and administrative                                                1,841,000         1,802,000
     Research and development                                                    298,000           540,000
                                                                       -----------------------------------

         Total operating expenses                                              3,160,000         2,933,000
                                                                       -----------------------------------

Operating loss                                                                (2,715,000)       (2,802,000)
                                                                       -----------------------------------

Other income (expense):
     Interest income                                                              49,000            57,000
     Interest expense                                                            (33,000)         (265,000)
     Other                                                                       (60,000)                -
                                                                       -----------------------------------

                                                                                 (44,000)         (208,000)
                                                                       -----------------------------------

Loss before provision for income taxes                                        (2,759,000)       (3,010,000)

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

Net loss                                                               $      (2,759,000) $     (3,010,000)
                                                                       -----------------------------------

Loss per common share - basic and diluted                              $           (.69)  $           (.82)
                                                                       -----------------------------------



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


See accompanying notes to financial statements.
                                                                                                       F-4

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                PARADIGM MEDICAL INDUSTRIES, INC.
                                                                Statement of Stockholders' Equity

                                                           Years Ended December 31, 1998 and 1997
-------------------------------------------------------------------------------------------------

                                         Preferred Stock
                     -------------------------------------------------------
                          Series A           Series B          Series C           Common Stock
                     ----------------------------------------------------------------------------
                      Shares   Amount   Shares    Amount     Shares    Amount   Shares    Amount
                     ----------------------------------------------------------------------------

<S>                    <C>      <C>     <C>       <C>             <C>  <C>      <C>       <C>    
Balance at
January 1, 1997        121,704  $     -  448,398  $       -        -   $     -  3,194,061 $ 3,000

Conversion of 
preferred stock 
to common stock        (71,582)       - (403,015)         -        -         -    569,518   1,000

Issuance of common
stock for compensation       -        -        -          -        -         -     22,852       -

Warrants exercised for
common stock                 -        -        -          -        -         -     12,500       -

Issuance of warrants 
in connection with 
the issuance of debt         -        -        -          -        -         -          -       -

Amortization of
unearned compensation
                             -        -        -          -        -         -          -       -

Difference between the
convertible notes
payable conversion
price and common
stock fair value             -        -        -          -        -         -          -       -

</TABLE>
<TABLE>
<CAPTION>
                                                                                        Unrealized
                                                                  Stock                    Gain
                      Additional                      Unearned     Sub-       Accum-        on
                       Paid-In         Treasury Stock  Compen-   scription    ulated    Marketable
                                    ----------------- 
                       Capital      Shares   Amount    sation   Receivable   Deficit    Securities
                     -----------------------------------------------------------------------------
<S>                  <C>            <C>   <C>       <C>        <C>       <C>           <C>     
Balance at
January 1, 1997      $  8,162,000   2,600 $ (4,000) $ (63,000) $      -  $ (5,248,000) $ 10,000

Conversion of 
preferred stock to 
common stock                    -       -        -          -         -             -         -

Issuance of common
stock for compensation     78,000       -        -          -         -             -         -

Warrants exercised for
common stock               42,000       -        -          -         -             -         -

Issuance of warrants 
in connection with 
the issuance of debt      317,000       -        -          -         -             -         -

Amortization of
unearned compensation
                                -       -        -     63,000         -             -         -

Difference between the
convertible notes
payable conversion
price and common
stock fair value          235,000       -        -          -         -             -         -


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

See accompanying notes to financial statements.
                                                                                            F-5
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                                                  PARADIGM MEDICAL INDUSTRIES, INC.
                                                                  Statement of Stockholders' Equity

                                                             Years Ended December 31, 1998 and 1997
---------------------------------------------------------------------------------------------------

                                         Preferred Stock
                     -------------------------------------------------------
                          Series A           Series B          Series C        Common Stock
                     ------------------------------------------------------------------------------
                        Shares   Amount  Shares     Amount   Shares    Amount   Shares     Amount
                     ------------------------------------------------------------------------------

<S>                    <C>           <C> <C>             <C> <C>           <C>   <C>          <C>    

Net change in 
unrealized gain on 
marketable securities        -        -        -          -        -        -           -        -

Net loss                     -        -        -          -        -        -           -        -
                      -----------------------------------------------------------------------------

Balance at
December 31, 1997       50,122        -   45,383          -        -        -    3,798,931    4,000

Issuance of Series C
preferred stock for:
  Cash                       -        -        -          -   19,937        -            -        -
  Debt                       -        -        -          -    9,950        -            -        -
  Subscription 
   receivable                -        -        -          -       93        -            -        -

Conversion of 
preferred stock to 
common stock           (15,503)       -  (14,147)         -  (23,080)       -    1,354,424    1,000

Issuance of common
stock for:
  Services                   -        -        -          -        -        -       93,135        -
  Payables                   -        -        -          -        -        -       90,000        -
  Debt                       -        -        -          -        -        -       37,500        -
  Assets                     -        -        -          -        -        -      126,316        -

Issuance of stock
options for services         -        -        -          -        -        -            -        -

</TABLE>
<TABLE>
<CAPTION>
                                                                                   Unrealized
                                                               Stock                  Gain
                      Additional                   Unearned    Sub-       Accum-       on
                       Paid-In    Treasury Stock   Compen-   scription    ulated   Marketable
                                 -----------------
                       Capital    Shares  Amount    sation  Receivable   Deficit   Securities
                     -------------------------------------------------------------------------

<S>                     <C>         <C>     <C>      <C>        <C>     <C>           <C>     

Net change in 
unrealized gain on 
marketable securities           -       -        -         -         -           -    (10,000)

Net loss                        -       -        -         -         -  (3,010,000)         -
                      -----------------------------------------------------------------------

Balance at
December 31, 1997       8,834,000   2,600   (4,000)        -         -  (8,258,000)         -

Issuance of Series C
preferred stock for:
  Cash                  1,739,000       -        -         -         -           -          -
  Debt                    829,000       -        -         -         -           -          -
  Subscription 
   receivable               8,000       -        -         -    (8,000)          -          -

Conversion of preferred
stock to common stock      (1,000)      -        -         -         -           -          -

Issuance of common
stock for:
  Services                290,000       -        -   (94,000)        -           -          -
  Payables                399,000       -        -         -         -           -          -
  Debt                     75,000       -        -         -         -           -          -
  Assets                  500,000       -        -         -         -           -          -

Issuance of stock
options for services      161,000       -        -         -         -           -          -


---------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
                                                                                          F-6

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                               Statement of Stockholders' Equity

                                                          Years Ended December 31, 1998 and 1997
------------------------------------------------------------------------------------------------

                                         Preferred Stock
                     -------------------------------------------------------
                          Series A           Series B          Series C        Common Stock
                     ----------------------------------------------------------------------------
                      Shares   Amount   Shares    Amount    Shares  Amount    Shares    Amount
                     ----------------------------------------------------------------------------

<S>                     <C>    <C>        <C>     <C>       <C>    <C>        <C>        <C>    
Difference between 
the series C preferred 
stock conversion 
price and common stock 
fair value                   -        -         -        -      -         -           -         -

Net loss                     -        -         -        -      -         -           -         -
                      ---------------------------------------------------------------------------

Balance at
December 31, 1998       34,619 $      -   31,236  $      -  6,900  $      -   5,500,306  $  5,000
                      ---------------------------------------------------------------------------

</TABLE>
<TABLE>
<CAPTION>  
                                                                                            Unrealized
                                                                     Stock                     Gain
                      Additional                         Unearned     Sub-         Accum-       on
                       Paid-In         Treasury Stock    Compen-    scription      ulated   Marketable
                                    ------------------
                       Capital      Shares      Amount   sation    Receivable      Deficit  Securities
                     ---------------------------------------------------------------------------------

<S>                   <C>            <C>    <C>        <C>         <C>          <C>            <C>     

Difference between 
the series C preferred 
stock conversion 
price and common stock 
fair value                4,870,000      -          -           -           -      (4,870,000)     -

Net loss                          -      -          -           -           -      (2,759,000)     -
                      --------------------------------------------------------------------------------

Balance at
December 31, 1998     $  17,704,000  2,600  $  (4,000) $  (94,000) $   (8,000)  $ (15,887,000) $   -
                      --------------------------------------------------------------------------------



------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
                                                                                                   F-7

</TABLE>


<PAGE>
<TABLE>
<CAPTION>

                                                                         PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                   Statement of Cash Flows

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



                                                                                 1998              1997
                                                                       -----------------------------------
Cash flows from operating activities:
<S>                                                                    <C>                 <C>             
     Net loss                                                          $      (2,759,000)  $    (3,010,000)
     Adjustments to reconcile net loss to net
       cash used in operating activities:
         Depreciation and amortization                                           106,000           209,000
         Loss on disposal of equipment                                                 -            12,000
         Issuance of common stock for services                                   196,000            78,000
         Interest and stock compensation expenses related
         to common stock options/warrants                                        161,000           235,000
         Provision for losses on receivables                                      30,000                 -
         (Increase) decrease in:
              Receivables                                                       (475,000)         (102,000)
              Inventories                                                        240,000          (592,000)
              Debt offering cost                                                 259,000                 -
              Prepaid expenses                                                     1,000             8,000
         Increase (decrease) in:
              Payables                                                            14,000           466,000
              Accrued liabilities                                               (187,000)           72,000
                                                                       -----------------------------------
                  Net cash used in
                  operating activities                                        (2,414,000)       (2,624,000)
                                                                       -----------------------------------

Cash flows from investing activities:
     Purchase of property and equipment                                          (48,000)          (32,000)
     Notes receivable                                                            (44,000)                -
     Capitalized engineering and design charges                                        -          (370,000)
     Proceeds from the sale of marketable securities                                   -           500,000
                                                                       -----------------------------------
                  Net cash (used in) provided by
                  investing activities                                           (92,000)           98,000
                                                                       -----------------------------------

Cash flows from financing activities:
     Proceeds from issuance of Series C preferred stock                        1,739,000                 -
     Principal payments on long-term  debt                                        (6,000)           (3,000)
     Proceeds from issuance of  notes payable                                          -         1,070,000
     Proceeds from lines of credit                                                     -           980,000
     Payment on lines of credit                                                        -          (980,000)
     Payment of debt offering costs                                                    -          (165,000)
     Proceeds from exercise of warrants                                                -            42,000
                                                                       -----------------------------------
                  Net cash provided by
                  financing activities                                         1,733,000           944,000
                                                                       -----------------------------------

Net decrease in cash                                                            (773,000)       (1,582,000)

Cash, beginning of year                                                          887,000         2,469,000
                                                                       -----------------------------------

Cash, end of year                                                      $         114,000   $       887,000
                                                                       -----------------------------------

----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
                                                                                                      F-8
</TABLE>
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements

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


1.   Organization and Significant Accounting Policies

Organization
Paradigm Medical Industries, Inc. (the Company) is a California
Corporation incorporated in October 1989.

The Company is engaged in marketing and selling  advanced  surgical  systems for
cataracts,   various  attachments  and  disposable  accessories  and  diagnostic
equipment and  instrumentation.  The Company is in the process of  introducing a
proprietary  laser-based  surgical  machine which is expected to become its core
business.


The Company is primarily  dependent upon a single  product line targeted  toward
minimally  invasive  cataract  surgery  devices.  Revenues  recognized  to  date
primarily  represent  revenues  from  the  sale  of the  Company's  conventional
ultrasound  cataract surgery machine (the  Precisionist)  and related  accessory
instruments.  The Company has  recognized  minimal  revenue from the sale of its
proprietary  laser-based product, the Photon LaserPhaco System (the Photon). The
Company's  surgical and diagnostic  systems are regulated as medical  devices by
the FDA under the FDC Act. In May 1995, the Company received regulatory approval
to manufacture the Photon in limited  quantities and conduct  clinical trials in
the U.S.  on a limited  basis.  The  Company is  currently  conducting  clinical
studies. The Company's ability to achieve profitability depends upon its ability
to obtain the regulatory approvals required to manufacture and market the Photon
on an unlimited scale.


During the year ended  December 31, 1998,  the Company  acquired,  the rights to
begin  manufacturing  an established  product line, which consists of ultrasound
diagnostic devices used in eye care.

Liquidity

The  Company  incurred a net loss of  $2,759,000  and  negative  cash flows from
operating  activities of $2,414,000  for the year ended December 31, 1998. As of
December 31, 1998, the Company had an  accumulated  deficit of  $15,887,000.  In
March 1999, the Company  completed the private  placement of 1,140,000 shares of
Series D  Preferred  Stock at $100 per  share  (see  Note 7),  resulting  in net
proceeds of approximately $1,649,000, net of offering costs. Management believes
that if sales projections are realized these net proceeds, plus existing working
capital,  will be sufficient to assure continuation of the Company's  operations
through December 31, 1999. However, no assurances can be given that management's
plans will be successful in achieving profitability to positive cash flows.

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

<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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



1.   Organization and Significant Accounting Policies
     Continued

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.


Marketable Securities
The Company  classifies  its marketable  debt and equity  securities as "held to
maturity" if it has the positive  intent and ability to hold the  securities  to
maturity.  All other  marketable  debt and equity  securities  are classified as
"available for sale." Securities  classified as "available for sale" are carried
in the financial statements at fair value. Realized gains and losses, determined
using the specific  identification method, are included in earnings;  unrealized
holding gains and losses are reported as a separate  component of  stockholders'
equity. Securities classified as held to maturity are carried at amortized cost.


For both  categories of securities,  declines in fair value below amortized cost
that are other than temporary are included in earnings.


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-10

<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------
1.   Organization and Significant Accounting Policies
     Continued

Capitalized Engineering and Design Charges
The capitalized portion of payments to a manufacturer for engineering and design
services are being  amortized  using the  straight  line method over a five year
period. At December 31, 1998 and 1997, the accumulated amortization was $135,000
and $61,000, respectively. Amortization expense for the years ended December 31,
1998 and 1997 was $74,000 and $61,000, respectively.


Income Taxes
Deferred  income  taxes are  provided  in amounts  sufficient  to give effect to
temporary  differences between financial and tax reporting,  principally related
to depreciation and accrued liabilities.


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.  Common stock equivalents are not included in the diluted
earnings per share calculation when their effect is antidilutive.


Revenue Recognition
Revenues for sales of the Photon product,  are recognized upon  installation and
acceptance  by  the  customer.  Revenues  for  sales  of  the  Precisionist  and
ultrasound diagnostic devices are recognized when the product is shipped.

The Company offers the  Precisionist  with an  unconditional  arrangement  under
which the customer may trade in their  Precisionist to upgrade to other systems,
such as the Photon. Under this agreement,  the customer will receive full credit
for the  purchase  price of the  Precisionist  against  the  price of the  other
system.


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


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

<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------
1.   Organization and Significant Accounting Policies
     Continued

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.  Substantially  all of the Company's  current
products are  manufactured  and  assembled by two  companies,  one of which is a
related party (see Note 11).  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. A change in supplier or manufacturer,  however,
could cause a delay in manufacturing  and a possible loss of sales,  which would
affect  operating  results  adversely.  In  addition,  since  the  supplier  and
manufacturer  are related  parties,  there can be no assurance  that  comparable
terms could be obtained.


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 $2 million per claim with an aggregate policy limit of $2 million. Any losses
that the Company many suffer from any product liability  litigation could have a
material adverse effect on the Company.


A significant  portion of the Company's product sales are 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.


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

<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

1.   Organization and Significant Accounting Policies
     Continued

Concentration of Risk - Continued
Accounts  receivable  are  due  from  medical  distributors,   surgery  centers,
hospitals  and  ophthalmologists  located  throughout  the U.S.  and a number of
foreign  countries.  The  receivables  are  generally due within thirty days for
domestic  customers and sixty days for  international  customers.  Credit losses
historically have not been significant.


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.


Use of Estimates in the  Preparation of Financial  Statements The preparation of
financial statements in conformity with generally accepted accounting principles
requires  management to make estimates and assumptions  that affect the reported
amounts  of assets and  liabilities  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  accounts in the 1997 financial  statements  have been  reclassified  to
conform with the presentation of the current year financial statements.


2.   Detail of Certain Balance Sheet Accounts

Receivables:
     Trade receivables                                        $         566,000
     Employee receivables                                                 9,000
     Other                                                               21,000
     Allowance for doubtful accounts                                    (30,000)
                                                              ------------------

                                                              $         566,000
                                                              ------------------



Inventory:
     Finished goods                                           $         493,000
     Raw materials                                                      227,000
                                                              ------------------

                                                              $         720,000
                                                              ------------------


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

<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------
2.   Detail of Certain Balance Sheet Accounts
     Continued

Payables:
     Accounts payable                                     $          209,000
     Related party payables                                          107,000
                                                          ------------------

                                                          $          316,000
                                                          ------------------



3.   Property and Equipment

Property and equipment consists of the following:

Production rights                                         $         374,000
Office equipment                                                    135,000
Computer equipment                                                   84,000
Automobile                                                           26,000
Furniture and fixtures                                               21,000
                                                          -----------------

                                                                    640,000

Accumulated depreciation and
amortization                                                        (93,000)
                                                          -----------------

                                                          $         547,000
                                                          -----------------

4.   Long-Term Debt

Long-term debt consists of the following:


Note payable to a bank in monthly installments of
$418, including interest at 9.95% secured by an
automobile and due September 2001                         $          12,000

Capital lease obligations (see note 5)                               34,000
                                                          -----------------

                                                                     46,000

Less current portion                                                (13,000)
                                                          -----------------

                                                          $          33,000
                                                          -----------------

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

<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

4.   Long-Term Debt
     Continued 

Future maturities are as follows:


Year Ending December 31,                                       Amount
                                                          -----------------

                           1999                           $          13,000
                           2000                                      16,000
                           2001                                      17,000
                                                          -----------------

                                                          $          46,000
                                                          -----------------



5.   Lease Obligations

During the year ended  December  31, 1998 the Company  leased  certain  computer
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 equipment                                        $          36,000

Less accumulated amortization                                        (2,000)
                                                          -----------------

                                                          $          34,000
                                                          -----------------

Amortization  expense  on assets  under  capital  leases  during  the year ended
December 31, 1998 was $2,000.


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

<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

5.   Lease Obligations
     Continued

Capital lease  obligations have imputed interest rates of 22% and are payable in
monthly installments of approximately $1,200 trough 2001. The leases are secured
by computer equipment.  Future minimum payments on the capital lease obligations
are as follows:


1999                                                      $          16,000
2000                                                                 16,000
2001                                                                 14,000
                                                          -----------------

                                                                     46,000

Less amount representing interest                                   (12,000)
                                                          -----------------

                                                          $          34,000
                                                          -----------------



The Company leases office and warehouse space under operating lease  agreements.
Future  minimum  rental  payments  under  noncancelable  operating  leases as of
December 31, 1998 are as follows:


Year Ending December 31,                                       Amount
                                                          -----------------

                           1999                           $          94,000
                           2000                                      94,000
                                                          -----------------
                           Total future minimum rental 
                            payments                      $         188,000
                                                          -----------------

Rent expense related to the  noncancelable  operating  leases was  approximately
$41,000  and  $62,000  for  the  years  ended   December   31,  1998  and  1997,
respectively.



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

<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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



6.   Income Taxes

The provision for income taxes is different than amounts 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,
                                          ---------------------------------
                                                 1998            1997
                                          ---------------------------------

Federal income tax benefit at
  statutory rate                          $         938,000  $    1,174,000
Other                                                45,000               -
Change in valuation allowance                      (983,000)     (1,174,000)
                                          ---------------------------------

                                          $               -  $            -
                                          ---------------------------------

Deferred tax assets (liabilities) are comprised of the following:


                                                             December 31,
                                                                 1998
                                                          -----------------

Net operating loss carryforward                           $       3,606,000
Depreciation                                                        (18,000)
Research and development tax credit
  carryforwards                                                      34,000
Allowance and reserves                                               31,000
                                                          -----------------

                                                                  3,653,000

Valuation allowance                                              (3,653,000)
                                                          -----------------

                                                          $               -
                                                          -----------------

At December  31,  1998,  the Company had net  operating  loss  carryforwards  of
approximately  $9,600,000 and research and development tax credit  carryforwards
of approximately  $34,000.  These  carryforwards  are available to offset future
taxable income and begin to expire in 2006. 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.

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

<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


7.   Capital Stock

The  Company has  established  four  series of  preferred  stock with a total of
5,000,000  authorized  shares  and a par value of  $.001,  the  series  included
certain rights and  privileges,  and one series of common stock with a par value
of $.001 and a total of 20,000,000 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.


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.


5.   The Company may, at its option, redeem all of the then outstanding share of
     the Series A 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-18

<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

7.   Capital Stock
     Continued

Series B Preferred Stock
On May 9, 1994, the Company established a series of non-voting  preferred shares
designated at 12% Series B Preferred  Stock,  consisting of 500,000  shares with
$.001 par value.  The Series B  Preferred  Stock have 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 right of
     the holders of Series A Preferred Stock to receive a distribution of
     $1.00 per share plus accrued and unpaid dividends.


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-19

<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


7.   Capital Stock
     Continued

Series C Preferred Stock
In January 1998, the Company authorized the issuance of a total of 30,000 shares
of Series C Preferred  Stock,  $.001 par value,  $100 stated value. 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 is  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.


Series D Preferred Stock
In January 1999, the Company's  Board of Directors  authorized the issuance of a
total of 1,140,000  shares of  non-voting  Series D Preferred  Stock,  $.001 par
value per share,  $1.75 stated value.  Each share initially is convertible  into
one share of Common Stock. Each share,  which remains  outstanding on January 1,
2002, shall be automatically  converted into one share of Common Stock.  Holders
of the shares of Series D Preferred  Stock are  entitled  to 10%  non-cumulative
dividends.


In March 1999,  the  Company  closed a private  placement  of Series D Preferred
Stock,  selling 1,140,000 shares at a price of $1.75 per share. The net proceeds
to the Company from the private placement were approximately $1.6 million.


--------------------------------------------------------------------------------
                                                                            F-20

<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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



7.   Capital Stock
     Continued

In August 1997, the Company  entered into an investment  banking  agreement with
Win Capital  Corp.  (Win Capital) for a two year period which may be extended an
additional  year. The Company pays a retainer to Win Capital of $2,000 per month
for the first six months,  $4,000 per month for the second six months and $6,000
per month for the remainder of the  contract.  The Company also issued a warrant
to Win Capital.


8.   Stock Option Plan and Warrants

In November 1995, the Company's Board of Directors and shareholders approved the
Company's 1995 Stock Option Plan (the Option Plan) which reserved 300,000 shares
of the Company's  authorized but unissued common stock for the granting of stock
options. In June 1997, the Company's  shareholders  approved an amendment to the
Plan to increase  the number of shares of common  stock  reserved  for  issuance
thereunder by an aggregate of 300,000 shares.


The  Option  Plan  provides  for  the  grant  of  incentive  stock  options  and
non-qualified  stock  options to  employees  and  non-employee  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.


In addition,  the Company has granted  warrants to purchase the Company's common
stock to various  entities.  During the years ended  December 31, 1998 and 1997,
the Company granted the following warrants:

o    In  connection  with the  Company  issuing  Series C Preferred  Stock,  the
     Company issued warrants to purchase up to 100,000 shares of common stock at
     a purchase price of $3.00 per share.  The warrant is currently  exercisable
     and expires on February 24, 2001. The fair value of the warrant of $336,000
     has been netted  against gross proceeds from issuance of Series C Preferred
     Stock.



o    The Company  issued  warrants to purchase  100,00  shares of the  Company's
     common  stock  at  a  price  of  $4.00  per  share  to  an  individual,  as
     consideration  for consulting legal services.  The warrants are exercisable
     beginning in January 1999 and expire on December 18, 2008.


--------------------------------------------------------------------------------
                                                                            F-21

<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------
8.   Stock Option Plan and Warrants
     Continued

o    In  connection  with an  investment  banking  agreement  (see Note 7),  the
     Company issued a warrant to Win Capital to purchase up to 191,000 shares of
     common  stock at a  purchase  price of $3.00  per  share.  The  warrant  is
     currently exercisable and expires on August 19, 2000. The fair value of the
     warrant of $317,060 was recorded as debt  offering  costs and was amortized
     over the term of the debt.


A schedule of the options and warrants is as follows:


                                                                    Exercise
                                              Number of            Price Per
                                     ----------------------------
                                        Options       Warrants       Share
                                     ------------------------------------------

Outstanding at January 1, 1997              378,940     1,558,125 $ 3.00 - 8.13
     Granted                                135,000       191,000   3.00 - 5.00
     Exercised                                    -       (12,500)         3.33
     Expired                                (63,740)            -          5.00
                                     ------------------------------------------

Outstanding at December 31,
  1997                                      450,200     1,736,625   3.00 - 8.13
     Granted                                319,960       200,000   2.31 - 5.00
     Forfeited                              (50,000)            -          5.00
                                     ------------------------------------------

Outstanding at December 31,
  1998                                      720,160     1,936,625 $ 3.00 - 8.13
                                     ------------------------------------------

--------------------------------------------------------------------------------
                                                                            F-22

<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


9.   Earnings Per Share

Financial  accounting standards requires companies to present basic earnings per
share (EPS) and diluted  earnings per share along with additional  informational
disclosures. Information related to earnings per share is as follows:


                                                        Years Ended
                                                        December 31,
                                            ------------------------------------
                                                   1998              1997
                                            ------------------------------------
Basic and Diluted EPS:
  Net loss available to common
    stockholders                            $       (2,759,000)  $   (3,010,000)
                                            ------------------------------------

  Weighted average common shares                     4,022,000        3,663,000
                                            ------------------------------------

  Net loss per share                        $             (.69)  $         (.82)
                                            ------------------------------------




10.  Stock-Based Compensation

The Company  adopted the  disclosure  only  provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based  Compensation."
Accordingly,  no  compensation  expense has been  recognized  for stock  options
granted to employees.  Had compensation  expense for the Company's stock options
been determined based on the fair value at the grant date for awards in 1998 and
1997  consistent  with the provisions of SFAS No. 123, the Company's  results of
operations would have been reduced to the pro forma amounts indicated below:


                                                        Years Ended
                                                        December 31,
                                            ------------------------------------
                                                   1998              1997
                                            ------------------------------------

Net loss - as reported                      $       (2,759,000)  $   (3,010,000)
Net loss - pro forma                        $       (3,044,000)  $   (3,168,000)
Loss per share - as reported                $             (.69)  $         (.82)
Loss per share - pro forma                  $             (.76)  $         (.86)
                                            ------------------------------------

--------------------------------------------------------------------------------
                                                                            F-23

<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

10.  Stock-Based Compensation
     Continued

The fair value of each option  grant is estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions:


                                                   December 31,
                                        -----------------------------------
                                               1998             1997
                                        -----------------------------------

Expected dividend yield                 $                -  $             -
Expected stock price volatility                        82%             102%
Risk-free interest rate                               5.0%             5.5%
Expected life of options                           6 years          5 years
                                        -----------------------------------



The  weighted  average  fair value of  options  granted  during the years  ended
December 31, 1998 and 1997 are $1.85 and $3.31, respectively.


The  following  table  summarizes  information  about stock options and warrants
outstanding at December 31, 1998:


                            Outstanding                      Exercisable
              ------------------------------------------------------------------
                               Weighted
                               Average
                  Number      Remaining    Weighted      Number        Weighted
   Range of     Outstanding  Contractual    Average    Exercisable      Average
   Exercise          at          Life       Exercise       at          Exercise
    Prices       12/31/98      (Years)       Price      12/31/98        Price
--------------------------------------------------------------------------------

$2.30 - 2.75       20,160       9.86     $    2.47            -     $     -
 3.00 - 4.00      736,625       2.91          3.29      644,958           3.19
 5.00 - 8.13    1,900,000       2.87          6.53    1,814,400           6.61
--------------------------------------------------------------------------------

$2.30 - 8.13    2,656,785       2.94     $    5.60    2,459,358     $     5.57
--------------------------------------------------------------------------------



11.  Related Party Transactions

The Company has entered into an exclusive  three year  design,  engineering  and
manufacturing  agreement (the  Agreement)  for its Photon laser cataract  system
with a company that is a shareholder (the Manufacturer). Under the provisions of
the  Agreement,  the Company paid a total of $1,000,000 to the  Manufacturer  at
various  milestone dates for engineering and design  services.  $630,000 of this
amount was  charged to expense as  research  and  development;  the  balance was
recorded as capitalized engineering and design charges.


--------------------------------------------------------------------------------
                                                                            F-24

<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

11.  Related Party Transactions
     Continued

In addition, the Company will pay the actual cost of tooling, plus a two percent
mark-up, which is not expected to be significant. All items for tooling purposes
will belong to the Company. The Agreement  establishes the purchase price of the
systems  at the  lesser  of a  fixed  purchase  price  or  the  actual  cost  of
manufacturing plus a markup.


The  Company   purchased   research  and   development   services,   design  and
manufacturing  services  and  systems  from the  Manufacturer  in the  amount of
approximately $49,000 and $1,070,000 during the year ended December 31, 1998 and
1997, respectively.


The Agreement  prohibits the manufacturer from  participating in any activities,
including manufacturing, related to laser surgical systems for any other company
for a period of two years beyond the term of any renewed term of the  Agreement.
The Agreement includes certain termination  provisions,  which include the event
that the Company is unable to obtain governmental or regulatory  approvals.  The
Agreement is renewable for successive one year additional terms.


In 1997, the Company signed an amended exclusive patent license agreement with a
company which owns the patent for the  laser-probe  used on the Photon  machine.
This company is owned by a shareholder  of the Company.  The agreement  provides
for the  payment of a 1%  royalty  on all sales  proceeds  related  directly  or
indirectly,  to the Photon  machine.  The agreement  terminates on July 7, 2003.
Through  December 31, 1998, no  significant  royalties have been paid under this
agreement.


A law firm,  of which a director of the Company is a  shareholder,  has rendered
legal services to the Company.  The Company paid this firm $97,000, and $119,000
for the year ended December 31, 1998 and 1997, respectively.  As of December 31,
1998, the Company owed this firm $16,000, which is included in accounts payable.



--------------------------------------------------------------------------------
                                                                            F-25

<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

12.  Supplemental Cash Flow Information

During the year ended December 31, 1998:

o    The Company issued Series C Preferred  Stock in exchange for long-term debt
     of $995,000 and debt-offering costs of $166,000.

o    The  Company  issued  common  stock for  future  services  in the amount of
     $94,000.

o    The Company issued common stock in exchange for long-term debt of $75,000.


o    The Company issued common stock in exchange for a related-party  payable of
     $399,000.

o    The Company  issued  common  stock in  exchange  for  production  rights of
     $374,000 and inventory of $126,000.

o    The  Company  increased  the  accumulated  deficit and  additional  paid-in
     capital by $4,870,000 due to the difference  between the Series C preferred
     stock conversion price and the common stock fair value.


o    The Company acquired  computer  equipment in exchange for long-term debt of
     $36,000.

During the year ended December 31, 1997, the Company issued  warrants  valued at
$317,060 in exchange for services.


Actual amounts paid for interest and income taxes are as follows:


                                                      Years Ended
                                                     December 31,
                                        -----------------------------------
                                                  1998              1997
                                        -----------------------------------

Interest                                $           33,000  $        22,000
                                        -----------------------------------

Income taxes                            $                -  $             -
                                        -----------------------------------


--------------------------------------------------------------------------------
                                                                            F-26

<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

13.  Export Sales

Total sales include export sales by major geographic area as follows:


                                                    Years Ended
                                                   December 31,
                                        -----------------------------------
Geographic Area                                1998              1997
---------------                                                      
                                        -----------------------------------

Middle East                             $          150,000  $         2,000
South America                                      140,000                -
Europe                                              11,000           38,000
Far East                                             3,000           18,000
                                        -----------------------------------

                                        $          304,000  $        58,000
                                        -----------------------------------


14.  Employment Agreements

Effective  January 1, 1998, the Company entered into employment  agreements with
four  officers  which  expire on January 1, 2003.  The  agreements  provide  for
aggregate annual compensation of $480,000. In addition,  the Company has entered
into  agreements  which  provide  for  additional  payments  to be made to these
officers in the event the Company has a change of control.


15.  Profit Sharing Plan

The Company has adopted a profit  sharing plan pursuant to which an amount equal
to 10% of the pretax profits of the Company will be set aside for the benefit of
the Company's  officers and key employees.  This amount will only be paid if the
Company's  qualified pretax profits exceed $10,000,000 for any fiscal year prior
to December 31, 2001.


16.  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 100% matching
contribution by the Company up to 3% of a participant's compensation. During the
years ended  December  31, 1998 and 1997,  the Company  contributed  $10,646 and
$36,136 to the Plan, respectively.

--------------------------------------------------------------------------------
                                                                            F-27

<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

--------------------------------------------------------------------------------
17.  Recent Accounting Pronouncements

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
Instruments and Hedging Activities." This statement  establishes  accounting and
reporting standards for derivative  instruments and requires  recognition of all
derivatives as assets or liabilities in the statement of financial  position and
measurement of those  instruments at fair value.  The statement is effective for
fiscal  years  beginning  after June 15,  1999.  The Company  believes  that the
adoption  of SFAS  133  will  not have  any  material  effect  on the  financial
statements of the Company.


18.  Restatement of the 1997 Financial Statements

The  Company  had  previously  issued  financial  statements  for the year ended
December 31, 1997. The accompanying revised 1997 financial statements reflect an
adjustment  due to  correction  of an error.  The  adjustment  to the  financial
statements  arises from the expense  recognition for the difference  between the
conversion  price and the fair value of the common stock into which the security
is convertible.



The following  schedule  summarizes the adjustment leading to the restatement of
the 1997 financial statements:


                                          As Originally
                Category                     Reported         Restated
---------------------------------------------------------------------------

Net loss                                $       (2,775,000) $    (3,010,000)

Interest expense                        $           30,000  $       265,000

The revised net loss reflects a change  involving the  recognition of a non-cash
expense for the  difference  between the  convertible  notes payable  conversion
price and the fair value of the common stock,  on the debt issuance date and has
been  recorded in interest  expense for the year ended  December 31, 1997.  This
adjustment  resulted  in an  increase  to the net loss and  interest  expense of
$235,000.

--------------------------------------------------------------------------------
                                                                            F-28

<PAGE>


Item  8.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
--------------------------------------------------------------------------------
Financial Disclosurec
--------------------

   None.

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
--------------------------------------------------------------------------------
with Section 16(a) of the Exchange Act.
---------------------------------------

                                       26

<PAGE>



    The executive  officers and  directors of the Company,  their ages and their
positions are set forth below:

      Name                      Age         Position

      Thomas F. Motter          50      Chairman of the Board, President and
                                          Chief Executive Officer
      Michael W. Stelzer        51      Vice President of Operations,
                                          Chief Operating Officer, Secretary   
                                          and Director
      Robert W. Millar          42      Vice President of Engineering and
                                         Manufacturing, and Director
      John W. Hemmer            72      Vice President of Finance, Treasurer,
                                         Chief Financial Officer and Director
      Patrick M. Kolenik        47      Director
      Robert L. Frome           59      Director

      The  directors  are elected  for one year terms  which  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.

      Thomas F. Motter has served as Chairman of the Board of the Company  since
April 1993.  Since  December 12, 1997 and from May 1994 to August  1997,  he has
served as President and Chief Executive  Officer of the Company.  From June 1989
to April 1993, Mr. Motter served as Chief Executive Officer of Paradigm Medical,
Inc.  which merged with the Company in May 1994.  From  September  1990 to April
1992, he was employed by HGM Medical  Laser Systems as general  manager of their
International  Division. From October 1978 to June 1989, Mr. Motter was employed
by SmithKline  Beckman's  Humphrey  Instruments  Division,  which  developed and
manufactured  advanced  ophthalmic  diagnostic  instruments,   serving  last  as
National Sales Manager overseeing all domestic sales in its ophthalmic  computer
division. Mr. Motter received a B.A. degree in English from Stephen's College in
1970 and an M.B.A. degree from Pepperdine University in 1975.

      Michael W. Stelzer has served as Vice  President of  Operations  and Chief
Operating Officer of the Company since December 12, 1997 and its Secretary since
July 30, 1998.  From August 8, 1997 to December 12, 1997, he served as President
and Chief  Executive  Officer of the Company.  Mr.  Stelzer joined the Company's
Board of Directors in April 1993.  From June 1989 to April 1993,  he served as a
General Counsel and a director of Paradigm  Medical,  Inc. which merged with the
Company in May 1994. From January 1995 to August 1997, Mr. Stelzer served as the
Executive Vice President and Chief Financial Officer of Rhino Marketing, Inc., a
sports related holding  company,  and was President of one of its  subsidiaries.
Prior to joining  Rhino,  Mr.  Stelzer was  President  and  General  Counsel for
MarDec, Inc., a golf accessory marketing company, from 1993 to 1995. Mr. Stelzer
is a licensed  attorney  with the state of  California  and has practiced law in
California  since  1980.  From March  1972 to  January  1980,  Mr.  Stelzer  was
controller of Ponderosa Telephone Company. Mr. Stelzer received a B.S. degree in
business  administration from the University of California,  Davis in 1970 and a
Juris Doctorate from Humphreys College of Law in 1979.

      Robert  W.  Millar  has  served  as  Vice  President  of  Engineering  and
Manufacturing of the Company

                                       27

<PAGE>



since December 12, 1997 and as a director of the Company since April 1993.  From
April 1995 to December 12, 1997,  Mr. Millar served as Executive  Vice President
of the Company. From January 1991 to April 1993, he was employed as President by
Paradigm Medical,  Inc., which merged with the Company in May 1994. From January
1990 to January  1991,  Mr.  Millar was employed by HGM Medical  Laser  Systems,
serving as Director of Marketing and Product  Management  for all ophthalmic and
surgical markets. From October 1988 to December 1989, Mr. Millar was employed as
Group Products Manager for the Customer  Products  Division of Esselte Pendaflex
Corporation, a manufacturer and distributor of office supply products. From July
1986 to February 1988, Mr. Millar was employed by  TechnaVision  Inc., a company
engaged in the manufacture of ophthalmic diagnostic and other eyecare equipment.
From February 1980 to July 1986, he was employed by Pogue McJunkin & Associates,
a  professional  industrial  design firm. Mr. Millar  received a B.S.  degree in
industrial design from the College of Design in Detroit, Michigan in 1979.

      John W. Hemmer, C.F.A., has served as Vice President of Finance, Treasurer
and Chief  Financial  Officer of the  Company and as a director  since  November
1995. Since October 1989, Mr. Hemmer has served as a director and consultant for
Sea Pride Industries,  Inc. and its subsidiaries in Gulf Breeze,  Florida, which
developed the first offshore marine production system licensed and permitted for
use in the Gulf of Mexico. From March 1992 to July 1994, Mr. Hemmer was employed
as the Secretary  and Vice  President of Finance of Advance  Electronics,  Inc.,
which is engaged in the retail distribution of health and beauty products.  From
November 1991 to December  1994,  Mr. Hemmer was Secretary and Treasurer of Agro
Industrial Development,  Ltd., which established a Free Trade Zone in Belize for
the production and export of seafood.  He was the President and Chief  Executive
Officer of John W. Hemmer,  Inc., a registered  broker/dealer firm from May 1987
to May 1989, which subsequently changed its name to Westfalia  Investments Inc.,
but  retained  his  registered  representative  status  until March 1995.  Prior
thereto,  he was Vice  President of Bankers  Trust  Company in charge of venture
capital and a member of the research and investment management  committees.  Mr.
Hemmer was Vice  President  of Corporate  Finance at Dempsey,  Tegler & Company,
Inc., a Senior  Analyst at Lazard Freres & Company and an Investment  Officer of
The Chase  Manhattan  Bank. Mr. Hemmer received a B. A. degree in Economics from
Queens  College in 1951 and an M.S.  degree in Banking and Finance from Columbia
University Graduate School of Business in 1952.

      Patrick M. Kolenik has been a director of the Company since November 1997.
Mr.  Kolenik  has been  Special  Assistant  to the  President  of  International
Heritage,  Inc.  since 1996 and President and Co- Founder of Cyn Del & Co., Inc.
("Cyn Del") since 1992.  He was a co-founder  and director of Win Capital  Corp.
("Win"),  an investment  banking firm, but resigned as a director in 1996. As of
July 1, 1998,  Mr. Kolenik  resumed an affiliation  with Win. From 1969 to 1989,
Mr. Kolenik held various  positions at Sherwood  Securities  Corp., a securities
firm, including President and Chief Executive Officer,  Executive Vice President
of Trading,  Executive Vice President of Corporate  Syndicate and Vice President
of Corporate Finance.  He also served as a director of Sherwood Securities Corp.
Mr. Kolenik attended Baruch College where he majored in finance.

      Robert L. Frome,  Esq. has been a director of the Company since  September
3, 1998. He has been a Senior Partner at the Olshan Grundman Frome  Rosenzweig &
Wolosky  LLP law firm in New York  City for over  twenty  years.  He serves as a
director of HealthCare  Services Group,  Inc., the nation's  largest provider of
housekeeping,  linen and laundry services to long term care  facilities,  and of
NuCo2 Inc., the nation's  largest provider of bulk carbon dioxide to restaurant,
fast food outlets and

                                       28

<PAGE>



convenience  stores. Mr. Frome is a trustee of Daytop Village Foundation and The
Hospital for Joint Diseases of New York University  Medical Center.  He received
an LL.B.  from  Harvard Law School in 1961 and LL.M.  and B.S.  degrees from New
York University in 1962 and 1958, respectively.

Technical and Medical Advisory Personnel

      The Company  utilizes an informal  Clinical  Advisory  Board of recognized
practicing  ophthalmic  surgeons in technical and medical  advisory  capacities.
Outside  consultants are generally used on an ad hoc basis and such  individuals
do not meet  together  as a group and are not  compensated.  The  Members of the
Company's Clinical Advisory Board are as follows:

      Paul L. Archambeau,  M.D. -- Dr. Archambeau is an ophthalmologist in Santa
Rosa,  California  and a faculty  member at the  University of California at San
Francisco.  He received his medical degree at the University of Buffalo  Medical
School in 1959 and  performed  his  residency  at the Mayo Clinic in  Rochester,
Minnesota.

      Daniele S. Aron-Rosa,  Ph.D, M.D. -- Dr.  Aron-Rosa is a faculty member at
the Rothschild Eye Institute in Paris,  France.  She received a doctorate degree
in physics from the  University of Paris in 1957 and received her medical degree
there in 1962 and performed her residency at the University of Paris Hospital.

      David C. Brown,  III,  M.D.  -- Dr.  Brown is an  ophthalmologist  in Fort
Myers,  Florida.  He received his medical degree at the University of Florida in
1963 and also performed his residency at that facility.

      Alan S. Crandall,  M.D. -- Dr. Crandall is an ophthalmologist in Salt Lake
City, Utah. He received his medical degree at the University of Utah in 1973 and
performed his residency at the University of Pennsylvania

      I.  Howard  Fine,  M.D. -- Dr. Fine is an  ophthalmologist  practicing  in
Eugene,  Oregon and a member of the Oregon Health Sciences  University  faculty.
Dr. Fine  received  his  medical  degree at Boston  University  in 1966 and also
performed his residency at that facility.

      Stephane P. Ganem,  M.D. - -- Dr.  Ganem is chairman of the  ophthalmology
department at the Rothschild Eye Institute in Paris, France.

      Frederic B. Kremer,  M.D. - Dr.  Kremer is an  ophthalmologist  in Radnor,
Pennsylvania.  He received his medical degree at the Jefferson Medical Center in
1976 and  performed  his  residency at the Wills Eye  Hospital in  Philadelphia,
Pennsylvania.

      Francis A.  L'Esperance,  M.D.  -- Dr.  L'Esperance  is  President  of the
American Board of Laser Surgery and a faculty member at the Columbia  College of
Physicians  and Surgeons.  He received his medical  degree from Harvard  Medical
School in 1956 and  performed  his  residency at the  Massachusetts  Eye and Ear
Infirmary.

      Michael B. Limberg,  M.D. -- Dr. Limberg is an ophthalmologist  practicing
in San Luis Obispo, California. He received his medical degree at the University
of Utah Medical School in 1982 and

                                       29

<PAGE>



performed his residency at Louisiana State University.

      Marc  A.  Michelson  M.D.  --  Dr.  Michelson  is  an  ophthalmologist  in
Birmingham, Alabama. He received his medical degree at the University of Alabama
in  1975,  and  performed  his  residency  at the  Eye  Foundation  Hospital  in
Birmingham, Alabama.

      Lawrence E. Noble M.D. -- Dr. Noble is an  ophthalmologist in Provo, Utah.
He  received  his  medical  degree at the  University  of  Oregon  in 1964,  and
performed his residency at the Good Samaritan Hospital.

      Jaswant Singh Pannu, M.D. -- Dr. Pannu is an ophthalmologist in Lauderdale
Lakes,  Florida.  He received his medical  degree at the  University of Miami in
1967  and  performed  his  residency  at  the  Milwaukee,   Wisconsin   Veterans
Administration Hospital and at Evanston Hospital in Evanston, Illinois.

      David  M.  Schneider,  M.D.  -- Dr.  Schneider  is an  ophthalmologist  in
Cincinnati, Ohio. He received his medical degree at the University of Cincinnati
in 1975, and performed his residency at the University of Cincinnati.

      Jeffrey G. Straus,  M.D. -- Dr. Straus is an  ophthalmologist in Metairie,
Louisiana.  He received his medical  degree at State  University  of New York at
Buffalo in 1984 and performed his residency at Ochsner  Foundation  Hospital and
Clinic in New Orleans, Louisiana.

      Gerald Zelman,  M.D. -- Dr. Zelman is a Ophthalmologist in Manhasset,  New
York. He received his medical  degree at the University of Lausanne in 1964, and
performed  his  residency at the Brooklyn Eye and Ear facility in Brooklyn,  New
York.

Board Meetings and Committees

      The Board of  Directors  held a total of five  meetings  during the fiscal
year ended  December  31,  1998.  The Audit  Committee of the Board of Directors
consists  of  directors  Michael W.  Stelzer,  Patrick M.  Kolenik and Robert L.
Frome. The Audit Committee last met on September 14, 1998 The Audit Committee is
primarily  responsible  for  reviewing  the services  performed by the Company's
independent  public accountants and internal audit department and evaluating the
Company's accounting  principles and its system of internal accounting controls.
The  Compensation  Committee  of the Board of  Directors  consists of  directors
Robert M. Millar,  Michael W. Stelzer and Patrick M. Kolenik.  The  Compensation
Committee  also last met on September 14, 1998.  The  Compensation  Committee is
primarily  responsible  for  reviewing  compensation  of executive  officers and
overseeing the granting of stock options. No director attended fewer than 75% of
all meetings of the Board of Directors during the 1998 fiscal year.

      Pursuant  to  Nasdaq  corporate  governance   requirements  recently  made
applicable  to Nasdaq  SmallCap  Market  companies,  the Company must have (i) a
minimum of two independent directors; (ii) an audit committee with a majority of
independent directors; and (iii) an annual stockholders meeting. The Company has
and can presently satisfy each of these requirements.  Messrs. Kolenik and Frome
qualify as independent directors.


                                       30

<PAGE>




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

      Effective May 1, 1991,  the  Securities  and Exchange  Commission  adopted
revised  rules  regarding  reporting of  beneficial  ownership of  securities by
officers,  directors  and  owners of more  than 10% of any class of a  company's
equity securities.  During fiscal 1997, George J. Barenholtz, then a director of
the Company,  through an oversight,  filed one late stock  purchase  transaction
report covering one transaction.


Item 10. Executive Compensation

      The  following  table sets forth,  for each of the last three fiscal years
and for the three  month  period  ended  December  31,  1996,  the  compensation
received by Thomas F. Motter, the Company's Chairman of the Board, President and
Chief Executive  Officer,  and all other executive officers  (collectively,  the
"Named Executive  Officers") at December 31, 1998 whose salary and bonus for all
services in all  capacities  exceed  $100,000 for the fiscal year ended December
31, 1998.

<TABLE>
<CAPTION>

                                                        Summary Compensation Table

                                                                                        Long-Term Compensation
                                   Annual Compensation                          Awards                     Payouts

                                                         Other                  Securities
                                                        Annual     Restricted   Underlying      Long-term    All Other
     Name and                                          Compensa-      Stock      Options/       Incentive    Compensa-
Principal Position    Period   Salary($)    Bonus($)   tion($)(6)    Awards($)     SARs(#)       Payout($)   tion ($)(5)

<S>                   <C>       <C>         <C>            <C>             <C>    <C>                <C>       <C>   
Thomas F. Motter,     1998(1)   $122,497         0              0          0           0             0         $6,000
Chairman of the       1997(2)    129,584         0         $5,250          0           0             0              0
Board, President      1996(3)     33,750         0              0          0           0             0              0
and Chief Executive   1996(4)    111,042    $1,000          3,600          0           0             0          6,000
Officer                         

Robert W. Millar,     1998(1)    121,019         0              0          0           0             0          6,000
Vice President of     1997(2)    114,675         0          5,250          0           0             0              0
Engineering and       1996(3)     31,250         0              0          0           0             0              0
Manufacturing         1996(4)     99,792     1,000          3,600          0           0             0          6,000

John W. Hemmer,       1998(1)    117,884         0              0          0           0             0          6,000
Treasurer, Chief      1997(2)    112,670         0          5,250          0           0             0              0
Financial Officer     1996(3)     30,000         0              0          0           0             0              0
and Director          1996(4)     80,000         0          3,600(6)       0      20,000(6)          0          4,000
</TABLE>



(1)   For the fiscal year ended December 31, 1998
(2)   For the fiscal year ended December 31, 1997.
(3)   For the three month period ended December 31, 1996.
(4)   For the fiscal year ended September 30, 1996.
(5)   The amounts indicated under "Other Annual  Compensation" for 1996 and 1997
      consist of payments  related to the operation of  automobiles by the named
      executive.
(6)   On February  16,  1996,  the Company  granted  Mr.  Motter and Mr.  Millar
      options to  purchase  106,000  and  84,000  shares,  respectively,  of the
      Company's  Common  Stock at an  exercise  price of $5.00 per share.  These
      options  expire on February  15, 2001.  On January 31,  1996,  the Company
      granted Mr.  Hemmer  options to purchase  20,000  shares of the  Company's
      Common Stock at an exercise price of $5.00 per share.
      These options expire January 30, 2001.

      The  following  table sets forth  information  concerning  the exercise of
options to acquire shares of the Company's  Common Stock by the Named  Executive
Officers during the fiscal year ended December 31,

                                       31

<PAGE>



1998, as well as the aggregate  number and value of unexercised  options held by
the Named Executive Officers on December 31, 1998.


<TABLE>
<CAPTION>

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

                                                        Number of Securities Underlying         Value of Unexercised
                                                           Unexercised Options/SARs         In-the-Money Options/SARs at
                                                             at December 31, 1997(#)             December 31, 1997($)
                     Shares Acquired       Value
       Name          on Exercise (#)   Realized ($)      Exercisable      Unexercisable     Exercisable      Unexercisable
<S>                        <C>              <C>              <C>               <C>              <C>               <C>
Thomas F. Motter           -0-              -0-              106,000           -0-              -0-               -0-

Robert W. Millar           -0-              -0-               84,000           -0-              -0-               -0-

John W. Hemmer             -0-              -0-               20,000           -0-              -0-               -0-

Michael W.                 -0-              -0-               20,000           -0-              -0-               -0-
Stelzer

</TABLE>

Director Compensation

      The outside  directors were each granted stock options to purchase  75,000
shares of the  Company's  Common Stock at an exercise  price of $4.00 per share.
Outside  directors are also reimbursed for their expenses in attending Board and
committee meetings.  Directors are not precluded from serving the Company in any
other capacity and receiving compensation therefor.

Employee 401(k) Plan

      In  October  1996,  the  Company's  Board of  Directors  adopted  a 401(k)
Retirement  Savings  Plan.  Under the terms of the 401(k) plan,  effective as of
November  1,  1996,  the  Company  may  make  discretionary   employer  matching
contributions  to its 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 the Company and satisfy other plan requirements are eligible to participate
in the 401(k) plan.

1995 Stock Option Plan

      The Company  adopted a 1995 Stock Option Plan (the "Plan"),  for officers,
employees,  directors and  consultants  of the Company on November 7, 1995.  The
Plan  authorized the granting of stock options  ("Plan  Options") to purchase an
aggregate of not more than 300,000  shares of the  Company's  Common  Stock.  On
February 16, 1996, options for substantially all 300,000 shares were granted. On
June 9, 1997,  the Company's  shareholders  approved an amendment to the Plan to
increase the number of shares of Common Stock reserved from issuance  thereunder
by an  aggregate  of 300,000  shares.  That same day,  20,000  options each were
granted to Michael W. Stelzer,  Vice President of Operations and Chief Operating
Officer of the Company, and John W. Hemmer, Vice President of Finance, Treasurer
and Chief  Financial  Officer of the  Company.  On September  14,  1998,  37,450
options  each were granted to Thomas F. Motter,  President  and Chief  Executive
Officer of the Company,  Robert W. Millar,  Vice  President of  Engineering  and
Manufacturing,  and  Messrs.  Stelzer  and Hemmer,  and 75,000  options  each to
Patrick M.

                                       32

<PAGE>



Kolenik and Robert L. Frome, the two outside directors of the Company. There are
presently outstanding options to purchase 750,000 shares of the Company's Common
Stock  that  have  been  granted  under  the  Plan.  No such  options  have been
exercised.

      The Plan is  administered  by the  Board of  Directors  or a  Compensation
Committee of not less than two disinterested  members of the Board of Directors.
In general,  the Board of Directors or the Compensation  Committee,  as the case
may be,  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 Board of Directors or the
Compensation Committee, as the case may be.

      Options under the Plan may be either incentive stock options ("ISOs"),  as
such term is  defined in the  Internal  Revenue  Code of 1986,  as  amended,  or
non-ISOs.  ISOs may only be granted to persons who are employees of the Company.
Non-ISOs may be granted to any person,  including, but not limited to, employees
of the Company,  independent agents,  consultants,  as the Board of Directors or
the Compensation  Committee,  as the case may be, believes has  contributed,  or
will  contribute,  to the success of the Company.  The Board of Directors or the
Compensation Committee as the case may be, shall determine the exercise price of
options  granted under the Plan,  provided that, in the case of ISOs, such price
may not be less than 100% (110% in the case of ISOs granted to holders of 10% of
voting power of the Company's 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 ISOs
become exercisable for the first time in any year cannot exceed $100,000.

      The term of each option shall not be more than 10 years (five years in the
case of ISOs  granted to holders  of 10% of the  voting  power of the  Company's
stock)  from the date of  grant.  The Board of  Directors  has a right to amend,
suspend  or  terminate  the Plan at any time;  provided,  however,  that  unless
ratified by the Company's stockholders,  no amendment or change in the Plan will
be effective which would increase the total number of shares which 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

      The Company  entered  into  employment  agreements  with each of Thomas F.
Motter,  Michael  W.  Stelzer,  Robert W.  Millar  and John W.  Hemmer and which
commenced  on January 1, 1998 and  expire on  January  1, 2003.  The  agreements
require  each  employee to devote  substantially  all of his working time to the
Company, provide that each of them may be terminated for "cause" (as provided in
the  agreements)  and prohibit each of them from  competing with the Company for
two years following the termination of his employment agreement.  The agreements
provide  for the payment of an initial  base  salary of $135,000 to Mr.  Motter,
$100,000 to Mr. Stelzer,  $125,000 to Mr. Millar and $120,000 to Mr. Hemmer, and
became  effective  as of January  1, 1998.  In January  1998,  Mr.  Hemmer  also
received a bonus of 50,000 shares of the Company's  Common Stock in  recognition
of the services  previously  rendered by him. The agreements  provide for salary
increases and bonuses as shall be  determined at the  discretion of the Board of
Directors.


                                       33

<PAGE>



Change of Control Termination Agreements

      On  September  14,  1998,  the  Company  entered  into a Change of Control
Termination  Agreement (the "Agreement") with each of Thomas F. Motter,  Michael
W. Stelzer, Robert W. Millar and John W. Hemmer. The Agreements are effective as
of January 1, 1998 and continue in effect  through  December 31, 2002.  However,
beginning on December 31, 2002 and each December 31 thereafter, the term of each
of the  Agreements  shall  automatically  be extended  for one  additional  year
unless,  no later than the  preceding  November 1, the Company  shall have given
notice  that it does not wish to extend such  Agreement.  If a change of control
occurs during the original or any extended term of the Agreement,  the Agreement
shall continue in effect for a period of 12 months beyond the month in which the
change of control occurred.

      The  Agreements  provide  that if  there  is a change  of  control  of the
Company,  and provided there has been no termination of employment on account of
death,  disability,  retirement or for cause, each of Messrs.  Motter,  Stelzer,
Millar and Hemmer  shall be entitled to receive  the  following  benefits in the
event their  employment with the Company is terminated  subsequent to the change
of control:  (i) payment of full base salary  through the date of termination of
employment  (the  "Termination  Date")  at the rate in effect at the time of the
change of control, plus all other amounts and benefits to which each is entitled
under any compensation  plan of the Company;  (ii) in lieu of any further salary
payments for periods subsequent to the Termination Date, the Company shall pay a
lump sum severance payment equal to 2.99 times the sum of the annual base salary
in effect at the time of the change of control;  (iii)  payments of any deferred
compensation,  including  deferred  bonuses;  (iv)  in  lieu  of  shares  of the
Company's  Common Stock  issuable upon the exercise of outstanding  options,  an
amount in cash shall be  distributed  equal to the  product of the excess of the
closing price of the Company's  shares as reported on the Nasdaq SmallCap Market
on or nearest the  Termination  Date over the per share  exercise  price of each
option times the number of shares covered by each such option; and (v) all legal
fees and expenses  incurred as a result of such  termination  including all fees
and expenses  incurred in contesting or disputing any  termination of employment
or seeking to obtain or enforce any right or benefit provided by the Agreement.

      For the purposes of the Agreement, a change of control shall have occurred
if (a) any  person  becomes a  beneficial  owner of 30% or more of the  combined
voting power of the Company's then outstanding securities, (b) during any period
of two consecutive years (not including any period prior to the execution of the
Agreement),  individuals  who at the  beginning  of the  period  constitute  the
Company's Board of Directors and any new director whose election by the Board or
nomination for election by the Company's  shareholders was approved by a vote of
at least  two-thirds  of the  directors  then still in office  who  either  were
directors at the  beginning of the period or whose  election or  nomination  for
election  were  previously  so  approved,  cease for any reason to  constitute a
majority,  (c) the Company enters an agreement  resulting in the occurrence of a
change of control  of the  Company,  (d) the Board of  Directors  eliminates  or
otherwise reduces the authority, duties and/or responsibilities of the Executive
Committee,  or (e) the  shareholders  approve a merger or  consolidation  of the
Company with any other  corporation,  other than a merger or consolidation  that
would result in the voting  securities  of the Company  outstanding  immediately
prior to it continuing to represent (either by remaining outstanding or by being
converted  into voting  securities of the surviving  entity) at least 30% of the
combined voting power of the voting  securities of the Company or such surviving
entity  outstanding  immediately  after  the  merger  or  consolidation,  or the
shareholders  of the  Company  approve  a plan of  complete  liquidation  of the
Company or as  agreement  for the sale or  disposition  by the Company of all or
substantially all of the Company's assets.

      If any of the events constituting a change of control of the Company shall
occur, each of Messrs. Motter,  Stelzer,  Millar and Hemmer shall be entitled to
the benefits set forth above on the subsequent termination of

                                       34

<PAGE>



their employment  during the term of the Agreements unless the termination is on
account of death,  disability,  or retirement,  by the Company for cause,  or by
such individuals other than for good reason. Termination for cause is defined in
the Agreement to include  termination  on the willful and  continued  failure to
substantially  perform their duties with the Company after a written  demand for
substantial  performance  is delivered to the Board of  Directors,  which demand
specifically  identifies  the manner in which the board  believes that they have
not  substantially  performed  their  duties,  or the  willful  engaging by such
individuals  in conduct that is  demonstrably  and  materially  injurious to the
Company.  No act,  or  failure to act,  on their part shall be deemed  "willful"
pursuant  to  the  Agreement  unless  done,  or  omitted  to be  done,  by  such
individuals not in good faith and without a reasonable  belief that their action
or omission was in the best interest of the Company. In addition, they shall not
be deemed to have been terminated for cause unless or until they shall have been
delivered a copy of a  resolution  duly adopted by the  affirmative  vote of not
less than 75% of the entire  membership  of the Board of  Directors at a meeting
called for such purpose.

      Under the terms of the Agreements, each of Messrs. Motter, Stelzer, Millar
and Hemmer are entitled to terminate their respective Agreement for good reason.
Good reason is defined in the  Agreements  to include (1) the  assignment of any
duties inconsistent with their status and position immediately prior to a change
in control of the Company,  or substantial  adverse  alteration in the nature or
status of their  responsibilities  and those in  effect  immediately  prior to a
change in control;  (2) a reduction  in their annual base salary as in effect on
the date of this  Agreement or as such salary may be increased from time to time
except  for  across-the-board  salary  reductions  similarly  effecting  all key
employees  of the Company and all key  employees of any person in control of the
Company; (3) their relocation to a location not within 25 miles of the Company's
present  executive  offices;  (4) the  failure  by the  Company,  without  their
consent,  to pay to them any part of their current  compensation,  or to pay any
part of an installment of deferred  compensation under any deferred compensation
program of the Company,  within seven days of the date the  compensation is due;
(5) the  failure by the  Company to continue to effect any bonus which they were
entitled or any compensation plan which they participated immediately prior to a
change of control that is material to their total  compensation,  including  the
Company's  1995 Stock Option Plan,  401(k) pretax  retirement  savings plan, and
flexible  benefit  plan;  (6) the  failure of the Company to continue to provide
them with  benefits  substantially  similar  to those  enjoyed by them under the
Company's life  insurance,  medical,  health and accident,  or disability  plans
which they are  participating at the time of a change of control of the Company,
and for the  failure to continue to provide  them with a Company  automobile  or
allowance in lieu of it, if they were provided with such automobile or allowance
in lieu of it at the time of a change of  control;  and (7) the  failure  of the
Company to obtain a  satisfactory  agreement  with any  successor  to assume and
agree to perform the Agreements.

Profit Sharing Plan

      On February 16, 1996, the Company adopted a Profit Sharing Plan,  pursuant
to which an amount equal to 10% of the pretax profits of the Company will be set
aside for the benefit of the Company's officers and key employees.  This funding
will be paid to the Company's  officers and key employees as follows:  Thomas W.
Motter,  Chairman  of the Board,  President  and Chief  Executive  Officer--30%;
Robert W. Millar, Vice President of Engineering and Manufacturing--25%;  John W.
Hemmer,  Chief  Financial  Officer and  Treasurer--20%;  and a pool of 25% to be
allocated  among the other  officers  and key  employees  as  determined  by the
Compensation Committee and approved by the Board of Directors. This funding will
only be paid if the Company's  qualified  pretax profits exceed  $10,000,000 for
any fiscal year beginning  October 1, 1996 and ending  December 31, 2001. If the
Company's  pretax  profits  reach  $10,000,000  for any fiscal year,  the entire
pretax  profits for that year will qualify for the funding.  The plan expires at
the end of its fifth fiscal year on December 31, 2001,  when all funds held will
be disbursed.

                                       35

<PAGE>




Limitation of Liability and Indemnification

      The Company  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.  The Company
believes  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. The Company's Certificate of Incorporation limits the
liability of directors to the maximum  extent  permitted by Delaware  law.  This
provision is intended to allow the  Company's  directors the benefit of Delaware
General  Corporation Law which 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.  The Company's Bylaws provide that the Company shall
indemnify its officers and directors to the fullest extent  provided by Delaware
law. The Bylaws authorize the use of indemnification  agreements and the Company
has  entered  into such  agreements  with each of its  directors  and  executive
officers.

      There  is no  pending  litigation  or  proceeding  involving  a  director,
officer,  employee or other agent of the Company as to which  indemnification is
being sought,  nor is the Company aware of any  threatened  litigation  that may
result in claims for indemnification by any director, officer, employee or other
agent.

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


Item 11. Security Ownership of Certain Beneficial Owners and Management
-----------------------------------------------------------------------

      The  following  table  sets  forth  certain  information  with  respect to
beneficial  ownership of the Company's Common Stock as of September 30, 1998 for
(i) each  executive  officer of the  Company  (ii) each  director of the Company
(iii) each person known to the Company to be the  beneficial  owner of more than
5% of the outstanding shares, and (iv) all directors and officers as a group.

                                       36

<PAGE>





                                                                    Percent of
Name and Address(1)                   Number of Shares              Ownership(2)

Thomas F. Motter(3)(6)                      520,000                      12.0%
Douglas MacLeod                             418,451                       9.6%
Robert W. Millar(4)(6)                      336,105                       7.7%
Michael W. Stelzer(5)(6)                     62,935                       1.4%
John W. Hemmer(5)(6)                         20,513                          *
Robert L. Frome(7)                           14,000                          *
Patrick M. Kolenik(8)                         1,007                          *
Executive officers and 
directors as a group (6 persons)            954,560                      22.0%
---------------

*     Less than 1%.
(1)   The address for Mr.  Motter,  Mr.  Millar and Mr.  Stelzer is c/o Paradigm
      Medical  Industries,  Inc., 1127 West 2320 South, Suite A, Salt Lake City,
      Utah 84119. The address for Mr. MacLeod is 1002 South 10th Street, Tacoma,
      Washington 98405. The address for Mr. Hemmer is 88 Meadow Road, Briarcliff
      Manor, New York 10510. The address for Mr. Frome is 505 Park Avenue,  16th
      Floor,  New York,  New York  10022.  The  address  for Mr.  Kolenik  is 35
      Elizabeth Drive, Laurel Hollow, New York 11791.
(2)   Assumes no exercise of the Class A Warrants,  the Bridge  Warrants and the
      Attorney's  Warrants  and  no  conversion  of  outstanding  shares  of the
      Company's  Series A,  Series B and Series C  Preferred  Stock into  Common
      Stock.
(3)   Does not  include  options  to  purchase  143,450  shares of Common  Stock
      granted to Mr. Motter under the Company's 1995 Option Plan.
(4)   Includes  2,000 shares held by William E.  Millar,  Mr.  Millar's  father,
      1,000  shares held by Michael S. Millar,  Mr.  Millar's  brother;  and 100
      shares  to  Nathan  Glynn,  Mr.  Millar's  nephew.  Mr.  Millar  disclaims
      beneficial  ownership of these 3,100 shares.  Does not include  options to
      purchase  121,450  shares of Common Stock  granted to Mr. Millar under the
      Company's 1995 Option Plan.
(5)   Does not include options to purchase 57,450 shares of Common Stock granted
      to each of the two directors under the Company's 1995 Option Plan.
(6)   Does not include 250 shares of Series C Convertible  Preferred  Stock held
      by each of the four management directors.
(7)   Does not include 750 shares of Series C Convertible  Preferred  Stock held
      by Mr. Frome or options to purchase  75,000 shares of Common Stock granted
      to him.
(8)   Does not include 2,000 shares of Series C Convertible Preferred Stock held
      by Mr.  Kolenik or  options  to  purchase  75,000  shares of Common  Stock
      granted to him.


Item 12. Certain Relationships and Related Transactions
-------------------------------------------------------

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

                                       37

<PAGE>



unaffiliated parties.

      The Company subcontracts the manufacture of its Precisionist 3000 Plus(TM)
and Precisionist Thirty Thousand(TM) Workstation(TM) to one of its shareholders,
Zevex, Inc. ("Zevex") which is located in Salt Lake City, Utah. On September 23,
1996, the Company entered into a Design, Engineering and Manufacturing Agreement
with  Zevex for the  engineering  and  manufacture  of the  Workstation(TM)  and
Precisionist   Thirty   Thousand(TM).   As  of  December  31,  1998,  Zevex  has
manufactured and delivered 39 systems to the Company. However, the agreement can
be  terminated  at any time by the  Company if Zevex  fails for two  consecutive
quarters to timely  fulfill the Company's  purchase  orders,  or by Zevex if the
Company fails to timely make the payments required by the agreement after having
received a 20 day notice from Zevex  demanding  payment.  Zevex is also under an
exclusive  contract  with the Company,  which expires  September 23, 1999,  that
prohibits Zevex from manufacturing complete ultrasound or laser surgical systems
for any other company, without permission from the Company. For the fiscal years
ended  September 30, 1996,  the three month period ended  December 31, 1996, the
fiscal year ended  December 31, 1997and the fiscal year ended December 31, 1998,
the  Company  purchased  design and  manufacturing  services  in the  amounts of
$353,949, $30,386, $1,070,000 and $48,663, respectively, from Zevex.

      On January 8, 1997, the Company subcontracted the subassembly of the laser
module piece of the Photon(TM) Laser Phaco(TM) from Sunrise  Technologies,  Inc.
("Sunrise").  During the 12 month period ending  December 31, 1997,  the Company
purchased 10 laser module  subassemblies for a total purchase price of $160,000,
from Sunrise whose president was a member of the Company's Board of Directors at
the time the manufacturing agreement was signed.

      On December 19, 1995,  the Company  entered into a settlement  and release
agreement (the "Settlement  Agreement")  with Douglas A. MacLeod,  a significant
shareholder of the Company.  Pursuant to this  agreement,  Mr. MacLeod agreed to
terminate certain anti-dilution rights granted to him by the Company.  Under the
terms  of this  Settlement  Agreement,  Mr.  MacLeod  agreed  to  terminate  his
anti-dilution rights in consideration for the following: (i) Mr. Motter agreeing
to sell to Mr. MacLeod from his personal holdings 61,111 shares of the Company's
Common Stock at a purchase price of $611.11, (ii) Mr. Millar agreeing to sell to
Mr.  MacLeod from his personal  holdings  38,889 shares of the Company's  Common
Stock at a purchase price of $388.89, and (iii) the Company agreeing to issue to
MacLeod an additional 20,000 shares of Common Stock. Based on the value assigned
by the Company's investment banker, Kenneth Jerome & Company, Inc., of $1.50 per
share, the Company recognized $30,000 of expense for the 20,000 shares issued by
the Company  and  $149,000 of expense  and  additional  paid-in-capital  for the
100,000 shares sold by Mr. Motter and Mr. Millar. The Company represented in the
Settlement Agreement that a public offering of the Company's securities would be
completed by June 1, 1996. On May 24, 1996, the Company and Mr. MacLeod  amended
the  Settlement  Agreement to indicate  that a public  offering of the Company's
securities  would be completed  by July 15, 1996.  By order dated July 10, 1996,
the SEC  declared the  Company's  Registration  Statement  to be  effective  and
following  the sale of the  Company's  securities,  the  closing  of the  public
offering occurred on July 25, 1996.

      The Photon(TM)  LaserPhaco(TM)  system is protected  under a United States
patent  issued  in 1987 to  Daniel  M.  Eichenbaum,  M.D.  (U.S.  Patent  Number
4,694,828)  for the  utility  and  methods  of laser  ablation,  aspiration  and
irrigation of tissue  through a hand-held  probe of a unique design and assigned
to Photomed, a corporation owned in part by Dr. Eichenbaum.  The Company secured
the exclusive worldwide right to this patent shortly after its issue, and to the
international  patents  pending,  from Photomed by means of a License  Agreement
that  entitled Dr.  Eichenbaum to royalty  payments  equal to 1% of the proceeds
from  the net  commercial  sales of the  Photon(TM)  LaserPhaco(TM)  system  and
accessories in all medical specialties. The License Agreement terminates

                                       38

<PAGE>



July 7, 2003.  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 sub-specialties other than ophthalmology for which the
Company would receive royalty  payments equal to 1% of the proceeds from the net
sales of products utilizing the patent.

      Mr. Mackey,  a director of the Company from September 1995 to September 3,
1998, is President and a shareholder of the law firm of Mackey Price & Williams,
which  has  rendered  legal  services  to the  Company  since  February  1995 in
connection with the Company's public offering and other corporate matters. Legal
fees and  expenses  paid to Mackey  Price & Williams  for the fiscal  year ended
December 31, 1997, the three month period ended December 31, 1996 and the fiscal
year  ended  September  30,  1996  totaled   $118,765,   $25,468  and  $234,504,
respectively.  For the fiscal year ended  December  31,  1998,  The Company paid
legal fees and  expenses in the amount of $97,414 and at year end owed  $16,371.
The Company also granted  Mackey  Price & Williams  warrants to purchase  25,000
shares  of Common  Stock at an  exercise  price of $3.33  per  share in  partial
payment for legal services relating to the Company's public offering.

      Mr.  Kolenik,  a director of the Company since  November 1997, is a former
director of Win,  the  placement  agent for the Series C  Convertible  Preferred
Stock  offering.  Under the terms of an agency  agreement  with Win, the Company
agreed to pay to Win a commission equal to 9% of the aggregate purchase price of
the  Shares  sold,  or  $269,820.  Win was also paid a  non-accountable  expense
allowance  equal to 3% of the aggregate  purchase  price of the Shares sold. The
Company has also  entered  into an  agreement  with Win dated  August 20,  1997,
wherein Win agreed to perform  unspecified  investment  banking services for the
Company for a two year period, for which the Company agreed to pay Win a monthly
retainer of $2,000 for the first six months of the  agreement,  $4,000 per month
for the  second  six  months,  and  $6,000  per month for the  remainder  of the
agreement.  In an agreement  entered into in February 1999, WIN agreed to accept
$7,500 in cash plus  $60,500 in Common Stock valued at the close of business the
day prior to the initial close of the Series D Preferred Offering in addition to
a $50,000 finders fee as it relates to the Series D Preferred Stock Offering.
   In addition,  the Company  issued Win warrants to purchase  191,000 shares of
Common  Stock at an  exercise  price of $3.00 per share in  connection  with the
investment banking agreement and additional  warrants to purchase 100,000 shares
of  Common  Stock at $3.00  per  share  for  services  rendered  in the  private
placement  of  Series C  Convertible  Preferred  Stock  (collectively,  the "Win
Warrants").

      Prior to the initial closing of the Offering, the Company borrowed $75,000
from Cyn Del, of which Mr.  Kolenik is  President,  a director and a shareholder
and $25,000 from WIN Capital.  The combined $100,000 loan shall bear interest at
a rate of 10% per annum,  which shall be payable pro rata monthly,  and shall be
due on the 6-month  anniversary  of the loan. The Company shall issue to Cyn Del
five-year  warrants to purchase  105,000  shares of Common Stock and WIN Capital
warrants to purchase  35,000 share of Common  Stock both at an initial  exercise
price equal to the closing price of the  Company's  Common Stock on the business
day  immediately  prior  to the  issuance  date  of  the  warrants,  subject  to
adjustment  according to the terms contained  therein.  The Company also entered
into a one-year consulting agreement, wherein WIN Capital will provide financial
consulting  services  to the  Company in  consideration  for a fee of $5,000 per
month for the term of the agreement.


                                     PART IV


                                       39

<PAGE>



Item 13. Exhibits and Reports on Form 8-K

      (a)         Exhibits

      The  following  Exhibits  are  filed  herewith  pursuant  to  Rule  601 of
Regulation S-B or are incorporated by reference to previous filings.

Table No.                            Document

 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  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  Attorney's Warrant with Mackey Price & Williams(1)
 4.7  Warrant to Purchase Common Stock with Win Capital Corp.
 4.8  Specimen Series C Convertible Preferred Stock Certificate
 4.9  Certificate of the  Designations,  Powers,  Preferences  and Rights of the
      Series C Convertible Preferred Stock
10.1  Exclusive Patent License Agreement with Photomed(1)
10.2  Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3  Confidential Disclosure Agreement with Zevex, Inc.(1)
10.4  Indemnity Agreement with Zevex International, Inc.(1)
10.5  Manufacturing Agreement with Sunrise Technologies, Inc.(1)
10.6  Royalty  Agreement  dated January 30, 1992, with Dennis L. Oberkamp Design
      Services(1)
10.7  Indemnity Agreement dated January 30, 1992, with Dennis L. Oberkamp Design
      Services(1)
10.8  Royalty Agreement (for Ultrasonic Phaco Handpiece) with Dennis L. Oberkamp
      Design Services(1)
10.9  Lease Agreement with Eden Roc
10.10 Settlement and Release Agreement with Douglas A. MacLeod(1)
10.11 Form of Indemnification Agreement(1)
10.12 1995 Stock Option Plan and forms of Stock Option Grant Agreements(1)
10.13 Form of Promissory Note between the Company and third parties(1)
10.14 Form of Warrant to  Purchase  Common  Stock  between the Company and third
      parties(1)
10.15 Employee's Lock-Up Agreement(1)
10.16 Registering Shareholders Lock-Up Agreement(3)
10.17 Amendment of Settlement and Release Agreement with Douglas A. MacLeod (3)
10.18 Design, Engineering and Manufacturing Agreement with Zevex, Inc.(5)
10.19 License and Manufacturing Agreement with O.B.F. Labs, Ltd. (6)
10.20 Settlement Agreement with Estate of H.L. Federman (6)
10.21 Agreement with Win Capital Corp. (6)
10.22 12% Convertible, Redeemable Promissory Note (6)
10.23 Securities Exchange Agreement (6)

                                       40

<PAGE>



10.24 Stock   Exchange   for   Satisfaction   of  Debt   Agreement   with  Zevex
      International, Inc. (7)
10.25 Co-Distribution  Agreement  with  Pharmacia & Upjohn  Company and National
      Healthcare Manufacturing Corporation (7)
10.26 Agreement for Purchase and Sale of Assets with Humphrey  Systems  Division
      of Carl Zeiss, Inc. (7)
10.27 Employment Agreement with Thomas F. Motter (8)
10.28 Employment Agreement with Robert W. Millar (8)
10.29 Employment Agreement with John W. Hemmer (8)
10.30 Employment Agreement with Michael W. Stelzer (8)
10.31 Change of Control Termination Agreement with Thomas F. Motter (8)
10.32 Change of Control Termination Agreement with Robert W. Millar (8)
10.33 Change of Control Termination Agreement with John W. Hemmer (8)
10.34 Change of Control Termination Agreement with Michael W. Stelzer (8)
23.1  Consent of Medical Laser Insight(3)
23.2  Consent of Frost & Sullivan(3)
23.3  Consent of Ophthalmologists Times(3)
27    Financial Data Schedule

(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 Amendment No. 3 to  Registration  Statement
      on Form SB-2, as filed on June 28, 1996.
(5)   Incorporated  by reference from Annual Report on Form 10-KSB,  as filed on
      December 30, 1996.
(6)   Incorporated  by reference from Annual Report on Form 10-KSB,  as filed on
      April 16, 1998.
(7)   Incorporated by reference from Quarter Report on Form 10-QSB,  as filed on
      August 19, 1998.
(8)   Incorporated by reference from Quarter Report on Form 10-QSB,  as filed on
      November 12, 1998.

      (b)  Reports on Form 8-K
           -------------------

      On January 7, 1998,  the Company  filed a report on Form 8-K regarding pro
forma financial statements as of November 30, 1997.

      On February 18, 1998, the Company filed a report on Form 8-K regarding pro
forma financial statements as of December 31, 1997.

      On February 27, 1998, the Company filed a report on Form 8-K regarding pro
forma financial statements as of January 31, 1998.

                                       41

<PAGE>



                                   SIGNATURES

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

                                        PARADIGM MEDICAL INDUSTRIES, INC.



Dated: March 30, 1999                   By:   /s/Thomas F. Motter               
                                        ----------------------------------------
                                        Thomas F. Motter, Chairman of the Board,
                                        President and Chief Executive Officer


      Pursuant to the  requirements  of the Securities Act of 1934,  this report
has been signed by the following persons in counterpart on behalf of the Company
on the dates indicated.


<TABLE>
<CAPTION>

       Signature                        Title                                            Date
       ---------                        -----                                            ----

<S>                             <C>                                                  <C> 
/s/Thomas F. Motter             Chairman of the Board,                               March 30, 1999
----------------------          President and Chief Executive Officer   
Thomas F. Motter                (Principal Executive Officer)
                                


/s/Michael W. Stelzer           Vice President of Operations, Chief                  March 30, 1999
----------------------          Operating Officer, Secretary and Director
Michael W. Stelzer              



/s/Robert W. Millar             Vice President of Engineering and                    March 30, 1999
----------------------          Manufacturing and Director
Robert W. Millar                



/s/John W. Hemmer               Vice President of Finance,                           March 30, 1999
----------------------          Treasurer, Chief Financial Officer and
John W. Hemmer                  Director (Principal Financial and
                                Accounting Officer)
                                


/s/ Patrick M. Kolenik          Director                                             March 30, 1999
----------------------
Patrick M. Kolenik
</TABLE>


                                       42

<PAGE>





<TABLE>
<S>                             <C>                                                  <C>
/s/ Robert L. Frome             Director                                             March 30, 1999
----------------------
Robert L. Frome
</TABLE>

10K-410M.PMI

                                       43


<PAGE>