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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  Form 10-KSB/A
                                 Amendment No. 2

              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                 For the fiscal year ended December 31, 2007, or

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                        For the Transition Period from to
                         Commission File Number 0-28498

                        Paradigm Medical Industries, Inc.
                 (Name of small business issuer in its charter)

                       DELAWARE                                  87-0459536
            (State or other jurisdiction                     (I.R.S. Employer
          of incorporation or organization)               Identification Number)

           2355 South 1070 West, Salt Lake City, Utah              84119
            (Address of principal executive offices)             (Zip Code)

       Registrant's telephone number, including area code: (801) 977-8970

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the 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 [ ]

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-B is not contained  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, 2007 were
$1,911,000.

         Indicate by check mark whether the registrant is an  accelerated  filer
(as defined in Exchange Act Rule 12b-2):Yes [ ] No [X]

         Indicate by check mark whether the  registrant  is a shell  company (as
defined in Exchange Act Rule 12b-2): Yes [ ] No [X]

         The aggregate  market value of the voting stock held by  non-affiliates
of the registrant as of June 30, 2007 was  approximately  $1,500,000  based upon
the closing  sale price of such stock as reported on the OTC  Bulletin  Board on
that date.

         As of March 31, 2008, registrant had outstanding  798,887,500 shares of
common stock, 5,627 shares of Series A preferred stock, 8,986 shares of Series B
preferred stock, no shares of Series C preferred stock, 5,000 shares of Series D
preferred  stock,  250 shares of Series E preferred  stock,  4,598.75  shares of
Series F preferred stock, and 588,235 shares of Series G preferred stock.

                      DOCUMENTS INCORPORATED BY REFERENCE:

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

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






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                                     PART I

Item  1. Description of Business

General

         The  Company  develops,   manufactures,   sources,  markets  and  sells
ophthalmic  surgical and  diagnostic  instrumentation  and related  accessories,
including disposable products.  The Company's surgical equipment is designed for
minimally  invasive cataract  treatment.  The Company's cataract removal system,
the Photon(TM)  laser system,  is a laser cataract surgery system designed to be
marketed  as the next  generation  of  cataract  removal.  Because of the "going
concern" status of the Company, management has focused efforts on those products
and activities  that will, in its opinion,  achieve the most resource  efficient
short-term cash flow to the Company.  As reflected in the results for the fiscal
year ended  December 31, 2007,  diagnostic  products are currently the Company's
major focus and the  Photon(TM)  and other  extensive  research and  development
projects  have been put on hold pending  future  evaluation  when the  financial
position of the Company  improves.  Due to the lack of FDA approval and the lack
of current  evidence to support  recoverability,  the  Company  has  recorded an
inventory  reserve to offset the majority of the inventory  associated  with the
Photon(TM).  In addition, most inventory associated with the Precisionist Thirty
Thousand(TM) has been reserved due to the estimated lack of recoverability.  The
Company's  focus is not on any  specific  diagnostic  product or  products,  but
rather on its entire group of diagnostic products. The Photon(TM) can be sold in
markets outside of the United States.  Both the Photon(TM) and the  Precisionist
ThirtyThousand(TM)  are manufactured as an Ocular Surgery  Workstation(TM).  The
Company is considering  marketing the Photon(TM) and other lasers for use in eye
care.

         The  Company's   diagnostic  products  include  a  pachymeter,   a  P55
pachymetric analyzer, a P37 Ultrasonic A/B Scan, P40, P45 and P60 UBM Ultrasound
Biomicroscopes,  a P37 A/B Scan, two perimeters,  a corneal  topographer and the
Blood Flow  Analyzer.  The  diagnostic  ultrasonic  products  including  the P55
pachymetric  analyzer,  the P37  Ultrasonic  A/B Scan and the P40 UBM Ultrasound
Biomicroscope  were acquired from Humphrey Systems,  a division of Carl Zeiss in
1998.  The Company  developed  and offered for sale in the fall of 2000 the P45,
which  combines the P37  Ultrasonic  A/B Scan and the UBM  biomicroscope  in one
machine.  In addition,  the Company developed and offered for sale in March 2005
the P60, which  represents  the fourth  generation of UBM devices and has better
visual clarity and image  flexibility than earlier  versions.  The perimeter and
the corneal  topographer  were added when the Company  acquired the  outstanding
shares of the stock of Vismed,  Inc. d/b/a/  Dicon(TM) in June 2000. The Company
purchased  Ocular Blood Flow, Ltd. in June 2000 whose  principal  product is the
Blood  Flow  Analyzer(TM).  This  product is  designed  for the  measurement  of
intraocular  pressure and  pulsatile  ocular blood flow volume for detection and
monitoring  of  glaucoma.   The  Company  is  currently  developing   additional
applications for all of its diagnostic products.

         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.  In June 2000, the
Company  purchased  Occular Blood Flow, Ltd., the manufacturer of the Blood Flow
Analyzer(TM).  The terms and  conditions  of the sale were  $100,000 in cash and
100,000  shares  of  common  stock.   In  April  2001,   the  Company   received
authorization  to use a  common  procedure  terminology  or CPT  code  from  the
American  Medical  Association  for  procedures  performed  with the Blood  Flow
Analyzer(TM) , for reimbursement purposes for doctors using the device. However,
certain  payers  have  elected  not to  reimburse  doctors  using the Blood Flow
Analyzer(TM).

         On July 23, 1998,  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 78,947  shares of common
stock which were issued to Humphrey  Systems and 26,316  shares of common  stock
which were issued to business broker Douglas Adams. If the net proceeds received
by Humphrey Systems from the sale of the shares issued pursuant to the Agreement
was less than $375,000,  after payment of commissions,  transfer taxes and other
expenses  relating to the sale of such shares,  the Company would be required to
issue  additional  shares of common stock,  or pay additional  funds to Humphrey
Systems as would be necessary to increase the net proceeds  from the sale of the
assets to $375,000.  Since Humphrey Systems realized only $162,818 from the sale
of 78,947  shares of its common  stock,  the Company  issued  80,000  additional
shares in January  1999 to enable  Humphrey  Systems to receive  its  guaranteed
amount.  The amount of $21,431 was paid to the Company as excess  proceeds  from
the sale of this additional stock.



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<PAGE>

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

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

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

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

         The Company was  unsuccessful in supplying the disposable  blades.  The
Company  discontinued the marketing and sales efforts of this product during the
third quarter of 2002. On April 1, 2002,  the Company  entered into a consulting
agreement  with  John  Charles  Casebeer,   M.D.  to  develop  and  promote  the
microkeratome.  For Dr. Casebeer's services during the period from April 1, 2002
to September  30, 2002,  the Company  issued him a total of 43,684 shares of its
common stock,  representing  payment of $100,000 in stock for his services.  All
assets acquired from Innovative  Optics,  including  remaining  inventory with a
book value of $160,000 and equipment and intangible  assets with a book value of
$2,082,000, were written off during 2002.

         On  September  19,  2002,  the  Company  completed a  transaction  with
International  Bio-Immune Systems,  Inc., a Delaware  corporation , in which the
Company acquired  2,663,254  shares,  or 19.9% of the outstanding  shares of its
common stock,  and warrants to purchase  1,200,000 shares of its common stock at
$2.50 per share for a period of two years,  through the exchange and issuance of
736,945 shares of its common stock,  the lending of 300,000 shares of its common
stock to the  company  and the  payment of certain of its  expenses  through the
issuance of an aggregate of 94,000 shares of its common stock to the company and
its counsel. During 2004, the Company sold all 2,663,254 shares of International
Bio-Immune Systems stock for net proceeds of $505,000.

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

         On September 28, 2004, the Company  entered into an Investment  Banking
Agreement with Alpha Advisory  Services,  Inc. Under the terms of the agreement,
Alpha  Advisory  Services is to use its best  efforts to provide  the  following
services to the Company:  (i) review of and make  recommendations  regarding the
Company's  business plan and  promotional  materials;  (ii) identify and contact


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potential investors in the United States and Europe for potential  investment in
the Company's  securities;  (iii) organize meetings with potential investors and
participate in such meetings;  and (iv) assist the Company in future financings,
mergers, acquisitions and potential buyouts.

         The term of the agreement  was for a period of three months,  which was
to be automatically renewed for successive one-year terms. Following the initial
three month period,  either party could  terminate  the  agreement  upon 15 days
written  notice to the other  party.  In  consideration  for the  services to be
performed under the agreement,  Alpha Advisory  Services was to receive a fee of
$3,000 per month,  plus reasonable  travel and other  expenses,  and warrants to
purchase  25,000  shares of the  Company's  common stock at $.15 per share.  The
warrants are exerciseable,  on a cashless basis, over a two year period from the
date of issuance.  The Company  provided  notice to Alpha  Advisory  Services to
terminate  the  agreement,  effective  January 28,  2006.  During the four month
period the agreement was in effect,  the Company paid Alpha Advisory  Services a
total of $12,000 pursuant to the terms of the agreement.

         In  March  2005,   the  Company   introduced  the  P60  UBM  Ultrasound
Biomicroscope.  The P60  Biomicroscope  represents the fourth  generation of UBM
devices  and has  better  visual  clarity  and image  flexibility  than  earlier
versions.  On March 1, 2005,  the  Company  was awarded the CE Mark for the P60,
which enables it to market the device in 19 Western European countries,  most of
the Middle East and India,  and some parts of Asia and the  Pacific  Rim. On May
26, 2005, the Company received FDA 510(k) premarket  approval for the P60, which
allows it to be sold in the United  States.  On  February  9, 2006,  the Company
received a Canadian  device  license for the P60,  which allows it to be sold in
Canada.

         On June 12, 2006,  the Company  entered into a Worldwide  OEM Agreement
with  MEDA Co.,  Ltd.,  one of  China's  leading  developers  and  producers  of
ultrasound  devices.  Under the terms of the  agreement,  MEDA agrees to jointly
engineer,   develop  and  manufacture  the  Company's  next  generation  of  the
Ultrasound  BioMicroscope,  as  well  as  other  proprietary  new  products  and
enhancement of the Company's current  products.  The products to be manufactured
by MEDA,  at agreed upon costs,  and supplied to the Company for resale  include
the following new products:  an ultrasound  biomicroscope,  two  ultrasound  A/B
Scans, a biometric A-Scan and a pachymeter.

         The  agreement  provides  that the  Company  and MEDA  agree to jointly
develop and  collaborate  in the  improvement  and  enhancement of the Company's
products  and,  in  the  interest  of  product   development,   enhancement  and
differentiation,  MEDA  agrees  to  give  consideration  to  potential  software
development  or  enhancements  made  available to the Company for its  products.
Moreover,  in the interest of product  improvement,  MEDA agrees to  collaborate
with the Company and its  designated  engineers,  employees and  consultants  to
consider and potentially  implement  jointly or individually  the development of
product enhancements to the Company's products to be manufactured by MEDA.

         The software and hardware modifications designed jointly by the Company
and MEDA will be considered the joint  intellectual  property of the Company and
MEDA and may be used, without  restriction,  unless otherwise  previously agreed
to, by either party.  MEDA also agrees to provide a twelve month warranty on all
products that it manufactures for the Company. If defects cannot be corrected at
the Company's facilities,  the products may be returned to MEDA for the purposes
of carrying out such repairs as required, and MEDA agrees to return the repaired
products  to the  Company  or its  designated  agent or  distributor  within ten
working  days  from  the  date of  receiving  such  products,  at no cost to the
Company, and MEDA will pay return freight costs.

         MEDA  further  agrees to  endeavor  to answer any  technical  inquiries
concerning  the  products  it has  manufactured.  MEDA also  agrees to train the
Company's technical service engineers and designated international  distributors
as soon as possible  after the signing of this  agreement,  and as future  needs
arise and as MEDA can reasonably fit such training into the regular schedules of
its  employees.  MEDA agrees to  determine  the need for future  training on new
products  as  necessary  and will offer such  training in  Tiangin,  China.  For
training  conducted  outside China,  the Company or its designated  distributors
and/or service centers will be responsible  for the traveling,  living and hotel
expenses  for MEDA's  engineers.  Training is at no charge to the  Company.  The
training will also be made available to the Company's designated repair agencies
in order to provide service and repair on a worldwide basis.  Such agencies will
be considered  authorized  repair  facilities for the products  manufactured  by
MEDA.

         MEDA  provides  the Company  with  several  ultrasound  devices.  These
devices include the P37-II A/B Scan, the P2000 A-Scan Biometric Analyzer,  P2200
Pachymeter and the P2500,  which is a combined A-Scan and pachymeter.  MEDA also
manufactures  the P2700,  P3700,  and  P37-II  A/B Scans and the P50  Ultrasound
Biomicroscope.  The  agreement  provides  exclusive  distribution  rights to the
Company  throughout  most of the world,  including the United States and Canada,
once FDA approval is received on these devices.

         The  agreement  shall  be  effective  for  three  years  from  date  of
execution. At the end of the three year term, representatives of the Company and
MEDA will confer to determine whether to extend the term of the agreement.  This
will have a  practical  effect of  extending  the term of the  agreement  for an
additional 120 days. If mutual agreement for extending the term of the agreement
is not  reached  within 120 days after the end of the three year term,  then the
agreement will be deemed terminated.  However, if within the 120 day period, the


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Company  and MEDA  mutually  agree to  extend  the term of the  agreement,  then
thereafter either party may terminate the agreement by providing at least twelve
months' prior written notice to the other party.  All outstanding  orders at the
time of notification will be supplied under the terms of the agreement, and MEDA
will  continue to fulfill all orders  from the  Company  until the twelve  month
notice period has expired.

         On January 31 and  February 1, 2007,  the Company  received  FDA 510(k)
premarket  approval for a new  generation of ultrasound  devices.  This approval
allows  the new  devices  to be sold in the United  States.  The new  ultrasound
devices,  which are to be  manufactured  by MEDA and sold by the  Company in the
United  States,  include the P2000 A-Scan  (used to measure  axial length of the
eye), the P2200 Pachymeter (used for measuring corneal thickness),  the P2500 A-
Scan/Pachymeter  (a  combination  of the two  stand  alone  devices),  the P2700
AB/Scan (an  ultrasound  imaging device for detecting  abnormalities  within the
eye) and the P37-II (a more  advanced  AB/Scan used to provide  portability  for
ophthalmology  veterinary applications) and the P50 Ultrasound Biomicroscope for
high frequency imaging of the anterior chamber of the eye.

         On  September  25,  2006,  the Company  entered  into a  Worldwide  OEM
Agreement with Tinsley, a division of Hartest Precision Instruments Limited, and
one of Europe's  leading  developers  and  producers of visual  fields  analysis
devices  or  perimeters.  Under the terms of the  agreement,  Tinsley  agrees to
engineer,  develop and manufacture  the Company's  newest  perimeter,  the LD700
Visual Fields  Analyzer.  The product is to be manufactured by Tinsley at agreed
upon costs and supplied to the Company for resale.

         On August 14, 2007,  the Company  entered into an agreement with Equity
Source  Partners,  LLC of Jericho,  New York.  Under the terms of the agreement,
Equity  Source  Partners  will act as the  exclusive  financial  advisor  to the
Company  and will  assist the  Company in raising  private  capital,  creating a
strategy  for  growing its core  business,  pursuing a follow on  offering,  and
providing  general  strategic  corporate  advice.  Among the strategic  advisory
services  Equity Source  Partners will provide are to assist in identifying  and
introducing the Company to third parties in connection with potential  strategic
relationships,  provide advice concerning issues relating to potential strategic
relations,  capital  raises  and  potential  investment  banking  contacts,  and
establish  contact with  prospective  providers of capital.  Among the financing
services Equity Source Partners will perform is to solicit prospective providers
of capital on the Company's behalf.

         The term of the  agreement  is for twelve  months  unless  extended  by
mutual consent. As compensation for its services,  the Company agrees to provide
equity  Source  Partners with an advisory fee equal to an aggregate of 3% of the
outstanding  shares of the  Company's  common  stock.  In addition,  the Company
agrees  to pay  Equity  Source  Partners  a cash fee  equal to 7.5% of the gross
proceeds from the sale of securities  to investors  that were  introduced to the
Company  by  Equity  Source  Partners  and a cash fee  equal to 3% of the  gross
proceeds  received  from the  sale of  securities  to  investors  that  were not
introduced by Equity Source Partners.

         On January 16, 2008,  the Company  entered into a consulting  agreement
with Corcoran  Consulting  Group,  which  specializes  in medical  reimbursement
issues for optometry and ophthalmology.  The Company plans to work with Corcoran
Consulting  Group  to  create a new  common  procedure  technology,  or CPT code
number,  for reimbursement  purposes for physicians and practitioners  using the
Blood Flow  Analyzer(TM).  In addition,  the Company plans to work with Corcoran
Consulting Group to offer educational  seminars for physicians and practitioners
who purchase the Blood Flow Analyzer(TM).

         On January 28, 2008, the Company entered into a Distribution  Agreement
with  LACE  Elettronica  srl to  distribute  its  Glaid  device,  a  proprietary
electrophysiology  instrument  for the early  detection  of glaucoma by means of
measuring  the  physical  condition of the retina's  ganglion  cells,  including
retinal ganglion cell loss. The Glaid device was approved by the FDA in 2005 and
has  undergone  extensive  testing and  clinical  studies in the United  States,
Canada and  Italy,  including  at Bascom  Palmer Eye  Institute,  University  of
California at San Diego's Hamilton  Glaucoma Center,  and New York State College
of Optometry.

         Under the terms of the agreement,  the Company has the exclusive  right
to distribute the Glaid device in the United States and Canada. The Company also
has a first  right of refusal  for  distribution  of the  product  to  countries
outside  the United  States and Canada  where LACE is not  currently  selling or
marketing  the  product.  These  additional  distribution  rights are subject to
reasonable new minimum quotas.  The Distribution  Agreement requires the Company
to purchase  the Glaid device from LACE at an agreed upon price and to then sell
the product in compliance with minimum order requirements.  The five year quotas
for the Glaid device are 27 units, 60 units, 100 units, 120 units, and 120 units
for  years  one  through  five  of  the  agreement.  Paradigm  sales  for  quota
requirements  are to begin as soon as the product is fully  completed,  with all
accessories and consumables, and ready for delivery.

         The Distribution Agreement is for the term of five years. At the end of
the five year  term,  representatives  of the  Company  and LACE will  determine
whether  to  extend  the  term  of  the  agreement.   If  mutual  agreement  for
continuation  of the agreement is not reached  within 120 days  thereafter,  the
agreement will be deemed terminated.  However, if within the 120 day period, the


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Company and LACE mutually agree to continue the agreement, then either party may
terminate  the  agreement  at any time  thereafter  by providing at least twelve
months' prior written notice to the other party.  All outstanding  orders at the
time of notification will be supplied under the terms of the agreement, and LACE
will  continue to fulfill all orders  from the  Company  until the twelve  month
notice period has expired.

         LACE also  agrees to provide a twelve  month  warranty  from the day of
delivery on all Glaid devices supplied to the Company.  If the defects cannot be
corrected at the Company's  facilities or at the  facilities of trained  Company
repair  centers,  the  products  must then be returned  to LACE for  purposes of
carrying out such  repairs as  required,  and LACE agrees to return the repaired
products  to the  Company  or its  designated  agent or  distributor  within ten
working  days  from  the  date of  receiving  such  products,  at no cost to the
Company, and LACE will pay return freight costs. The Company additionally agrees
to arrange for  installation of the Glaid device at no cost to LACE. The Company
further agrees to provide  Company brand specific  labeling to be applied to the
LACE devices shipped directly to the Company's customers and distributors.

Background

         Corporate  History:  The Company's  business  originated  with Paradigm
Medical,  Inc.,  a  California  corporation  formed in  October  1989.  Paradigm
Medical,  Inc. developed its present ophthalmic business and was operated by its
founders Thomas F. Motter and Robert W. Millar.  In May 1993,  Paradigm Medical,
Inc. merged with Paradigm  Medical  Industries,  Inc. At the time of the merger,
the  Company  was a dormant  public  shell  existing  under the name  French Bar
Industries,  Inc.  French  Bar had  operated a mining and  tourist  business  in
Montana. Prior to its merger with Paradigm Medical, Inc. in 1993, French Bar had
disposed of its mineral and mining  assets in a settlement of  outstanding  debt
and had returned to the status of a dormant entity.  Pursuant to the merger, 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  Paradigm  Medical,  Inc.  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
Paradigm  Medical,  Inc.  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   re-domesticated   to  Delaware   pursuant  to  a
reorganization.

Overview

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

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

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

         Surgical use of ultrasonics in ophthalmology is limited to treatment of
cataract  lenses in the eye through a procedure  called  phacoemulsification  or
"phaco."  A primary  objective  of  cataract  surgeries  is the  removal  of the
opacified (cataract) lens through an incision that is as small as possible.  The
opacified  lens is then replaced by a new synthetic  lens  intraocular  implant.
Phaco  technology  involves a process by which a cataract  is broken  into small
pieces using ultrasonic shock waves delivered through a hollow, open-ended metal
needle attached to a hand held probe. The fragments of cataracts tissue are then


                                       6
<PAGE>

removed through aspiration. Phaco systems were first designed in the late 1960's
after various  attempts by surgeons to use other  techniques to remove opacified
lenses, including crushing,  cutting, freezing,  drilling and applying chemicals
to the  cataract.  By the  mid-1970's,  ultrasound  had  proven  to be the  most
effective   technology  to  fragment  cataracts.   Market  Scope's  (Manchester,
Missouri),  The 2001  Report on the  Worldwide  Cataract  Market,  January  2001
indicates that phaco cataract  treatment was the technology for cataract removal
used in over 80% of surgeries  in the United  States and over 20% of all foreign
surgeries.

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

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

Products

         The Company's principal  proprietary  surgical products are systems for
use by  ophthalmologists  to perform  surgical  treatment  procedures  to remove
cataracts.   The  Company  has  complete  ownership  of  each  product  with  no
technological licensing limitations.

         Precisionist ThirtyThousand(TM): The Precisionist ThirtyThousand(TM) is
the Company's core phaco surgical  technology.  The  Precisionist(TM) was placed
into  production  and  offered  for sale in 1997.  As a phaco  cataract  surgery
system, the Company believes the Precisionist(TM) with its new fluidics panel is
equal or  superior  to the  present  competitive  systems in the United  States.
However,  due to the  lack  of  recent  sales,  the  majority  of the  Company's
inventory   associated  with  the  Precisionist  Thirty  Thousand(TM)  has  been
estimated to be obsolete  and  therefore a reserve for such  inventory  has been
recorded.  The system features a graphic color display and unique proprietary on
board  computer and graphic user  interface  linked to a soft key membrane panel
for flexible programmable operation.  The system provides real-time "on-the-fly"
adjustment   capabilities  for  each  surgical  parameter  during  the  surgical
procedure  for high  volume  applications.  In  addition,  the  Precisionist(TM)
provides one hundred  pre-programmable  surgery  setups,  with a second level of
subprogrammed  custom modes within each major surgical screen (i.e.,  ultrasound
phaco and irrigation/aspiration modes).

         The  Precisionist(TM)  also  features  the  Company's  newly  developed
proprietary  fluidics  panel  which  is  completely   noninvasive  for  improved
sterility  and to  provide  a  surgical  environment  in the eye that  virtually
eliminates  fluidic  surge and  solves  chamber  maintenance  problems  normally
associated  with phaco  cataract  surgery.  This new  fluidics  system  provides
greater  control for the surgeon  and allows the safe  operation  at much higher
vacuum settings by sampling changes in aspiration 100 times per second.  Greater
vacuum in phaco surgery means less use of ultrasound or laser energy to fragment
the cataract and less chance for surrounding  tissue damage.  In addition to the
full complement of surgical modalities (e.g.,  irrigation,  aspiration,  bipolar
coagulation and anterior vitrectomy),  system automation includes  "dimensional"
audio  feedback  of vacuum  levels  and  voice  confirmation  for  major  system
functions,  providing  an  intuitive  environment  in which the  advanced  phaco
surgeon can  concentrate  on the surgical  technique  rather than the equipment.
Sales of the  Precisionist(TM) and related accessories were 0% of total revenues
in both the fiscal years 2006 and 2005, respectively.




                                       7
<PAGE>

         Ocular  Surgery  Workstation(TM):  The Ocular  Surgery  Workstation(TM)
comprises  the base  system of the  Precisionist  ThirtyThousand(TM)  and is the
first system, to the Company's knowledge,  which uses the expansive capabilities
of today's  advanced  computer  technology to offer  seamless open  architecture
expandability of the system hardware and software modules.  The  Workstation(TM)
utilizes an embedded open  architecture  computer  developed for the Company and
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) are all
included in the base model.  Each component is controlled as a peripheral module
within this fully integrated system. This approach allows for seamless expansion
and refinement of the Workstation(TM) with the ability to add other hardware and
software features.  Expansion such as the Company's  Photon(TM) laser system and
hardware for additional surgical applications are easily implemented by means of
a preexisting  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  marketplace.  If the FDA approves the  Photon(TM),  the Company
will  refer  to  the   Workstation(TM)   as  the   Photon(TM)   Ocular   Surgery
Workstation(TM).  To date, the Company has not commercially developed or offered
for sale any other added hardware or software features to its Workstation(TM).

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

         The laser probe may also eliminate any possibility for burns around the
incision  or at the  cornea  and may  therefore  be used with  cataract  surgery
techniques  that  utilize  a more  delicate  clear  cornea  incision  which  can
eliminate sutures and be conducted with topical anesthesia. However, this system
may not effectively remove harder grade cataracts. Harder grade cataracts can be
removed   using   the   already   existing   ultrasound    capability   of   the
Precisionist(TM).  Because  of  the  "going  concern"  status  of  the  Company,
management has focused  efforts on those  products and activities  that will, in
its opinion,  achieve the most resource  efficient  short-term  cash flow to the
Company.  As  reflected  in the results for the fiscal year ended  December  31,
2006,  diagnostic  products  are  currently  the  Company's  major focus and the
Photon(TM) and other extensive  research and development  projects have been put
on  hold  pending  future  evaluation  when  the  Company's  financial  position
improves.  Due to the  uncertainty  surrounding  the timetable for obtaining FDA
approval and the lack of significant  revenue from the other surgical  products,
the  Company has  recorded  an  inventory  reserve  against the  majority of the
inventory  associated with the Photon(TM) and Precisionist Thirty Thousand (TM).
The Company's focus is not on any specific  diagnostic product or products,  but
rather on its entire group of diagnostic products.

         At some  point in the  future,  the  Company  may  intend,  subject  to
economic feasibility and the availability of adequate funds, to refine the laser
delivery  system and laser  cataract  surgical  technique used on soft cataracts
through expanded  research and clinical studies.  Subject to the  aforementioned
constraints,  the Company  intends to refine the fluidics  management  system by
improving  chamber   maintenance  during  surgical  procedures  and  to  develop
techniques to optimize time and improve  invasive  techniques  through  expanded
research  and  clinical  studies.  As 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
denature   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 microprocessor  controlled Nd:YAG laser system provides
ophthalmic  surgeons  with a more  precise  and less  traumatic  alternative  in
cataract surgery.  Although conventional ultrasonic surgical systems have proven
effective  and  reliable  in  clinical  use for many  years,  their  use of high
frequency  shock waves and  vibration  to  fragment  the  cataract  can make the
procedure  difficult and can present risk of complication  both during and after
surgery.  In  contrast,   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-cataract  tissues within
the eye, the  Company's  Photon(TM)  laser  cataract  system  should only affect
tissues with which it comes into direct contact.

         In  October  of  2000,  the  Company  received  FDA  approval  for  the
Photon(TM)  Workstation(TM)  to be  used  with a  532mm  green  laser  which  is
effective  for  medical   procedures  other  than  cataract  removal,   such  as
photocoagulation  of retinal  and venous  anomalies  within or outside  the eye,
pigmented  lesions around the orbital socket,  posterior or anterior  procedures


                                       8
<PAGE>

associated  with glaucoma or diabetes and general  photocoagulation  for various
dermatological  venous anomalies  including  telangiectasia  (surface veins), or
commonly  referred  to as "spider  veins".  The goal is to be able to  integrate
multiple laser  wavelengths  into one system or workstation that can be used for
multiple medical specialties. This approval represents only one of the potential
applications that could represent  substantial  growth  opportunities  including
additional sales of equipment, instruments, accessories and disposables.

         The Photon(TM) Ocular Surgery Workstation(TM) has not been commercially
developed  with any other  added  hardware  or  software  features.  There is no
guarantee  that the  ophthalmic  surgery  market  will  accept the laser in this
capacity or that the FDA will grant approval.  Regulatory approval would require
completion of pending  Photon(TM)  clinical trials and  resubmission of a 510(k)
predicate  device  application to the FDA. Because of the "going concern" status
of the Company,  management has focused efforts on those products and activities
that will, in its opinion,  achieve the most resource efficient  short-term cash
flow to the  Company.  As  reflected  in the  results  for the fiscal year ended
December 31, 2007, diagnostic products consisting mainly of P40, P45 and P60 UBM
Ultrasound  Biomicroscopes;  P2700, P3700 and P37 A/B Scans;  perimeters,  CT 50
Corneal  Topographer,  and Blood Flow  Analyzer(TM)  are currently the Company's
major focus and the  Photon(TM)  and other  extensive  research and  development
projects  have been put on hold pending  future  evaluation  when the  financial
position of the company  improves.  The  Company's  focus is not on any specific
diagnostic  product or products,  but rather on the entire  group of  diagnostic
products.

         On March 31, 2005,  Joseph W. Spadafora  filed a complaint  against the
Company in the United  States  District  Court,  District  of Utah,  in which he
alleges that he was a clinical  investigator  in the study for the FDA involving
the  Company's  Photon(TM)  laser system where he performed  numerous  surgeries
using the Photon(TM). Dr. Spadafora contends that in meetings with the Company's
personnel he suggested  ways in which the handpiece on the  Photon(TM)  could be
improved.  Dr.  Spadafora  further  contends  that on August 5,  1999,  when the
Company filed a patent  application  for an improved  handpiece  with the United
States Patent and Trademark  Office, he was not named as one of the inventors or
a coinventor on the patent  application.  On September 24, 2004, the Company was
issued a patent entitled,  "Laser Surgical  Handpiece with Photon Trap." Because
the Company did not list Dr.  Spadafora as one of the  inventors or a coinventor
on the patent,  Dr.  Spadafora  requests in his complaint  that a court order be
entered  declaring that he is the inventor or coinventor of the patent and, as a
result, is entitled to all or part of the royalties and profits that the Company
earned  or will  earn from the sale of any  product  incorporating  or using the
improved handpiece.

         On June 2, 2006, the Company  entered into a settlement  agreement with
Dr.  Spadafora  for  the  dismissal  of the  lawsuit.  Under  the  terms  of the
settlement  agreement,  the  Company  agrees to provide Dr.  Spadafora  with the
exclusive right over a three-year period to market and sell the Photon(TM) laser
system and its  components,  including the inventory and  intellectual  property
rights.  If Dr. Spadafora were successful in finding a prospective  purchaser to
acquire the  Photon(TM)  laser system upon terms  acceptable to the Company,  it
agrees to pay him a commission  equal to 10% of the total purchase price. If the
purchase  price for the  Photon(TM)  laser  system  includes  a royalty or other
payments  payable to the Company on later sales of the  Photon(TM)  laser system
other than its handpiece  component,  the Company agrees to pay Dr. Spadafora 8%
of such royalties or other payments on such later sales through the full term of
the purchase  agreement.  The Company  further  agrees that if a purchase  price
includes a royalty or other  payments  payable to the  Company on later sales of
the handpiece  component of the Photon(TM)  laser system,  the Company agrees to
pay Dr.  Spadafora 15% of such royalties or other payments through the full term
of the purchase agreement.

         Additionally,  the settlement agreement provides that if the Company is
successful through its sole efforts,  without any assistance from Dr. Spadafora,
in finding a purchaser to acquire the Photon(TM)  laser system or its components
during the second or third year of Dr. Spadafora's exclusive rights, the Company
agrees to pay Dr.  Spadafora a  commission  equal to 1.7% of the total  purchase
price and of the Company's  royalties or other  payments on subsequent  sales of
the  Photon(TM)  laser  system or its  components  through  the full term of the
purchase  agreement.  Finally,  the  settlement  agreement  provides  for mutual
releases by Dr.  Spadafora  and the  Company for the benefit of each other,  and
that the Company and Dr.  Spadafora each agree to pay their own costs,  expenses
and attorney's  fees incurred in connection with the lawsuit and the preparation
of the settlement agreement.

         Surgical  Instruments  and  Disposables:  In addition  to the  cataract
surgery  equipment,  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  penetrates  the cataract  surgery
market and expands the treatment  applications  for its  Workstation(TM).  These
products contributed 0% of total revenues for both 2006 and 2005.

         Diagnostic  Eye Care  Products:  Glaucoma is a second  leading cause of
adult  blindness in the world.  Glaucoma is described as a partial or total loss
of visual field  resulting from certain  progressive  disease or degeneration of
the  retina,  macula or nerve  fiber  bundle.  The cause  and  mechanism  of the
glaucoma pathology is not completely understood. Present detection methods focus
on the  measurement  of  intraocular  pressure  in the  eye,  visual  field  and
observation  of the optic nerve head to determine  the  possibility  of pressure


                                       9
<PAGE>

being exerted upon the retina and optic nerve fiber  bundle,  which can diminish
the visual field.  Recently,  retinal blood  circulation has been indicated as a
key component in the presence of glaucoma.  Some companies produce color Doppler
equipment in the $80,000 price range  intended to provide  measurement of ocular
blood flow activity in order to diagnose and treat glaucoma at an earlier stage.

         Blood  Flow  Analyzer(TM):  In June  1997,  the  Company  received  FDA
clearance  to market  the  Blood  Flow  Analyzer(TM)  for  early  detection  and
treatment management of glaucoma and other retinal 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.  This was the first  diagnostic  eye care device.  The
device is a portable  desktop  system that utilizes a  proprietary  and patented
pneumatic Air Membrane Applanation Probe(TM) or AMAP(TM),  which can be attached
to any model of  standard  examination  slit lamp,  which is then  placed on the
cornea of the patient's eye to measure the intraocular  pressure within the eye.
The device is unique in that it reads a series of  intraocular  pressure  pulses
over a short period of time  (approximately five to ten seconds) and generates a
waveform profile, which can be correlated to blood flow volume within the eye. A
proprietary  software  algorithm  developed by David M. Silver,  Ph.D., at Johns
Hopkins  University,  calculates  the blood flow volume.  The device  presents a
numerical  intraocular  pressure  reading  and blood flow  analysis  rating in a
concise printout, which is affixed to the patient history file. In addition, the
data generated by the device can be downloaded to a personal computer system for
advanced database development and management.

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

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

         The manufacturing  activities for the Blood Flow Analyzer(TM) have been
moved to the Salt  Lake City  facility  from the  outsourced  plant  located  in
England.  On October 21, 2002,  the Company  received FDA approval on its 510(k)
application for additional  indications of use for the Blood Flow  Analyzer(TM).
The additional  indications  include  pulsatile  ocular blood flow and pulsatile
ocular  blood  volume.  These  are  diagnostic   measurements  that  assess  the
hemodynamic  and vascular health of the eye. Also, the Company is continuing its
aggressive  campaign  to  educate  the  insurance  payors  about the Blood  Flow
Analyzer(TM),  its purposes and the  significance  of its performance in patient
care in order to  achieve  reimbursements  to the  doctors  using its Blood Flow
Analyzer(TM).  Sales of the Blood  Flow  Analyzer(TM)  and  related  accessories
accounted for 13% and 10% of total sales for the fiscal years ended December 31,
2007 and 2006, respectively.

         On January 16, 2008,  the Company  entered into a consulting  agreement
with Corcoran  Consulting  Group,  which  specializes  in medical  reimbursement
issues for optometry and ophthalmology.  The Company plans to work with Corcoran
Consulting  Group  to  create a new  common  procedure  technology,  or CPT code
number,  for reimbursement  purposes for physicians and practitioners  using the
Blood Flow  Analyzer(TM).  In addition,  the Company plans to work with Corcoran
Consulting Group to offer educational  seminars for physicians and practitioners
who purchase the Blood Flow Analyzer(TM).

         Dicon(TM)  Perimeters:  Dicon(TM) perimeters consist of the LD 400, the
TKS 5000, and software  consisting of FieldLink(TM),  FieldView(TM) and Advanced
FieldView.  Perimeters  are used to determine  retinal  sensitivity  testing the
visual  pathway.  Perimeters have become a standard of care in the detection and
monitoring  of glaucoma  worldwide.  Perimetry is  reimbursable  worldwide.  The


                                       10
<PAGE>

Dicon(TM)  perimeters  feature patented kinetic fixation and voice synthesis now
in 27 different languages.  Software programs are sold to assist in the analysis
of the test results.  Sales of the perimeters and related accessories  generated
19% and 35% of the total revenues for 2007 and 2006, respectively.

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

         The LD700 Perimeter is the next  generation of perimeters,  providing a
small  footprint  and  compact  design.  The test given with the LD700 tests for
visual field loss that is often an  indicator  of the presence of glaucoma.  The
LD700 is designed to identify  glaucoma  suspects  and also monitor the onset of
glaucoma in patients  afflicted  with this eye  disease.  It is also used in the
management  of  medication  used to treat  glaucoma  to  assure  the  prescribed
medication  is  effective  in slowing  the  progression  of  glaucoma  and other
ailments that result in visual field loss.

         Dicon(TM) Corneal Topographers:  Dicon(TM) corneal topographers include
the CT 200(TM) and the CT 50.  Corneal  topographers  are used to determine  the
shape and  integrity of the cornea,  the anterior  surface of the eye.  Clinical
applications for corneal topographers include refractive surgery that eliminates
the need for  eyeglasses  and  optometric  applications  including  contact lens
fitting. Revenues from the topographer and related accessories were 1% and 3% of
the total revenues for 2007 and 2006,  respectively.  An enhanced version of the
CT 200(TM) was  introduced  during the fourth  quarter of 2003.  The Company has
completed  the  upgrades to the CT 200(TM)  and the CT 50 Corneal  Topographers,
which are now operating with Windows XP software  rather than the former Windows
95 operating systems.

         P55  Pachymetric  Analyzer:  The  ultrasonic  pachymeter  is  used  for
measurement  of corneal  thickness.  The Model P55 is  positioned  as a standard
office pachymeter.  This device is targeted to the refractive surgery market and
contributed 1% of the total revenues for both 2007 and 2006.

         P20 A-Scan Biometric Ultrasound  Analyzer:  The A-Scan was removed from
the Company's line of diagnostic  products in 2002 but added back as a result of
its  Worldwide  OEM  Agreement  with MEDA Co.,  Ltd. in which MEDA has agreed to
jointly  develop and  collaborate  in the  improvement  and  enhancement  of the
Company's  products.  The  A-Scan  is a  prerequisite  procedure  reimbursed  by
Medicare  and is  performed  before every  cataract  surgery.  Over 5,000 A-Scan
systems have been installed in the worldwide market,  representing a substantial
market  opportunity for software  upgrades and extended warranty contract sales.
A-Scan sales were 0% of the total revenues for both 2007 and 2006.

         P37 A/B  Scan  Ocular  Ultrasound  Diagnostic:  The A/B Scan is used by
retinal  subspecialists  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 and its image resolution qualities. Sales from this product were 10%
and 8% of the total revenues for 2007 and 2006, respectively.

         P40,  P45 and  P60  UBM  Ultrasound  Biomicroscopes:  Humphrey  Systems
developed the P40 UBM Ultrasound  Biomicroscope in conjunction with the New York
Eye and Ear  Infirmary  in  Manhattan  and the  University  of Toronto.  The P40
biomicroscope  and its intellectual  property were included in the purchase from
Humphrey  Systems and gives the Company the  proprietary  rights to this device.
The P40  biomicroscope  creates a high  resolution  computer image of the unseen
parts of the eye that is a "map" for the glaucoma surgeon. The P40 biomicroscope
is an "enabling  technology" for the  ophthalmologist,  one that the Company has
repositioned  for  broader  market  sales  penetration.  Formerly  sold  only to
glaucoma   subspecialty   practitioners,   the  Company   reintroduced  the  P40
biomicroscope at a price point targeted for the average practitioners seeking to
add glaucoma filtering surgical procedures and income to their cataract surgical
practice.

         The P40 biomicroscope  related surgical filtering  procedures are fully
reimbursable  by Medicare  and  insurance  providers.  This  untapped new market
positions  the  Company  with its  proprietary  P40  biomicroscope  and,  to its
knowledge, the only commercially viable product of this type on the market, as a
leader in the rapidly expanding glaucoma imaging and treatment  segment.  In the
fall of 2000, the Company introduced the P45 UBM Ultrasonic Biomicroscope, which
combines the P40 biomicroscope and the P37 A/B Scan Ocular Ultrasound Diagnostic
into one instrument.  The Company believes that by combining functions,  the P45
will appeal to a broader market.  The P40 biomicroscope and related  accessories
sales were 6% and 4% of the total revenues for 2007 and 2006, respectively.  The
P45  biomicroscope  and related  accessories  sales contributed 2% and 6% of the
total revenues for 2007 and 2006, respectively.



                                       11
<PAGE>

         On October 25,  2004,  the Company  entered  into a  Manufacturing  and
Distribution  Agreement  with  E-Technologies,  Inc., a Iowa based  developer of
software and related technology for technical  applications.  Under the terms of
the  agreement,  E-Technologies  granted to the Company the  exclusive  right to
manufacture,  market,  sell and  distribute  an ultrasound  biomicroscope.  Upon
execution  of the  agreement,  the Company paid  $30,000 to  E-Technologies  for
engineering costs associated with the development of the biomicroscope. When the
bioimicroscope  received  FDA  approval  on  May  26,  2005,  the  Company  paid
E-Technologies an additional fee of $45,000.

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

         In  March  2005,   the  Company   introduced  the  P60  UBM  Ultrasound
Biomicroscope.  The P60  biomicroscope  represents the fourth  generation of UBM
devices  and has  better  visual  clarity  and image  flexibility  than  earlier
versions.  On March 1, 2005,  the  Company  was awarded the CE Mark for the P60,
which  enables it to market the device in 19  Western  European  countries,  the
Middle East and India,  and some parts of Asia and the  Pacific  Rim. On May 26,
2005,  the Company  received FDA 510(k)  premarket  approval for the P60,  which
allows it to be sold in the United  States.  On  February  9, 2006,  the Company
received a Canadian  device  license for the P60,  which allows it to be sold in
Canada. The P60 biomicroscope and related  accessories sales were 21% and 16% of
total revenues for 2007 and 2006, respectively.

         On June 5, 2007, the Company  introduced a new software package for the
P60 biomicroscope.  This V2.1 software incorporates greater image resolution,  a
user-friendly and robust database management system, and networking capabilities
that allow the patient image data to be transferred  within a user's network for
efficient patient record management. The Company developed the new V2.1 software
in partnership with the optic and engineering group at Reliacon Global, Inc.

         In July 2000, the Company received ISO 9001 and EN 46001  certification
using TUV Essen as the notified body. Under ISO 9001certification,  its products
are now CE marked.  The CE mark allows the  Company to ship  product for revenue
into the European Community. The Company successfully retained its certification
in 2005 and retained ISO 13485 in December 2005 from TUV Essen.

         On June 12, 2006,  the Company  entered into a Worldwide  OEM Agreement
with  MEDA Co.,  Ltd.,  one of  China's  leading  developers  and  producers  of
ultrasound  devices.  Under the terms of the  agreement,  MEDA agrees to jointly
engineer,   develop  and  manufacture  the  Company's  next  generation  of  the
Ultrasound  BioMicroscope,  as  well  as  other  proprietary  new  products  and
enhancement of the Company's current  products.  The products to be manufactured
by MEDA,  at agreed upon costs,  and supplied to the Company for resale  include
the following new products:  an ultrasound  biomicroscope,  two  ultrasound  A/B
Scans, a biometric A-Scan and a pachymeter.

         The  agreement  provides  that the  Company  and MEDA  agree to jointly
develop and  collaborate  in the  improvement  and  enhancement of the Company's
products  and,  in  the  interest  of  product   development,   enhancement  and
differentiation.  MEDA  agrees  to  give  consideration  to  potential  software
development  or  enhancements  made  available to the Company for its  products.
Moreover,  in the interest of product  improvement,  MEDA agrees to  collaborate
with the Company and its  designated  engineers,  employees and  consultants  to
consider and potentially  implement  jointly or individually  the development of
product enhancements for the Company's products to be manufactured by MEDA.

         On January 31 and  February 1, 2007,  the Company  received  FDA 510(k)
pre-market  approval for a new generation of ultrasound  devices.  This approval
allows  the new  devices  to be sold in the United  States.  The new  ultrasound
devices,  which are to be  manufactured  by MEDA and sold by the  Company in the
United  States,  include the P2000 A-Scan  (used to measure  axial length of the
eye), the P2200 Pachymeter (used for measuring corneal thickness),  the P2500 A-
Scan/Pachymeter  (a combination of the two stand-alone  devices),  the P2700 and
P3700 AB/Scans (an ultrasound imaging device for detecting  abnormalities within
the eye), the P37-II (a more advanced  AB/Scan used to provide  portability  for
ophthalmology  veterinary applications) and the P50 Ultrasound Biomicroscope for
high frequency imaging of the anterior chamber of the eye.

         Parts and Services:  The parts and service  revenue from the repair and
service of equipment sold accounted for 9% and 12% of total revenues in 2007 and
2006, respectively.

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




                                       12
<PAGE>
<TABLE>
<CAPTION>


                                                     Commercial      Reimbursement      % 2006      %2007             Regulatory
      Product (1)             Product Class         Development         Status          Sales       Sales             Approvals
<S>                       <C>                         <C>                 <C>             <C>       <C>      <C>
P55, P2200 and P2500         System, Imaging,         Complete            Yes             3%         4%      FDA 510(K) K844299*
Pachymetric Analyzer      Pulsed Echo Diagnostic                                                             ISO 9001: 1994, EN ISO
                                                                                                             9001**

P20 and P2000             System Imaging, Pulsed      Complete            Yes             1%         3%      FDA 510(K) I844299*
A-Scan Biometric             Echo Diagnostic                                                                 ISO 9001: 1994,
Ultrasound Analyzer                                                                                          EN ISO 9001**

P37, P37-II, P2700        Transducer, Ultrasound      Complete            Yes            10%         22%     FDA 510(K) K844299*
and P3700 A/B Scan              Diagnostic                                                                   ISO 9001: 1994,
Ocular Ultrasound                                                                                            EN ISO 9001**
Diagnostic

P40 UBM Ultrasound           System, Imaging,         Complete            Yes             5%         6%      FDA 510(K) K844299*
BioMicroscope             Pulsed Echo Ultrasound                                                             ISO 9001: 1994,
                                Diagnostic                                                                   EN ISO 9001**

P45 UBM Ultrasound           System, Imaging,         Complete            Yes             6%         2%      FDA 510(K) K844299*
Biomicroscope,            Pulsed Echo Ultrasound                                                             ISO 9001: 1994,
Workstation Plus                Diagnostic                                                                   EN ISO 9001**

P60 UBM Ultrasound           System, Imaging,         Complete            Yes            14%         21%     FDA 510(K) K844299*
Biomicroscope,            Pulsed Echo Ultrasound                                                             ISO 9001: 1994,
Workstation Plus                Diagnostic                                                                   EN ISO 9001**

BFA Ocular Blood            Tonometer, Manual         Complete            Yes****        10%         13%     FDA 510(K) K844299*
Flow Analyzer(TM) and              Diagnostic                                                                ISO 9001: 1994,
Disposables                                                                                                  EN ISO 9001**

CT 200 Corneal             Topographer Corneal        Complete            Yes             3%         1%      FDA 510(K) K844299*
Topography System               AC-Powered                                                                   ISO 9001: 1994,
                                Diagnostic                                                                   EN ISO 9001**

LD 400 Autoperimetry       Perimeter, Automatic       Complete            Yes            25%         15%     FDA 510(K) K844299*
System                          AC-Powered                                                                   ISO 9001: 1994,
                                Diagnostic                                                                   EN ISO 9001**

TKS 5000                   Perimeter, Automatic       Complete            Yes            11%         4%      FDA 510(K) K844299*
Autoperimetry System           AC-Powered,                                                                   ISO 9001: 1994,
                                Diagnostic                                                                   EN ISO 9001**

Precisionist Thirty         Phacofragmentation        Complete            Yes             0%         0%      FDA 510(K) K844299*
Thousand(TM), Ocular                                                                                         ISO 9001: 1994,
Surgery Workstation                                                                                          EN ISO 9001**
with Surgical
Equipment and
Disposables(2)

Photon(TM) Laser,          Phacoemulsification        In-Process (4)      No              0%         0%      IDE G940151
Ocular Surgery                                                                                               ISO 9001: 1994,
Workstation with                                                                                             EN ISO 9001**
Surgical Equipment
and Disposables(3)

Parts and Services           Perimeter, BFA,          Complete            Yes            12%         9%      FDA 510(K) K844299*
                                Tonometer,                                                                   ISO 9001: 1994,
                               Topographer,                                                                  EN ISO 9001**
                                Ultrasound
                          Workstations, Systems,
                                 Imaging

</TABLE>
-----------------------------
                                       13
<PAGE>

(1)      Except for the Photon(TM) Ocular Surgery Workstation, which can only be
         sold in countries outside the United States, these products can be sold
         in the United States and in foreign countries including but not limited
         to Argentina,  Australia,  Bangladesh,  Borneo,  Brazil, Canada, China,
         Czechoslovakia,  Egypt,  France,  Germany,  Greece,  Hong Kong,  India,
         Israel,  Italy, Japan, Jordan,  Korea,  Malaysia,  Mexico, New Zealand,
         Pakistan,  Peru, Poland,  Puerto Rico, Russia, Saudi Arabia, Spain, Sri
         Lanka,  Taiwan,  Thailand,  Turkey,  United  Kingdom,  and United  Arab
         Emirates.
(2)      Due to the lack of recent sales volume,  the inventory  associated with
         the   Precisionist   Thirty  Thousand  (TM),  the  SIStem(TM)  and  the
         Odyssey(TM) has been deemed obsolete and a reserve has been recorded to
         offset such inventory.
(3)      Due to the lack of recent  evidence  to support the  recoverability  of
         inventory  associated with the  Photon(TM),  the Company has recorded a
         reserve to offset the majority of such inventory on hand.
(4)      The Photon(TM) is in-process  and not complete  because the Company has
         not  completed  the clinical  trials in order to obtain FDA  regulatory
         approval.
*        FDA 510(K) K844299  represents  domestic approval by U.S. Food and Drug
         Administration
**       ISO 9001: 1994, EN ISO 9001 represents international approval
***      IDE G940151 represents approval for international distribution only
****     Represents full reimbursement in 20 states and partial reimbursement in
         six other states.

         As detailed in the table above,  except for the Photon(TM) Laser Ocular
Surgery  Workstation,  which  requires  additional  development  and  regulatory
approvals,  the Company's  current products are developed and available for sale
in footnote (1) of the table. The Company's  possible future efforts to finalize
development of the Photon(TM)  laser system and obtain the necessary  regulatory
approvals would depend on adequate funding. If these efforts were undertaken but
proved to be  unsuccessful,  the impact would include the costs  associated with
these efforts and the  anticipated  future  revenues which the Company would not
receive as expected. The Company estimates that the funds needed to complete the
clinical  trials  on the  Photon(TM)  in  order  to  obtain  the  necessary  FDA
regulatory approval to be approximately $225,000.

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

Marketing and Sales

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

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



                                       14
<PAGE>

         Current Market  Acceptance and Potential:  The principal  purchasers of
the Company's products have been  ophthalmologists,  optometrists,  universities
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,  (The National Eye  Institute  reported in
March 2002 that the number of blind or visually impaired  Americans is likely to
double over the next 30 years.) (ii) the entry by emerging countries  (including
China,  Russia,  and other  countries in Asia,  Eastern  Europe and Africa) into
advanced  technology  medical  care  for  their  populations,   (iii)  increased
awareness  worldwide of the benefits of the minimally  invasive  phaco  cataract
procedure,  (iv)  the  introduction  of  technology  improvements  such  as  the
Company's  laser  system,  and (v) the growing  awareness  of the need for early
detection and treatment of glaucoma.

         Marketing    Organization:    The   Company    markets   its   products
internationally  through a network  of  distributors  and  domestically  through
direct sales  representatives,  independent sales organizations,  and ophthalmic
product  distributors.  As of  December  31,  2007,  the Company had five direct
domestic sales  employees and one independent  sales  organization in the United
States and 24 ophthalmic  and medical  product  distributors  outside the United
States. These sales  representatives are assigned exclusive territories and have
entered  into  contracts  with the  Company  that  contain  performance  quotas.
Domestic  sales  channels  have  been  expanded  to  include  independent  sales
representatives  and distributors.  The Company also plans to continue to market
its products by identifying  customers  through internal market research,  trade
shows and direct marketing programs.

         Product  advertising  is intended  to be focused in the major  industry
trade  journals.  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 articles in these publications.

         Manufacturing  and Raw Materials:  Currently,  the Company  maintains a
16,926  square foot  facility in Salt Lake City.  The  Company  transferred  the
manufacturing  activities  for the Blood  Flow  Analyzer(TM)  to San Diego  from
Ocular Blood Flow,  Ltd. in England  during 2001.  During the second  quarter of
2002, the Company consolidated and closed the San Diego operations into the Salt
Lake City facility.  The facility accommodates its manufacturing,  marketing and
engineering  capabilities.  The Company  manufactures  under  systems of quality
control  and  testing,  which  complies  with the  Quality  System  Requirements
established  by the FDA, as well as similar  guidelines  established  by foreign
governments, including the CE Mark and IS0-9001.

         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 and at costs consistent with
its  financial   purchasing   capabilities   and  pricing  needs.   The  Company
manufactures certain accessories at its facility in Salt Lake City.

         Product  Service and  Support:  Service for the  Company's  products is
overseen from its Salt Lake City location and is augmented by its  international
dealer  network,  which  provides  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.  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  adequate  parts  inventory  and
provides overnight replacement parts shipments to its dealers.

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 its
future.   In  addition  to  its  expanded   in-house  research  and  development
capabilities,   the  Company  has  enlisted  several  recognized  and  respected
consultants  and other  technical  personnel  to act in  technical  and  medical
advisory capacities.

         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.

         Research,  development and service expenses (which includes  production
and  manufacturing  support and the service  department  expenses)  increased by
$94,000, or 38%, to $344,000 for the twelve months ended December 31, 2007, from
$250,000  for the  same  period  in 2006.  None of the  costs  of  research  and
development activities during 2007 and 2006 was borne directly by customers.


                                       15
<PAGE>

         During the period in which  Thomas F.  Motter  served as the  Company's
Chairman and Chief Executive  Officer,  he formed a clinical  advisory board and
met from  time to time with the  board.  Jeffrey  F.  Poore,  who  served as the
Company's  President and Chief Executive  Officer from March 2003 to March 2004,
decided not to utilize the clinical advisory board.  Instead,  he consulted with
former members of the advisory board on an informal basis. The Company currently
has no agreements  with any former  members of the clinical  advisory  board and
none of  these  former  members  hold  or own  any  rights  to its  products  or
technologies.

Competition

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

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

         The  Cataract  Surgical  System  Industry.   The  major   manufacturers
utilizing  ultrasonic  technology offer products currently in use. Those systems
rely on  accessories  including  single use cassette  packs and other  ancillary
surgical disposables such as saline solution, sutures and intraocular lenses for
their profits.  The cassette packs are required for fluid and tissue  collection
during the surgical  procedure.  The  cassette  packs are  generally  unique and
proprietary  to their  respective  systems and  represent a barrier to entry for
third party,  lower cost  aftermarket  suppliers.  While there is growing market
resistance in the United States and internationally to single use cassettes,  it
is  anticipated  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 international market, with significantly lower medical budgets, has
not been able to justify the expense of using disposable  components.  Budgetary
constraints have limited current  manufacturers from gaining a significant share
of the international  ultrasound equipment market, and have provided a niche for
the emerging smaller companies discussed above.

         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 & Lomb, Alcon Laboratories,  and
Allergan  Medical  Optics as its primary  competitors  in the  ultrasound  phaco
cataract equipment market. In respect to ultrasound diagnostic equipment such as
the UBM,  A-Scan,  Pachymeter  and A/B Scan,  the Company is well  positioned to
compete against companies that currently hold a significant share of the market.
The Company recognizes Sonomed, Tomey, Nidek, OTI and Quantel.

         Laser  Equipment  Manufacturers.  There  are  several  other  companies
attempting to develop laser equipment for cataract surgery.  These companies can
be  differentiated  by the laser wavelength  employed for the cataract  surgery.
Based on the  information  currently  available to us;  Er:YAG laser  wavelength
appears  to offer a less  viable  means of  removing  cataracts  than the Nd:YAG
wavelength  used by the  Photon(TM).  One competitor  uses a Nd:YAG  wavelength,
however the laser is used only to vibrate an ultrasonic needle.  Thus the device
remains an ultrasonic system subject to the same risk factors of phaco,  thereby
eliminating  the benefits of using a laser to remove the  cataract.  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.




                                       16
<PAGE>

         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 refractive surgeries, macular degeneration and glaucoma in the
United States, the leading causes of adult blindness worldwide. The National Eye
Institute  stated in 2002 that the  number of  visually  impaired  Americans  is
likely to double over the next three  decades.  Their report  estimated that 2.4
million people suffer some visual impairment in this country.  The damage caused
by these diseases is irreversible.  The  preconditions  for the onset of macular
degeneration  or glaucoma  are low ocular  blood flow  and/or  high  intraocular
pressure. Diagnostic screening is important for individuals susceptible to these
diseases.  People in high risk  categories  include:  African  Americans over 40
years of age, all persons over 60 years of age, persons with a family history of
glaucoma or diabetes, and the very nearsighted. The Glaucoma Research Foundation
recommends  that these high risk  individuals be tested  regularly for glaucoma.
According to the U.S.  Census Bureau,  in 1995 there were over 30 million adults
65 years of age and older and eight  million  African  Americans 45 years of age
and older.  The Glaucoma  Research  Foundation  reports that glaucoma  currently
accounts for more than seven 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  accounts for
the majority of  diagnostic  equipment  sales.  The Company  continues to derive
revenues  from the sale of its  ultrasound  diagnostic  equipment and blood flow
analyzer.  The blood flow analyzer is designed to detect  glaucoma in an earlier
stage than is presently possible. In addition, the device performs tonometry and
blood flow  analysis.  Other  ophthalmic  diagnostic  devices that do not detect
glaucoma  in the early  stages of the disease as does the  Company's  blood flow
analyzer  retail at comparable  prices.  Thus, the Company  believes that it can
compete in the  diagnostic  market place based upon the lower price and improved
diagnostic functions of the analyzer.

Intellectual Property Protection

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

         The  Company  acquired   proprietary   intellectual   property  in  the
transaction  with Humphrey  Systems when the Company  purchased  the  diagnostic
ultrasonic  product line in 1999.  This  technology  uses ultrasound to create a
high  resolution  computer  image of the unseen parts of the eye that is a "map"
for  the  practitioner.  The  P40  UBM  Ultrasound  Biomicroscope,  one  of  the
ultrasonic  products the Company  purchased,  is subject to a license  agreement
dated September 27, 1990, with Sunnybrook Health Science Center. Under the terms
of the license  agreement,  the Company has the  exclusive  worldwide  rights to
manufacture and sell the UBM biomicroscope, for which the Company is required to
pay a royalty of $150 for each licensed product sold. The license  agreement was
automatically  terminated  by its terms on September 27, 2002, at which time the
Company  had a  royalty  free  worldwide  license  to use and  sell  the P40 UBM
Ultrasound Biomicroscope. However, the Company has a continuing obligation after
such termination to continue to use and sell the biomicroscope only in the field
of ophthalmology.  As a result of its agreement with MEDA Co., Ltd., the Company
is also able to provide  the P50 UBM  biomicroscope,  which is  manufactured  by
MEDA,  to  other  industry  segments  such as the  research  and the  veterinary
markets.

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

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

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



                                       17
<PAGE>

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

         PhotoMed and Dr. Eichenbaum brought legal action against the Company on
September 11, 2000  involving an amount of royalties that were allegedly due and
owing to them from the sale of equipment  by the  Company.  The Company has paid
$15,717 to bring all royalty  payments up to date through  January 5, 2005.  The
Company has been working with  PhotoMed  and Dr.  Eichenbaum  to ensure that the
royalty  calculations  have been correctly made. It is anticipated that once the
parties  agree on the correct  royalty  calculations,  the legal  action will be
dismissed.

         An issue in dispute  concerning the method of calculating  royalties is
whether royalties should be paid on returned equipment. Since July 1, 2001, only
one  Photon(TM)  laser system has been sold and no systems  returned.  Thus, the
amount of royalties due, according to the Company's  calculations,  is $981. The
Company made payment of this amount to Photomed and Dr. Eichenbaum on January 5,
2005 and, as a result, seeks to have the legal action dismissed. However, if the
parties are unable to agree on a method for  calculating  royalties,  there is a
risk that  PhotoMed  and Dr.  Eichenbaum  might amend the  complaint  to request
termination of the license agreement and, if successful,  the Company would lose
its rights to manufacture or sell the Photon(TM) laser system.

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

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

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

         The  Company's  trademarks  are  important to its  business.  It is its
policy to pursue trademark  registrations for its trademarks associated with its
products as appropriate. Also, 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 its key employees,  consultants and advisors
are required to enter into a confidentiality agreement with the Company. Most of
its third-party  manufacturers and formulators are also bound by confidentiality
agreements with the Company.

Regulation

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



                                       18
<PAGE>

         Following the enactment of the Medical  Device  Amendments to the Food,
Drug and Cosmetics Act in May 1976, the FDA began classifying medical devices in
commercial  distribution  into one of three  classes:  Class I, II or III.  This
classification  is based on the controls  that are  perceived to be necessary to
reasonably  ensure the  safety and  effectiveness  of medical  devices.  Class I
devices are those devices,  the safety and effectiveness of which can reasonably
be ensured through general  controls,  such as adequate  labeling,  advertising,
premarketing notification and adherence to the FDA's Quality System Requirements
regulations.  Some Class I devices are exempt from some of the general controls.
Class II devices  are those  devices the safety and  effectiveness  of which can
reasonably be assured through the use of special  controls,  such as performance
standards, postmarket surveillance, patient registries and FDA guidelines. Class
III devices are devices  that must receive  premarketing  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 premarketing  notification  filing
under Section 510(k) of the Food,  Drug and Cosmetics Act. If a manufacturer  or
distributor  of a  medical  device  can  establish  that a  proposed  device  is
"substantially  equivalent"  to a legally  marketed  Class I or Class II medical
device or to a  pre-1976  Class  III  medical  device  for which the FDA has not
called for a pre-marketing  approval,  the  manufacturer or distributor may seek
FDA Section  510(k)  premarketing  clearance  for the device by filing a Section
510(k) premarketing notification.  The Section 510(k) notification and the claim
of substantial  equivalence will likely have to be supported by various types of
data and materials,  possibly including clinical testing results, obtained under
an  Investigational  Device  Exemption  granted by the FDA. The  manufacturer or
distributor may not place the device into interstate  commerce until an order is
issued by the FDA granting  premarketing  clearance for the device. There can be
no assurance that the Company will obtain Section 510(k) premarketing  clearance
for any of the  future  devices  for  which the  Company  seeks  such  clearance
including the Photon(TM) laser system.

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

         The  alternate  method  to  seek  approval  is to  obtain  premarketing
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  premarketing  approval for the  proposed  device.  A  premarketing
approval  application  would have to be submitted  and be supported by extensive
data,  including  preclinical  and  clinical  trial data to prove the safety and
efficacy  of the  device.  If human  clinical  trials of a  proposed  device are
required and the device  presents a significant  risk, the  manufacturer  or the
distributor of the device will have to file an Investigational  Device Exemption
application  with  the FDA  prior  to  commencing  human  clinical  trials.  The
Investigational   Device  Exemption  application  must  be  supported  by  data,
typically  including  the  results  of animal  and  mechanical  testing.  If the
Investigational Device Exemption application is approved,  human clinical trials
may begin at a specific number of investigational sites, and the approval letter
could include the number of patients approved by the FDA.

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

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


                                       19
<PAGE>

also  evaluate  the  application  and provide  recommendations  to the FDA as to
whether the device  should be approved.  In  addition,  the FDA will inspect the
manufacturing  facility  to  ensure  compliance  with the FDA's  Quality  System
Requirements prior to approval of a premarketing application.  While the FDA has
responded to premarketing approval applications within the allotted time period,
premarketing  approval reviews  generally take  approximately 12 to 18 months or
more from the date of filing to approval.  The premarketing  approval 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  other  companies  have  sought
premarketing approval have never been approved for marketing.

         Any products  manufactured or distributed by the Company  pursuant to a
premarket  clearance  notification  or pre-  marketing  approval  are or will be
subject to pervasive and  continuing  regulation by the FDA. The Food,  Drug and
Cosmetics  Act also  requires that the  Company's  products be  manufactured  in
registered  establishments  and in accordance  with Quality System  Requirements
regulations.  Labeling,  advertising and  promotional  activities are subject to
scrutiny by the FDA and, in certain instances,  by the Federal Trade Commission.
The  export  of  medical  devices  is also  subject  to  regulation  in  certain
instances.  In addition,  the use of 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 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  currently  complies  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  substances.  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 its products may be inspected on a
routine basis by both the FDA and individual  states for compliance with current
Quality System Requirements regulations and other requirements.

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

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





                                       20
<PAGE>

Regulatory Status of Products

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

         The Company  acquired  permission from the FDA to export the Photon(TM)
laser cataract  system  outside the United States under an open  Investigational
Device Exemption  granted by the FDA in September 1994.  Although the Photon(TM)
laser  cataract  system is uniquely  configured  in an original and  proprietary
manner,  the laser system,  a Nd:YAG laser,  is not proprietary to the device or
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 is  similar  to the  current
ultrasound cataract treatment employed by ophthalmologists.

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

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

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

Employees

         As of March 31,  2008,  the Company had 24  full-time  employees.  This
number does not include its manufacturer's  representatives  who are independent
contractors  rather  than its  employees.  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 its employees are a
member of a labor  union and the  Company  has never  experienced  any  business
interruption as a result of any labor disputes.

         In December  2001 the Company  initiated the first phase of a corporate
downsizing program to reduce its operating expenses. The Company implemented the
second phase of its downsizing program in the second quarter of 2002, by closing
and transferring  its  manufacturing  from its site in San Diego,  California to
Salt Lake City,  resulting in further  reductions  in operating  expenses.  As a
result  of the  downsizing  program  and some  resignations,  the  number of its
employees has been reduced by 72% from 112 to 22 employees.  The estimated  cost
savings from the  downsizing  program will be in excess of $2,000,000  annually.
The costs of downsizing have included onetime expenses of approximately  $43,000
for moving and travel.  In addition,  the Company  incurred  additional  onetime
expenses of approximately  $18,000 for housing  accommodations for key employees
working  in Salt  Lake  City.  The  Company  realized  a net cost  savings  from
downsizing of approximately  $2,394,000  during the twelve months ended December
31, 2002.



                                       21
<PAGE>

Item 2. Description of Property

         The Company's  corporate  offices are  currently  located at 2355 South
1070 West, Salt Lake City, Utah. This facility consists of 16,926 square feet of
leased office and warehouse space.  These facilities are leased from Eden Roc, a
California partnership,  at a base monthly rate of $7,109, plus a $1,690 monthly
common  area  maintenance  fee. In January  2003,  the  Company  renegotiated  a
three-year lease with Eden Roc at a monthly rate of $9,295, plus a $1,859 common
area  maintenance  fee for the year  2003,  with the rate  increased  to $11,433
(including  a $1,859  common  area  maintenance  fee)  for  2004 and to  $11,720
(including  a $1,859  common  area  maintenance  fee) for 2005.  Pursuant to the
lease,  the Company  pays all real estate and  personal  property  taxes and the
insurance costs on the premises.  The lease expired on December 31, 2005.  Since
January 1, 2006,  the  Company  has leased  16,926  square  feet of space in the
facility  on a month to month  basis at a monthly  rate of $7,109  plus a $1,690
common area maintenance fee.

         The Company believes that these facilities are adequate and satisfy its
needs for the foreseeable future.

Item 3. Legal Proceedings

         An action was  brought  against the  Company on  September  11, 2000 by
PhotoMed  International,  Inc.  and  Daniel  M.  Eichenbaum,  M.D.  in the Third
District Court of Salt Lake County, State of Utah. The action involves an amount
of royalties  that are allegedly due and owing to PhotoMed  International,  Inc.
and Dr. Eichenbaum under a license agreement dated July 7, 1993, with respect to
the sale of certain equipment, plus costs and attorney's fees. Certain discovery
has taken place and the Company has paid royalties of $15,717, which the Company
believes  brings all payments  current as of the date of last payment on January
7, 2005. The Company has been working with PhotoMed and Dr. Eichenbaum to ensure
that the calculations  have been correctly made on the royalties paid as well as
the proper method of calculation for the future.

         It is  anticipated  that  once the  parties  can  agree on the  correct
calculations on the royalties,  the legal action will be dismissed.  An issue in
dispute  concerning  the method of  calculating  royalties is whether  royalties
should be paid on returned  equipment.  Since July 1, 2001,  only one Photon(TM)
laser  system  has been  sold and no  systems  returned.  Thus,  the  amount  of
royalties  due,  according to the Company's  calculations,  is $981. The Company
made  payment of this amount to Photomed and Dr.  Eichenbaum  on January 5, 2005
and, as a result,  seeks to have the legal  action  dismissed.  However,  if the
parties are unable to agree on a method for  calculating  royalties,  there is a
risk that  PhotoMed and Dr.  Eichenbaum  might amend their  complaint to request
termination of the license agreement and, if successful,  the Company would lose
its right to manufacture and sell the Photon(TM) laser system.

         An action was filed on June 20, 2003,  in the Third  Judicial  District
Court, Salt Lake County,  State of Utah (Civil No. 030914195) by CitiCorp Vendor
Finance, Inc., formerly known as Copelco Capital, Inc. The complaint claims that
$49,626 plus  interest is due for the leasing of three copy  machines  that were
delivered to the Company's Salt Lake City  facilities on or about April of 2000.
The action  also seeks an award of  attorney's  fees and costs  incurred  in the
collection.  The Company filed an answer to the complaint  disputing the amounts
allegedly  owed due to machine  problems  and a claimed  understanding  with the
vendor.  The Company  returned two of the  machines.  The Company was engaged in
settlement  discussions  with CitiCorp until counsel for CitiCorp  withdrew from
the case. New counsel for CitiCorp was appointed.  After an initial meeting with
new counsel, the Company provided initial disclosures to the new counsel.

         On December 27, 2007, the Company  entered into a settlement  agreement
with Larry Hicks to settle the lawsuit Mr. Hicks brought against the Company for
payments due under a consulting agreement with the Company in the Third Judicial
District Court, Salt Lake County, State of Utah (Civil No. 030922220). Under the
terms of the agreement,  the Company agrees to pay Mr. Hicks a total of $20,000,
of which $10,000 has been paid.  The remaining  amount owing of $10,000 is to be
paid in quarterly  installments of $2,500 each prior to the end of the next four
consecutive quarters, with the next payment due on or before June 30, 2008.

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

Item 4. Submission of Matters to a Vote of Security Holders

         No  matters  were  submitted  to a vote of the  Company's  shareholders
during the quarter ended December 31, 2006.

                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters

         The Company's  authorized  capital stock consists of 800,000,000 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  seven  classes of


                                       22
<PAGE>

preferred  stock,  designated  as Series A preferred  stock,  Series B preferred
stock,  Series C preferred stock , Series D preferred stock,  Series E preferred
stock, Series F preferred stock and Series G preferred stock.

         The Company's  common stock trades on the OTC Bulletin  Board under the
symbol of "PMED.OB."  Prior to July 22, 1996, there was no public market for the
common stock.  From July 22, 1996 to June 25, 2003,  the Company's  common stock
was listed on the Nasdaq SmallCap Market.  Since June 25, 2003, the common stock
has traded on the OTC Bulletin  Board.  As of March 31,  2008,  the closing sale
prices of the common stock was $.001 per share.  The  following are the high and
low sale prices for the common  stock by quarter as reported by the OTC Bulletin
Board since January 1, 2004.

                                                                Common Stock
                                                                 Price Range
         Period (Calendar Year)                              High           Low
                                                             ----           ---
2005
    First Quarter .................................          .10           .08
    Second Quarter ................................          .09           .07
    Third Quarter..................................          .10           .001
    Fourth Quarter.................................          .048          .001
2006
    First Quarter .................................          .047          .001
    Second Quarter ................................          .014          .006
    Third Quarter..................................          .007          .004
    Fourth Quarter.................................          .005          .003
2007
    First Quarter .................................          .032          .003
    Second Quarter ................................          .014          .006
    Third Quarter..................................          .007          .004
    Fourth Quarter.................................          .005          .003
2008
    First Quarter .................................          .0023         .0008

         The  Company's  Series A preferred  stock,  Series B  preferred  stock,
Series C preferred stock,  Series D preferred  stock,  Series E preferred stock,
Series F preferred stock and Series G preferred  stock are not publicly  traded.
As of March 31,  2008,  there were 4,781  record  holders of common  stock,  six
record  holders of Series A preferred  stock,  four  record  holders of Series B
preferred  stock,  no record  holders of Series C  preferred  stock,  one record
holder of Series D  preferred  stock,  one record  holder of Series E  preferred
stock, 18 record holders of Series F preferred  stock,  and one record holder of
Series G 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, Series D preferred stock,
Series E preferred, Series F preferred stock and Series G preferred stock before
it can pay any cash dividend to holders of its common stock.  Dividends  paid in
cash pursuant to outstanding  shares of its Series A, Series B, Series C, Series
D,  Series E, Series F and Series G preferred  stock are only  payable  from its
surplus  earnings,  and are  noncumulative  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 its proposed  business and  operations.  Any
payment of cash  dividends  in the future on the common  stock will be dependent
upon its 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  its  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 preferred shareholders of record as of December 31, 1994.



                                       23
<PAGE>

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

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

Critical Accounting Policies

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

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

         2. Delivery and  performance  have occurred.  Unless the purchase order
requires specific  installation or customer  acceptance,  the Company recognizes
revenue  when  the  product  ships.  If the  purchase  order  requires  specific
installation or customer  acceptance,  the Company  recognizes revenue when such
installation  or  acceptance  has occurred.  Title to the product  passes to its
customer upon shipment.  This revenue  recognition  policy does not differ among
its various different product lines. The Company guarantees the functionality of
its product.  If its product does not function as marketed  when received by the
customer,  the Company  either  makes the  necessary  repairs on site or has the
product  shipped to the Company for the repair  work.  Once the product has been
repaired and retested for  functionality,  it is reshipped to the customer.  The
Company provides  warranties that generally extend for one year from the date of
sale. Such warranties  cover the necessary parts and labor to repair the product
as well as any  shipping  costs that may be  required.  The Company  maintains a
reserve for estimated  warranty  costs based on its  historical  experience  and
management's current expectations.

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

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

         5.  Revenues for sales of products that require  specific  installation
and  acceptance  by the  customer  are  recognized  upon such  installation  and
acceptance  by the  customer.  Revenues  for  sales of other  surgical  systems,
ultrasound  diagnostic devices,  and disposable products are recognized when the
product is shipped. A signed purchase agreement and a deposit or payment in full
from customers is required before a product leaves the premises. Title passes at
time of shipment (F.O.B.  shipping point).  The Company's  products contain both
hardware and software components. The Company does not recognize revenue for the
software components of the products separate from the product as a whole because
the  software is  incidental  to the  product,  as defined in paragraph 2 of SOP
97-2.

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

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



                                       24
<PAGE>

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

General

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

         The Company is engaged in the design, development, manufacture and sale
of high technology  diagnostic and surgical eye care products.  Given the "going
concern" status of the Company, management has focused efforts on those products
and activities  that will, in its opinion,  achieve the most resource  efficient
short-term  cash  flow.  As seen in the  results  for the  twelve  months  ended
December  31,  2007,  diagnostic  products  have  been the  major  focus and the
Photon(TM) and other extensive  research and development  projects have been put
on  hold  pending  future  evaluation  when  the  Company's  financial  position
improves.  The  Company  does not  focus on a  specific  diagnostic  product  or
products but, instead, on this entire diagnostic product group.

         During the year ended  December  31,  2007,  the  Company  recorded  an
increase in the  warranty  accrual of $72,000.  This  increase was a result of a
comprehensive  analysis  by  management  regarding  historical  warranty  costs.
Historically,  the Company has recorded a monthly  warranty  expense and related
increase to the warranty  accrual.  However,  in recent periods the usage of the
warranty  accrual  has  continued  to  increase.   After  reviewing  the  recent
historical  data,  management  determined  that the warranty  accrual  should be
increased by $72,000 to $227,000.  Management  will continue to closely  monitor
the warranty accrual usage to ensure that the proper amount has been accrued.

         During the twelve  months  ended  December 31,  2007,  management  made
certain  adjustments  to the financial  statements,  including a decrease in the
reserve for obsolete or estimated non-recoverable  inventory of $1,076,000.  The
Company also  recorded a net  increase in the  allowance  for doubtful  accounts
receivable  of $37,000,  impairment  of  intangibles  of $-0-,  and decreases in
accruals to settle outstanding disputes in the amount of $91,000.

         The Company's ultrasound  diagnostic products include a P55 pachymetric
analyzer,  a P2200  pachymetric  analyzer,  a P2000 Ultrasound  A-Scan biometric
analyzer, a P2500 combination A/Scan and Pachymeter,  a P37 Ultrasound A/B Scan,
a P37-II  Ultrasound A/B Scan, a P2700  Ultrasound A/B Scan, a P3700  Ultrasound
A/B Scan, a P40 Ultrasound  Biomicroscope,  a P45 Plus Ultrasound Biomicroscope,
and a P60 Ultrasound  Biomicroscope,  the technology for which was acquired from
Humphrey  Systems in 1998.  The Company  introduced  the P45 Plus in the fall of
2000,  which combines the A/B Scan, and the  biomicroscope  into one instrument.
The  Company  introduced  the P60 in March  2005,  which  represents  the fourth
generation  of UBM devices and has better visual  clarity and image  flexibility
than  earlier  versions.  In  addition,  the  Company  markets  its  Blood  Flow
Analyzer(TM)  acquired in the  purchase of Ocular  Blood Flow Ltd. in June 2000.
Other  diagnostic  products are the Dicon(TM) LD400 Auto Perimeter and the Dicon
(TM) CT 200e Corneal  Topographer,  which were  acquired in the  acquisition  of
Vismed d/b/a Dicon in June 2000.

         Because of the "going  concern"  status of the Company,  management has
focused  efforts on those  products and  activities  that will,  in its opinion,
achieve the most  resource  efficient  short-term  cash flow to the Company.  As
reflected in the results for the fiscal year ended December 31, 2007, diagnostic
products are currently the Company's  major focus and the  Photon(TM)  and other
extensive research and development projects have been put on hold pending future
evaluation when the financial position of the Company improves.  Due to the lack
of current  evidence to support  recoverability,  the  Company  has  recorded an
inventory  reserve  to offset the  inventory  associated  with the  Precisionist
Thirty  Thousand(TM) and the Photon(TM) as well as certain other inventory items
that are estimated to be non-recoverable due to the lack of significant turnover
of such items in recent periods.



                                       25
<PAGE>

         Activities  for the twelve  months  ended  December  31,  2007 and 2006
included sales of the Company's products and related  accessories and disposable
products.  Raymond P.L. Cannefax was named President and Chief Executive Officer
on January 5, 2006. On March 20, 2006,  the Company  named Luis A.  Mostacero as
Vice  President of Finance.  Mr.  Mostacero  previously  served as the Company's
Controller from June 2000 to August 2005. On January 8, 2008, Mr.  Mostacero was
also  appointed  as Chief  Financial  Officer.  On October 11,  2006,  Christina
O'Connor was  appointed as Vice  President of  International  Sales and Julio C.
Maximo as Vice  President of  Operations.  On April 10, 2006,  the Company named
Michael S. Austin as Vice  President  of Sales and  Marketing.  On November  28,
2006,  Mr.  Austin  resigned  from the  Company.  On January 4, 2007,  Alfred B.
Franklin  was  appointed  as Vice  President  of Domestic  Sales.  Mr.  Franklin
resigned  on May 10,  2007,  to pursue  other  opportunities.  On May 10,  2007,
Stephen  L.  Davis  was  appointed  as Vice  President  of  Domestic  Sales  and
Marketing.   Mr.  Davis   resigned  on  February  14,  2008,   to  pursue  other
opportunities.

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

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

         The impact of this nonpayment by certain payors on the Company's future
operations  is a lower  volume  of sales,  particularly  in those  states  where
reimbursement  is  not  yet  approved  or  is  delayed.   Currently,   there  is
reimbursement by insurance payors in 20 states and partial  reimbursement in six
other  states.  As  insurance  payors  have the  prerogative  whether to provide
reimbursement  to doctors  using the Blood  Flow  Analyzer(TM),  the  Company is
continuing  to  work  with  insurance   payors  in  states  where  there  is  no
reimbursement  to  doctors  using the CPT code to  demonstrate  the value of the
instrument.   However,   some  insurance  payors  are  currently  not  providing
reimbursement to doctors where a regional or state administrator of Medicare has
elected not to provide Medicare  coverage for the Blood Flow  Analyzer(TM).  The
Company is  continuing  to work with the  regional and state  administrators  of
Medicare who have denied  Medicare  coverage for the Blood Flow  Analyzer(TM) to
demonstrate the value of the instrument.

         There were a number of factors  that  contributed  to the  decrease  in
sales of the Company's diagnostic products. The U.S. recessionary economic trend
has  impacted  the  Company's   domestic   sales.   Additionally,   the  Company
restructured its sales  organization and sales channels by decreasing its direct
sales force who are full-time  employees to five direct sales  employees and one
independent  sales  organization  as of December 31, 2007.  The dependent  sales
force has been reduced because the Company does not have sufficient  revenues to
justify a larger direct sales force.  One of the challenges for fiscal 2008 will
be the judicious reestablishment of the sales force in anticipation of increased
sales.

                                       26
<PAGE>

         The  Company  intends to increase  its  efforts to sell its  diagnostic
products through  independent  sales  representatives  and ophthalmic  equipment
distributors,  which are paid  commissions  only for their sales. As of December
31, 2007, the Company had 24 ophthalmic and medical product distributors outside
the United States.  The Company hopes to benefit from these recently hired sales
representatives  and distributors in the United States as they gain familiarity,
through training, of the Company's diagnostic products.

Outstanding Commitments to Issue Shares

         The following  table  identifies our  outstanding  commitments to issue
shares,  including  the shares  underlying  the  convertible  notes and warrants
issuable upon conversion of the notes and exercise of the warrants:

                                              Underlying Shares
     Security                                  of Common Stock

Notes (1)                                       3,637,280,000
Warrants (2)                                       54,034,392
Preferred Stock (3)                                   862,404
Stock Options (4)                                  11,500,000
                                          -------------------
       Total                                    3,703,676,796

(1)      Assumes full  conversion of $3,928,262 of notes issued to AJW Partners,
         LLC,  AJW  Offshore,   Ltd.,  AJW  Qualified  Partners,  LLC,  and  New
         Millennium  Capital  Partners II, LLC at a conversion  price of $.00108
         per share  (based upon a market  price of $.0018 as of January 14, 2008
         with a 40% discount).
(2)      Consisting of warrants  exerciseable  at prices  ranging from $.001 per
         share to $6.75 per share,  including  warrants  issued to AJW Partners,
         LLC,  AJW  Offshore,   Ltd.,  AJW  Qualified  Partners,  LLC,  and  New
         Millennium  Capital Partners II, LLC to purchase  16,534,392  shares of
         common  stock at an  exercise  price of $.20  per  share,  exerciseable
         through the period from April 27, 2010 to June 30,  2010,  and warrants
         to purchase  12,000,000 shares of common stock at an exerciseable price
         of $.10 per share,  exerciseable  through the period from  February 28,
         2011 to April 20,  2012,  warrants  to  purchase  10,000,000  shares of
         common  stock at an  exercise  price of $.005 per  share,  exerciseable
         through June 11, 2012,  and warrants to purchase  15,000,000  shares of
         common  stock at an  exercise  price of $.001 per  share,  exerciseable
         through December 24, 2012.
(3)      Consisting of 6,753 shares of common stock issuable upon  conversion of
         5,627 shares of Series A preferred stock, 10,783 shares of common stock
         issuable upon  conversion of 8,986 shares of Series B preferred  stock,
         8,750 shares of common stock  issuable upon  conversion of 5,000 shares
         of Series D preferred  stock,  13,333  shares of common stock  issuable
         upon  conversion  of 250 shares of Series E  preferred  stock,  234,550
         shares of common stock issuable upon  conversion of 4,398.75  shares of
         Series F preferred  stock,  and 588,235 shares of common stock issuable
         upon conversion of 588,235 shares of Series G preferred stock.
(4)      Consisting of stock options granted to executive officers and employees
         to purchase 9,250,000 shares of common stock at exercise prices ranging
         from $.01 per share to $2.75 per share,  and stock  options  granted to
         directors  to  purchase  2,250,000  shares of common  stock at exercise
         prices ranging from $.01 per share to $2.75 per share.

         There are a total of  3,703,701,796  shares  underlying our convertible
notes, warrants,  preferred stock and stock options, assuming full conversion of
the  outstanding  notes  and  preferred  stock  and  the  exercise  of  all  the
outstanding  warrants and stock options.  The number of our authorized shares of
common stock is 1,400,000,000  shares.  The large number of our shares of common
stock  underlying our notes,  warrants,  preferred  stock and stock options will
require  us to  increase  the  number of  authorized  shares.  Failure to obtain
stockholder approval to increase the number of authorized shares could result in
the noteholders commencing legal action against us and foreclosing on all of our
assets to recover damages.  Any such action would require us to curtail or cease
our operations.

Convertible Notes

         April 27,  2005 Sale of  $2,500,000  in  Convertible  Notes.  To obtain
funding  for the  Company's  ongoing  operations,  the  Company  entered  into a
securities  purchase agreement with four accredited  investors on April 27, 2005
for the  sale of (i)  $2,500,000  in  convertible  notes  and (ii)  warrants  to
purchase  16,534,392  shares of its common  stock.  The sale of the  convertible
notes and warrants is to occur in three traunches and the investors provided the
Company with an aggregate of $2,500,000 as follows:



                                       27
<PAGE>
         o    $850,000 was disbursed on April 27, 2005;
         o    $800,000 was  disbursed on June 23, 2005 after the Company filed a
              registration  statement on June 22, 2005 to register the shares of
              common stock issuable upon conversion of the convertible notes and
              exercise of warrants; and
         o    $850,000 was disbursed on June 30, 2005, the effective date of the
              registration statement.

         Under the  terms of the  securities  purchase  agreement,  the  Company
agreed it would not, without the prior written consent of a majority-in-interest
of the  investors,  negotiate  or contract  with any party to obtain  additional
equity  financing  (including  debt  financing  with an equity  component)  that
involves  (i) the  issuance of common stock at a discount to the market price of
the common  stock on the date of issuance  (taking into account the value of any
warrants or options to acquire common stock in connection  therewith),  (ii) the
issuance of convertible  securities that are convertible  into an  indeterminate
number of shares of common stock,  or (iii) the issuance of warrants  during the
lock-up period  beginning April 27, 2005 and ending on the later of (a) 270 days
from April 27, 2005, or (b) 180 days from the date the registration statement is
declared effective.

         In  addition,  the Company  agreed not to conduct any equity  financing
(including debt financing with an equity  component) during the period beginning
April 27,  2005 and ending two years after the end of the above  lock-up  period
unless it first  provided each investor an option to purchase its pro rata share
(based on the ratio of each  investor's  purchase under the securities  purchase
agreement) of the  securities  being offered in any proposed  equity  financing.
Each investor must be provided  written notice  describing  any proposed  equity
financing at least 20 business days prior to the closing of such proposed equity
financing  and the option must be extended  to each  investor  during the 15-day
period following delivery of such notice.

         The $2,500,000 in convertible  notes bear interest at 8% per annum from
the date of issuance. Interest is computed on the basis of a 365-day year and is
payable  quarterly in cash,  with six months of interest  payable up front.  The
interest  rate resets to zero  percent for any month in which the stock price is
greater than 125% of the initial market price,  or $.0945,  for each trading day
during that month. Any amount of principal or interest on the convertible  notes
that is not paid when due will bear  interest  at the rate of 15% per annum from
the date due thereof until such amount is paid.  The notes mature in three years
from the date of issuance,  and are convertible  into the Company's common stock
at the noteholders'  option, at the lower of (i) $.09 or (ii) 60% of the average
of the three  lowest  intraday  trading  prices for the common  stock on the OTC
Bulletin  Board for the 20 trading days before but not including the  conversion
date.  Accordingly,  there is no limit on the  number of shares  into  which the
notes may be converted.

         The convertible  notes are secured by the Company's  assets,  including
the  Company's  inventory,   accounts  receivable  and  intellectual   property.
Moreover,  the Company has a call option under the terms of the notes.  The call
option  provides  the  Company  with the right to prepay all of the  outstanding
convertible  notes at any time,  provided  there is no event of  default  by the
Company and the Company's  stock is trading at or below $.09 per share. An event
of default  includes the failure by the Company to pay the principal or interest
on the notes when due or to timely file a registration  statement as required by
the Company or obtain  effectiveness with the Securities and Exchange Commission
of the  registration  statement.  Prepayment  of the notes is to be made in cash
equal to either (a) 125% of the outstanding  principal and accrued  interest for
prepayments  occurring within 30 days following the issue date of the notes; (b)
130% of the outstanding principal and accrued interest for prepayments occurring
between 31 and 60 days following the issue date of the notes; or (c) 145% of the
outstanding  principal and accrued interest for prepayments  occurring after the
60th day following the issue date of the notes.

         The warrants are exercisable until five years from the date of issuance
at a purchase  price of $.20 per share.  The investors may exercise the warrants
on a cashless  basis if the shares of common stock  underlying  the warrants are
not registered pursuant to an effective registration statement. In the event the
investors  exercise  the  warrants on a cashless  basis,  the  Company  will not
receive any proceeds therefrom.  In addition, the exercise price of the warrants
will be adjusted in the event the Company  issues  common stock at a price below
market,  with  the  exception  of any  securities  issued  as of the date of the
warrants or issued in connection  with the callable  secured  convertible  notes
issued pursuant to the securities purchase agreement.

         The noteholders  have agreed to restrict their ability to convert their
convertible notes or exercise their warrants and receive shares of the Company's
common  stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not exceed
4.99% of the then issued and outstanding  shares of common stock.  However,  the
noteholders  may repeatedly sell shares of common stock in order to reduce their
ownership percentage, and subsequently convert additional convertible notes.



                                       28
<PAGE>

         February 28, 2006 Sale of $1,500,000 in  Convertible  Notes.  To obtain
additional  funding for the Company's  ongoing  operations,  the Company entered
into a second securities  purchase  agreement on February 28, 2006 with the same
four  accredited  investors for the sale of (i) $1,500,000 in convertible  notes
and (ii) warrants to purchase 12,000,000 shares of its common stock. The sale of
the  convertible  notes  and  warrants  is to occur in three  traunches  and the
investors  are  obligated to provide the Company with an aggregate of $1,500,000
as follows:

         o    $500,000 was disbursed on February 28, 2006;
         o    $500,000 was  disbursed on June 28, 2006 after the Company filed a
              registration  statement on June 15, 2006 to register the shares of
              common stock  underlying the convertible  notes.  The registration
              statement  was  subsequently  withdrawn on July 25, 2006 and a new
              registration statement was filed on September 15, 2006 to register
              60,000,000  shares of common stock issuable upon conversion of the
              notes.
         o    $500,000 was  disbursed  on April 30,  2007,  the day prior to the
              effective date of the registration statement on May 1, 2007.

         Under the terms of the securities purchase agreement,  the Company also
agreed it would not, without the prior written consent of a majority-in-interest
of the  investors,  negotiate  or contract  with any party to obtain  additional
equity  financing  (including  debt  financing  with an equity  component)  that
involves  (i) the  issuance of common stock at a discount to the market price of
the common  stock on the date of issuance  (taking into account the value of any
warrants or options to acquire common stock in connection  therewith),  (ii) the
issuance of convertible  securities that are convertible  into an  indeterminate
number of shares of common stock,  or (iii) the issuance of warrants  during the
lock-up  period  beginning  February 28, 2006 and ending on the later of (a) 270
days from  February  28,  2006,  or (b) 180 days from the date the  registration
statement is declared effective.

         In  addition,  the Company  agreed not to conduct any equity  financing
(including debt financing with an equity  component) during the period beginning
February 28, 2006 and ending two years after the end of the above lock-up period
unless it first  provided each investor an option to purchase its pro rata share
(based on the ratio of each  investor's  purchase under the securities  purchase
agreement) of the  securities  being offered in any proposed  equity  financing.
Each investor must be provided  written notice  describing  any proposed  equity
financing at least 20 business days prior to the closing of such proposed equity
financing  and the option must be extended  to each  investor  during the 15-day
period following delivery of such notice.

         The $1,500,000 in convertible  notes bear interest at 8% per annum from
the date of issuance. Interest is computed on the basis of a 365-day year and is
payable  quarterly in cash,  with six months of interest  payable up front.  The
interest  rate resets to zero  percent for any month in which the stock price is
greater than 125% of the initial market price,  or $.0275,  for each trading day
during that month. Any amount of principal or interest on the convertible  notes
that is not paid when due will bear  interest  at the rate of 15% per annum from
the date due thereof until such amount is paid.  The notes mature in three years
from the date of issuance,  and are convertible  into the Company's common stock
at the noteholders'  option, at the lower of (i) $.02 or (ii) 60% of the average
of the three  lowest  intraday  trading  prices for the common  stock on the OTC
Bulletin  Board for the 20 trading days before but not including the  conversion
date.  Accordingly,  there is no limit on the  number of shares  into  which the
notes may be converted.

         The convertible  notes are secured by the Company's  assets,  including
the  Company's  inventory,   accounts  receivable  and  intellectual   property.
Moreover,  the Company has a call option under the terms of the notes.  The call
option  provides  the  Company  with the right to prepay all of the  outstanding
convertible  notes at any time,  provided  there is no event of  default  by the
Company and the Company's  stock is trading at or below $.02 per share. An event
of default  includes the failure by the Company to pay the principal or interest
on the notes when due or to timely file a registration  statement as required by
the Company or obtain  effectiveness with the Securities and Exchange Commission
of the  registration  statement.  Prepayment  of the notes is to be made in cash
equal to either (a) 125% of the outstanding  principal and accrued  interest for
prepayments  occurring within 30 days following the issue date of the notes; (b)
130% of the outstanding principal and accrued interest for prepayments occurring
between 31 and 60 days following the issue date of the notes; or (c) 145% of the
outstanding  principal and accrued interest for prepayments  occurring after the
60th day following the issue date of the notes.


                                       29
<PAGE>

         The warrants are exercisable until five years from the date of issuance
at a purchase  price of $.10 per share.  The investors may exercise the warrants
on a cashless  basis if the shares of common stock  underlying  the warrants are
not registered pursuant to an effective registration statement. In the event the
investors  exercise the warrants on a cashless basis,  then the Company will not
receive any proceeds therefrom.  In addition, the exercise price of the warrants
will be adjusted in the event the Company  issues  common stock at a price below
market,  with  the  exception  of any  securities  issued  as of the date of the
warrants  or  issued  in  connection  with  the  notes  issued  pursuant  to the
securities purchase agreement.

         The noteholders  have agreed to restrict their ability to convert their
callable secured convertible notes or exercise their warrants and receive shares
of the  Company's  common  stock such that the number of shares of common  stock
held by them in the  aggregate  and their  affiliates  after such  conversion or
exercise  does not exceed  4.99% of the then  issued and  outstanding  shares of
common stock.  However,  the  noteholders  may repeatedly  sell shares of common
stock in order to reduce their ownership  percentage,  and subsequently  convert
additional convertible notes.

         June 11, 2007 Sale of $500,000 in Callable Secured  Convertible  Notes:
To obtain  further  funding for the Company's  ongoing  operations,  the Company
entered  into a third  securities  purchase  agreement on June 11, 2007 with the
same four accredited  investors for the sale of (i) $500,000 in callable secured
convertible notes and (ii) warrants to purchase  10,000,000 shares of its common
stock. The investors disbursed $500,000 to the Company on June 11, 2007.

         Under the terms of the June 11, 2007 securities purchase agreement, the
Company  agreed  that it would  not,  without  the prior  written  consent  of a
majority-in-interest  of the investors,  negotiate or contract with any party to
obtain  additional  equity  financing  (including  debt financing with an equity
component)  that  involves (i) the issuance of common stock at a discount to the
market  price of the common  stock on the date of issuance  (taking into account
the value of any  warrants  or  options to acquire  common  stock in  connection
therewith),  (ii) the issuance of convertible  securities  that are  convertible
into an indeterminate number of shares of common stock, or (iii) the issuance of
warrants  during the lock-up  period  beginning  June 11, 2007 and ending on the
later of (a) 270 days  from  June 11,  2007,  or (b) 180 days  from the date the
registration statement is declared effective.

         In  addition,  the Company  agreed not to conduct any equity  financing
(including debt financing with an equity  component) during the period beginning
June 11,  2007 and ending two years  after the end of the above  lock-up  period
unless it first  provided each investor an option to purchase its pro-rata share
(based on the ratio of each  investor's  purchase under the securities  purchase
agreement) of the  securities  being offered in any proposed  equity  financing.
Each investor must be provided  written notice  describing  any proposed  equity
financing at least 20 business days prior to the closing of such proposed equity
financing  and the option must be extended  to each  investor  during the 15-day
period following delivery of such notice.

         The $500,000 in  convertible  notes bear  interest at 8% per annum from
the date of issuance. Interest is computed on the basis of a 365-day year and is
payable  quarterly in cash,  with six months of interest  payable up front.  The
interest  rate resets to zero  percent for any month in which the stock price is
greater than 125% of the initial market price,  or $.0275,  for each trading day
during that month.  Any amount of principal or interest on the callable  secured
convertible  notes that is not paid when due will bear  interest  at the rate of
15% per  annum  from  the  date due  thereof  until  such  amount  is paid.  The
convertible  notes  mature in three  years  from the date of  issuance,  and are
convertible into the Company's common stock at the noteholders'  option,  at the
lower  of (i) $.02 or (ii)  50% of the  average  of the  three  lowest  intraday
trading prices for the common stock on the OTC Bulletin Board for the 20 trading
days before but not  including the  conversion  date.  Accordingly,  there is no
limit on the number of shares into which the notes may be converted.

         The $500,000 in convertible  notes are secured by the Company's assets,
including  the  Company's   inventory,   accounts  receivable  and  intellectual
property.  Moreover, the Company has a call option under the terms of the notes.
The call  option  provides  the  Company  with the  right to  prepay  all of the
outstanding convertible notes at any time, provided there is no event of default
by the Company and its stock is trading at or below $.10 per share.  An event of
default  includes the failure by the Company to pay the principal or interest on
the  convertible  notes when due or to timely file a  registration  statement as
required by the Company or obtain effectiveness with the Securities and Exchange
Commission of the registration statement. Prepayment of the convertible notes is
to be made in cash equal to either  (a) 125% of the  outstanding  principal  and
accrued  interest for prepayments  occurring  within 30 days following the issue
date of the notes;  (b) 130% of the outstanding  principal and accrued  interest
for prepayments occurring between 31 and 60 days following the issue date of the
notes;  or (c)  145% of the  outstanding  principal  and  accrued  interest  for
prepayments occurring after the 60th day following the issue date of the notes.




                                       30
<PAGE>

         The  warrants  are  exercisable  until  seven  years  from  the date of
issuance at a purchase price of $.005 per share.  The investors may exercise the
warrants  on a  cashless  basis if the  shares of common  stock  underlying  the
warrants  are  not  then  registered  pursuant  to  an  effective   registration
statement. In the event the investors exercise the warrants on a cashless basis,
the Company will not receive any proceeds therefrom.  In addition,  the exercise
price of the warrants  will be adjusted in the event the Company  issues  common
stock at a price below market, with the exception of any securities issued as of
the date of the  warrants or issued in  connection  with the  convertible  notes
issued pursuant to the securities purchase agreement.

         The noteholders  have agreed to restrict their ability to convert their
convertible notes or exercise their warrants and receive shares of the Company's
common  stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not exceed
4.99% of the then issued and outstanding  shares of common stock.  However,  the
noteholders  may repeatedly sell shares of common stock in order to reduce their
ownership  percentage,  and subsequently  convert additional  convertible notes,
provided,  however,  that such  conversions  do not exceed  $75,000 per calendar
month,  or the average  daily dollar volume  calculated  during the ten business
days  prior to  conversion  multiplied  by the  number of  trading  days of that
calendar month, per calendar month.

         The  Company is required  to  register  the shares of its common  stock
issuable upon the  conversion of the  convertible  notes and the exercise of the
warrants that were issued to the noteholders pursuant to the securities purchase
agreement the Company entered in to on June 11, 2007. The registration statement
must be filed with the Securities and Exchange  Commission within 60 days of the
June 11, 2007 closing date and the  effectiveness  of the  registration is to be
within  135  days of  such  closing  date.  Penalties  of 2% of the  outstanding
principal  balance of the  convertible  notes plus  accrued  interest  are to be
applied for each month the  registration  is not  effective  within the required
time. The penalty may be paid in cash or stock at the Company's option.

         December 19, 2007 Issuance of $389,010 in Callable  Convertible  Notes:
On December 19, 2007, the Company was notified by the holders of the convertible
notes that there was a past due interest  owing on the  outstanding  convertible
notes. The total amount of interest owed was $389,010. To pay this interest, the
noteholders were willing to accept $389,010 in additional  convertible notes due
on December 31, 2010.  Accordingly,  on December  19, 2007,  the Company  issued
$389,010 in convertible notes to the noteholders as full payment of the past due
interest.

         The $389,010 in  convertible  notes bear  interest at 2% per annum from
December  31,  2007.  Interest is computed on the basis of a 365-day year and is
payable  quarterly in cash,  with six months of interest  payable up front.  The
interest  rate resets to zero  percent for any month in which the stock price is
greater than 125% of the initial market price,  or $.0275,  for each trading day
during that month.  Any amount of principal or interest on the callable  secured
convertible  notes that is not paid when due will bear  interest  at the rate of
15% per  annum  from  the  date due  thereof  until  such  amount  is paid.  The
convertible  notes  mature on December 31, 2010,  and are  convertible  into the
Company's common stock at the noteholders'  option,  at the lower of (i) $.02 or
(ii) 50% of the  average of the three  lowest  intraday  trading  prices for the
common  stock on the OTC  Bulletin  Board for the 20 trading days before but not
including the conversion date.  Accordingly,  there is no limit on the number of
shares into which the notes may be converted.

         The $389,010 in convertible notes have a call option under the terms of
the notes.  The call option provides the Company with the right to prepay all of
the  outstanding  convertible  notes at any time,  provided there is no event of
default by the Company  and its stock is trading at or below $.04 per share.  An
event of default  includes  the failure by the Company to pay the  principal  or
interest on the convertible notes when due.  Prepayment of the convertible notes
is to be made in cash equal to either (a) 135% of the outstanding  principal and
accrued  interest for prepayments  occurring  within 30 days following the issue
date of the notes;  (b) 145% of the outstanding  principal and accrued  interest
for prepayments occurring between 31 and 60 days following the issue date of the
notes;  or (c)  150% of the  outstanding  principal  and  accrued  interest  for
prepayments occurring after the 60th day following the issue date of the notes.



                                       31
<PAGE>

         The noteholders  have agreed to restrict their ability to convert their
convertible notes and receive shares of the Company's common stock such that the
number  of  shares  of  common  stock  held by them in the  aggregate  and their
affiliates  after such  conversion  does not exceed  4.9% of the then issued and
outstanding shares of common stock. However, the noteholders may repeatedly sell
shares  of common  stock in order to  reduce  their  ownership  percentage,  and
subsequently convert additional convertible notes, provided,  however, that such
conversions do not exceed the average daily dollar volume  calculated during the
ten business days prior to  conversion  multiplied by the number of trading days
of that calendar month, per calendar month.

         December  24, 2007 Sale of $250,000  in  Callable  Secured  Convertible
Notes:  To obtain  further  funding for the Company's  ongoing  operations,  the
Company entered into a fourth securities purchase agreement on December 24, 2007
with the same four accredited investors for the sale of (i) $250,000 in callable
secured convertible notes and (ii) warrants to purchase 15,000,000 shares of its
common stock.  The investors  disbursed  $250,000 to the Company on December 24,
2007.

         Under the terms of the December 24, 2007 securities purchase agreement,
the Company  agreed that it would not,  without the prior  written  consent of a
majority-in-interest  of the investors,  negotiate or contract with any party to
obtain  additional  equity  financing  (including  debt financing with an equity
component)  that  involves (i) the issuance of common stock at a discount to the
market  price of the common  stock on the date of issuance  (taking into account
the value of any  warrants  or  options to acquire  common  stock in  connection
therewith),  (ii) the issuance of convertible  securities  that are  convertible
into an indeterminate number of shares of common stock, or (iii) the issuance of
warrants during the lock-up period beginning December 24, 2007 and ending on the
later of (a) 270 days from  December 24, 2007, or (b) 180 days from the date the
registration statement is declared effective.

         In  addition,  the Company  agreed not to conduct any equity  financing
(including debt financing with an equity  component) during the period beginning
December 24, 2007 and ending two years after the end of the above lock-up period
unless it first  provided each investor an option to purchase its pro-rata share
(based on the ratio of each  investor's  purchase under the securities  purchase
agreement) of the  securities  being offered in any proposed  equity  financing.
Each investor must be provided  written notice  describing  any proposed  equity
financing at least 20 business days prior to the closing of such proposed equity
financing  and the option must be extended  to each  investor  during the 15-day
period following delivery of such notice.

         The $250,000 in  convertible  notes bear  interest at 8% per annum from
the date of issuance. Interest is computed on the basis of a 365-day year and is
payable  quarterly in cash,  with six months of interest  payable up front.  The
interest  rate resets to zero  percent for any month in which the stock price is
greater than 125% of the initial market price,  or $.0275,  for each trading day
during that month.  Any amount of principal or interest on the callable  secured
convertible  notes that is not paid when due will bear  interest  at the rate of
15% per  annum  from  the  date due  thereof  until  such  amount  is paid.  The
convertible  notes  mature in three  years  from the date of  issuance,  and are
convertible into the Company's common stock at the noteholders'  option,  at the
lower  of (i) $.02 or (ii)  50% of the  average  of the  three  lowest  intraday
trading prices for the common stock on the OTC Bulletin Board for the 20 trading
days before but not  including the  conversion  date.  Accordingly,  there is no
limit on the number of shares into which the notes may be converted.

         The $250,000 in convertible  notes are secured by the Company's assets,
including  the  Company's   inventory,   accounts  receivable  and  intellectual
property.  Moreover, the Company has a call option under the terms of the notes.
The call  option  provides  the  Company  with the  right to  prepay  all of the
outstanding convertible notes at any time, provided there is no event of default
by the Company and its stock is trading at or below $.10 per share.  An event of
default  includes the failure by the Company to pay the principal or interest on
the  convertible  notes when due or to timely file a  registration  statement as
required by the Company or obtain effectiveness with the Securities and Exchange
Commission of the registration statement. Prepayment of the convertible notes is
to be made in cash equal to either  (a) 125% of the  outstanding  principal  and
accrued  interest for prepayments  occurring  within 30 days following the issue
date of the notes;  (b) 130% of the outstanding  principal and accrued  interest
for prepayments occurring between 31 and 60 days following the issue date of the
notes;  or (c)  145% of the  outstanding  principal  and  accrued  interest  for
prepayments occurring after the 60th day following the issue date of the notes.



                                       32
<PAGE>

         The  warrants  are  exercisable  until  seven  years  from  the date of
issuance at a purchase price of $.001 per share.  The investors may exercise the
warrants  on a  cashless  basis if the  shares of common  stock  underlying  the
warrants  are  not  then  registered  pursuant  to  an  effective   registration
statement. In the event the investors exercise the warrants on a cashless basis,
the Company will not receive any proceeds therefrom.  In addition,  the exercise
price of the warrants  will be adjusted in the event the Company  issues  common
stock at a price below market, with the exception of any securities issued as of
the date of the  warrants or issued in  connection  with the  convertible  notes
issued pursuant to the securities purchase agreement.

         The noteholders  have agreed to restrict their ability to convert their
convertible notes or exercise their warrants and receive shares of the Company's
common  stock such that the number of shares of common stock held by them in the
aggregate and their affiliates after such conversion or exercise does not exceed
4.99% of the then issued and outstanding  shares of common stock.  However,  the
noteholders  may repeatedly sell shares of common stock in order to reduce their
ownership  percentage,  and subsequently  convert additional  convertible notes,
provided,  however,  that such  conversions  do not exceed  $75,000 per calendar
month,  or the average  daily dollar volume  calculated  during the ten business
days  prior to  conversion  multiplied  by the  number of  trading  days of that
calendar month, per calendar month.

         The  Company is required  to  register  the shares of its common  stock
issuable upon the  conversion of the  convertible  notes and the exercise of the
warrants that were issued to the noteholders pursuant to the securities purchase
agreement  the Company  entered in to on December  24,  2007.  The  registration
statement must be filed with the Securities  and Exchange  Commission  within 60
days  of the  December  24,  2007  closing  date  and the  effectiveness  of the
registration  is to be within 135 days of such closing date.  Penalties of 2% of
the outstanding principal balance of the convertible notes plus accrued interest
are to be applied for each month the  registration  is not effective  within the
required time. The penalty may be paid in cash or stock at the Company's option.

Simple Conversion Calculation

         The number of shares of common stock  issuable  upon  conversion of the
convertible  notes issued on April 27, 2005,  February 28, 2006,  June 11, 2007,
December 19, 2007,  and December 24, 2007 is determined by dividing that portion
of the  principal  of the notes to be  converted  and  interest,  if any, by the
conversion  price.  For example,  assuming  conversion of  $3,928,262  principal
amount of the convertible  notes on December 31, 2007  (consisting of $5,139,010
in convertible notes that were sold to the four investors pursuant to securities
purchase  agreements dated April 27, 2005, February 28, 2006, June 11, 2007, and
December 24, 2007,  plus  $389,010 in  convertible  notes issued on December 19,
2007 in payment of past due  interest  on the notes,  less  $1,210,748  in notes
converted  during the period  from June 12,  2005 to  December  31,  2007) and a
conversion  price of $.0018 per share with a 40% discount,  the number of shares
issuable upon conversion would be:

                 $3,928,262/$.0018 x 60% = 3,637,280,000 shares.

         The  Company's  obligation  to  issue  shares  upon  conversion  of the
convertible  notes issued on April 27, 2005,  February 28, 2006,  June 11, 2007,
December 19, 2007, and December 24, 2007 is essentially limitless. The following
is an  example of the amount of shares of common  stock that are  issuable  upon
conversion of $3,928,262  principal  amount of the convertible  notes (including
accrued  interest),  based on market  prices 25%,  50%, and 75% below the market
price, as of January 14, 2008 of $.0018 with a 40% discount:

% Below      Price Per      With 40%        Number of         % of Outstanding
Market        Share         Discount      Shares Issuable         Shares*
------        -----         --------     ----------------         ------
  25%         $.00135        $.00081        4,849,706,000            712%
  50%         $.0009         $.00054        7,274,559,000         10,682%
  75%         $.00045        $.00027       14,594,118,000         21,365%

*Based on 680,984,307 shares outstanding.

         As  illustrated,  the number of shares of common  stock  issuable  upon
conversion of the Company's callable secured  convertible notes will increase if
the  market  price of the  Company's  common  stock  declines,  which will cause
dilution to existing stockholders.



                                       33
<PAGE>

Adjustable Conversion Price of Convertible Notes

         The callable secured  convertible  notes are convertible into shares of
the Company's  common stock at a 40% discount to the trading price of the common
stock prior to the conversion. The significant downward pressure on the price of
the common stock as the noteholders  convert and sell material amounts of common
stock  could  encourage  short  sales by  investors.  This could  place  further
downward  pressure on the price of the common stock. The noteholders  could sell
common  stock  into the market in  anticipation  of  covering  the short sale by
converting their securities,  which could cause further downward pressure on the
stock price. In addition,  not only the sale of shares issued upon conversion or
exercise of notes, warrants and options, but also the mere perception that these
sales  could  occur,  may have a  depressive  effect on the market  price of the
common stock.

Possible Dilution to Stockholders

         The  issuance  of  shares  upon  conversion  of  convertible  notes and
exercise of warrants may result in  substantial  dissolution to the interests of
other  stockholders  since the holders of the  convertible  notes may ultimately
convert  and  sell  the full  amount  issuable  upon  conversion.  Although  the
noteholders  may not convert their  callable  secured  convertible  notes and/or
exercise their warrants if such conversion or exercise price would cause them to
own more than 4.99% of the Company's  outstanding common stock, this restriction
does not prevent the noteholders from converting and/or exercising some of their
holdings  and then  converting  the rest of their  holdings.  In this  way,  the
noteholders  could sell more than this limit while never  holding more than this
limit. There is no upper limit on the number of shares that may be issued, which
will have the effect of further diluting the  proportionate  equity interest and
voting power of holders of the Company's common stock.

Failure to Repay Convertible Notes May Require Company Operations to Cease

         On April 27,  2005,  the Company  entered  into a  securities  purchase
agreement  for the  sale of an  aggregate  of  $2,500,000  principal  amount  of
convertible  notes.  On February  28,  2006,  the Company  entered into a second
securities  purchase  agreement  for the  sale  of an  aggregate  of  $1,500,000
principal  amount of convertible  notes. On June 11, 2007 and December 24, 2007,
the Company entered into third and fourth securities purchase agreements for the
sale of an aggregate  of $750,000  principal  amount of  convertible  notes.  On
December 19, 2007,  the Company  issued an  additional  $389,010 in  convertible
notes as  payment  of past due  interest  owing on the  outstanding  convertible
notes. These convertible notes are all due and payable, with 8% interest,  three
years from the date of  issuance,  unless  sooner  converted  into shares of the
Company's  common stock.  Any event of default such as the Company's  failure to
repay the principal or interest when due on the notes, the Company's  failure to
issue shares of common stock upon conversion by the  noteholders,  the Company's
breach of any covenant,  representation  or warranty in the securities  purchase
agreement or related  convertible  notes,  the  assignment or  appointment  of a
receiver to control a substantial  part of the  Company's  property or business,
the filing of a money  judgment,  writ or similar process against the Company in
excess of $50,000, the commencement of a bankruptcy, insolvency,  reorganization
or  liquidation  proceeding  against  the  Company,  and  the  delisting  of the
Company's  common stock could  require the early  repayment  of the  convertible
notes,  including a default  interest rate of 15% on the  outstanding  principal
balance of the notes if the  default is not cured  within  the  specified  grace
period.

         The Company  anticipates that the full amount of convertible notes will
be converted  into shares of its common stock,  in accordance  with the terms of
the  convertible  notes.  If the Company is  required  to repay the  convertible
notes,  it would be  required  to use its  limited  working  capital  and  raise
additional  funds.  If the Company were unable to repay the notes when required,
the noteholders could commence legal action against the Company and foreclose on
all of its assets to recover the amounts due. Any such action would  require the
Company to curtail or cease operations.

Results of Operations

         Fiscal  Year Ended  December  31,  2007  Compared  to Fiscal Year Ended
December 31, 2006

         Net sales for the twelve  months ended  December 31, 2007  decreased by
$323,000 to $1,872,000  as compared to  $2,195,000  for the same period of 2006.
This reduction in sales was primarily due to decreased sales of the P40, P45 and
P60 Ultrasound Biomicroscopes, the P37 A/B Scan Ocular Ultrasound Diagnostic and
the P55 Pachymeter.



                                       34

<PAGE>

         For the twelve months ended December 31, 2007, sales from the Company's
diagnostic  products totaled $1,707,000,  or 91% of total revenues,  compared to
$1,928,000,  or 88% of total revenues for the same period of 2006. The remaining
9 % of sales,  or $165,000  during the twelve months ended December 31, 2007 was
from parts, disposables, and service revenue.

         Sales of the P40, P45 and P60 UBM Ultrasound  Biomicroscopes  decreased
to $513,000  during the twelve  months ended  December 31, 2007, or 27% of total
revenues for the period, compared to $547,000, or 25% of total revenues, for the
same period last year. Sales of the Blood Flow Analyzer(TM) increased by $46,000
to $257,000, or 14% of total revenues,  for the twelve months ended December 31,
2007,  compared to net sales of $211,000,  or 10% of total  revenues  during the
same period in 2006. Sales from the P37, P37-II, P2700 and P3700 A/B Scan Ocular
Ultrasound Diagnostic increased to $210,000,  or 11% of total revenues,  for the
twelve  month period  ended  December 31, 2007,  up compared to $221,000 for the
same period last year.  Combined sales of the LD 400 and TKS 5000 autoperimeters
and the CT 200 Corneal Topographer were $388,000,  or 20% of the total revenues,
for the twelve months ended December 31, 2007,  compared to $856,000,  or 39% of
total revenues, for the same period of 2006.

         Sales of the Blood  Flow  Analyzer(TM)  increased  due in part from the
reorganization of the Company's sales force. The Company anticipates  continuing
the upward trend in Blood Flow Analyzer(TM)  sales through additional efforts by
the Company to gain more wide spread  support  from the Blood Flow  Analyzer(TM)
through increased clinical awareness, product development and improved marketing
plans.

         Sales of surgical products are at a standstill  pending FDA approval of
the Photon(TM) laser system. In the twelve month period ended December 31, 2007,
the Company  realized no sales in the surgical line consisting of the Photon(TM)
laser system.  There were also no sales in the surgical line for the  comparable
period of 2006.

         Gross profit for the twelve months ended December 31, 2007 increased to
46% of total revenues,  compared to 42% of total revenues for the same period in
2006.  This  increase in gross  profit in 2007 was mainly due to  reductions  in
corporate  expenditures due to improved operating efficiencies during the twelve
months  ending  December 31,  2007.  There was no increase to cost of sales as a
result of a charge to the reserve for obsolete inventory in 2006.

         Marketing  and  selling  expenses  increased  by  $228,000,  or 53%, to
$662,000 for the twelve  months ended  December 31, 2007,  from $434,000 for the
comparable  period in 2006.  This  increase  was due  primarily  to an increased
number of sales  representatives  and higher travel related and associated sales
expenses.

         General and administrative  expenses increased by $206,000,  or 26%, to
$998,000 for the twelve  months ended  December 31, 2007,  from $792,000 for the
comparable period in 2006.  Contributing to this increase was a $42,000 increase
in salaries  from  $246,000 in 2006 to $288,000 in 2007,  primarily due to merit
increases in the salaries of existing  employees.  Commission expenses increased
by $16,000 from $72,000 in 2006 to $88,000 in 2007 due to an increased amount of
convertible notes sold in 2007 compared to 2006. Accounting support expenditures
increased  by  $25,000  in  2007  as a  result  of  the  necessary  updates  and
modifications to the Company's  network system services and associated  software
support.  The bad debt  allowance  increased  by $37,000 from $72,000 in 2006 to
$109,000 in 2007 due to an increased amount of the Company's accounts receivable
over 90 days during 2007 as compared to 2006.

         Also during 2007, the Company  collected  $22,000 in  receivables  that
were previously allowed in the allowance for doubtful accounts.

         Research,  development and service  expenses  increased by $94,000,  or
38%, to $344,000  for the twelve  months ended  December  31, 2007,  compared to
$250,000  for the same  period of 2006.  This  increased  was  mainly due to the
increased  expenses in 2007 for the development of the new software  package for
the P60 UBM.

         Due to our  ongoing  cash  flow  difficulties,  most  of the  Company's
vendors and  suppliers  were  contacted  during  2006 and 2007 with  attempts to
negotiate  reduced  payments and  settlement of  outstanding  accounts  payable.
Although some vendors  refused to negotiate and demanded  payment in full,  some
vendors  were  willing  to settle for a reduced  amount.  The  accounts  payable
forgiven  by vendors  and  suppliers  resulted  in a gain of $91,000 and $34,000
during the years ended December 31, 2007 and 2006, respectively.



                                       35

<PAGE>

Liquidity and Capital Resources

         The Company used  $1,135,000  in cash in operating  activities  for the
twelve  months  ended  December  31,  2007,  compared to $828,000 for the twelve
months  ended  December  31,  2006.  The  increase  in cash  used for  operating
activities  for  the  twelve  months  ended  December  31,  2007  was  primarily
attributable  to the  Company's  net loss and  increase in  accounts  payable,
accounts  receivable,  and   a   significant   decrease of the  change  of the
fair  value of  derivative  liabilities.  There was no cash used for  investment
activities for the twelve months ended December 31, 2007,  compared to cash used
for investment  activities of $20,000 for the same period in 2006. Net cash used
in financing  activities was $1,250,000 for the twelve months ended December 31,
2007,  versus net cash used of $988,000 in the same period in 2006.  The Company
had  working  capital of  $758,000 as of December  31,  2007.  In the past,  the
Company has relied  heavily  upon sales of the  Company's  common and  preferred
stock to fund  operations.  There can be no assurance  that such equity  funding
will be available on terms acceptable to the Company in the future.

         As  of  December  31,  2007,   the  Company  had  net  operating   loss
carryforwards  (NOLs) of approximately  $56  million.   These loss carryforwards
are available to offset future taxable income,  if any, and have begun to expire
in 2001 and extend for twenty years. The Company's  ability to use net operating
loss  carryforwards  (NOLs) to offset  future  income is dependent  upon certain
limitations as a result of the pooling  transaction with Vismed and the tax laws
in effect at the time of the NOLs  being  utilized.  The Tax  Reform Act of 1986
significantly limits the annual amount that can be utilized for certain of these
carryforwards as a result of change of ownership.

         As of December 31, 2007, the Company had accounts  payable of $417,000,
a  significant  portion  of which  was over 90 days past due.  The  Company  has
contacted  many of the vendors or  companies  that have  significant  amounts of
payables  past  due  in an  effort  to  delay  payment,  renegotiate  a  reduced
settlement  payment,  or  establish  a longer  term  payment  plan.  While  some
companies have been willing to renegotiate the outstanding amounts,  others have
demanded payment in full. Under certain conditions, including but not limited to
judgments  rendered  against the Company in a court of law, a group of creditors
could  force  the  Company  into  bankruptcy  due to its  inability  to pay  the
liabilities  arising  out of such  judgments  at that time.  In  addition to the
accounts payable noted above, the Company also has  noncancelable  capital lease
obligations  and  operating  lease  obligations  that  require  the  payment  of
approximately $110,000 in 2007, and $218,000 in 2006.

         The  Company  has taken  numerous  steps to reduce  costs and  increase
operating efficiencies. These steps consist of the following:

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

         2. The Company has reduced the size of its  manufacturing  facility and
corporate  office in Salt Lake City.  In doing so,  management  responsibilities
were consolidated. Such reduction in space resulted in a reduction in the number
of employees, as well as savings in rent and other overhead expenses.

         3. The Company has significantly reduced the use of consultants,  which
has resulted in a large decrease to these expenses.

         4.  The  Company   has   reduced  its  direct   sales  force  to  three
representatives,  which has resulted in less  payroll,  travel and other selling
expenses.

         Because the Company has significantly fewer sales representatives,  its
ability to generate sales has been reduced.

         The  Company has taken  measures to reduce the amount of  uncollectible
accounts  receivable  such as  more  thorough  and  stringent  credit  approval,
improved  training and  instruction  by sales  personnel,  and  frequent  direct
communication  with the  customer  subsequent  to delivery  of the  system.  The
allowance for doubtful accounts was 15% of total  outstanding  receivables as of
December 31, 2007 and 15% as of December 31, 2006.  The  allowance  for doubtful
accounts increased from $72,000 at December 31, 2006 to $109,000 at December 31,
2007.


                                       36
<PAGE>

         The Company intends to continue its efforts to reduce the allowance for
doubtful  accounts  as a  percentage  of  accounts  receivable.  The Company has
ongoing  efforts to collect a significant  portion of the sales price in advance
of the sale or in a timely manner after delivery. During the twelve months ended
December 31, 2007,  the Company added a net recovery of  receivables  previously
allowed of $22,000,  and during the twelve months ended  December 31, 2006,  the
Company  had a net zero to the  allowance  for  doubtful  accounts.  The Company
believes that by requiring a large portion of payment prior to shipment,  it has
greatly improved the collectibility of its receivables.

         The  Company   carried  an   allowance   for   obsolete  or   estimated
non-recoverable  inventory  of $244,000 at December 31, 2007 and  $1,320,000  at
December  31,  2006,  or 22%  and  58% of  total  inventory,  respectively.  The
Company's  means of expansion and  development  of product has been largely from
acquisition of businesses,  product lines, existing inventory, and the rights to
specific  products.   Through  such  acquisitions,   the  Company  has  acquired
substantial  inventory,  some of which the eventual use and  recoverability  was
uncertain.  On December 31, 2007, the Company disposed of $1,076,000 in obsolete
inventory, which had been previously reserved.

         On a quarterly basis, the Company attempts to identify  inventory items
that have shown relatively no movement or very slow movement.  Generally,  if an
item has shown little or no movement for over a year, it is determined not to be
recoverable  and a reserve is  established  for that item.  In addition,  if the
Company identifies products that have become obsolete due to product upgrades or
enhancements, a reserve is established for such products. The Company intends to
make efforts to sell these items at significantly  discounted  prices.  If items
are sold, the cash received would be recorded as revenue,  but there would be no
cost of sales on such items due to the reserve  that has been  recorded.  At the
time of  sale,  the  inventory  would  be  reduced  for the  item  sold  and the
corresponding inventory reserve would also be reduced.

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

Effect of Inflation and Foreign Currency Exchange

         The Company has not  realized a reduction  in the selling  price of its
products as a result of domestic inflation.  Nor has it experienced  unfavorable
profit  reductions due to currency  exchange  fluctuations or inflation with its
foreign customers.  All sales transactions to date have been denominated in U.S.
Dollars.  The Company has  experienced a higher cost for equipment  manufactured
for the  Company by Tinsley in  England  due to the  exchange  rate value of the
pound sterling.

Impact of New Accounting Pronouncements

         In February 2006, the FASB issued SFAS No. 155,  Accounting for Certain
Hybrid Financial Instruments.  This statement is an amendment of FASB Statements
Nos. 133 and 140 to address what had been characterized as a temporary exemption
from the  application of the  bifurcation  requirements  of Statement No. 133 to
beneficial  interests in securitized  financial  assets.  Prior to the effective
date of Statement No. 133, the FASB received inquiries on the application of the
exception  in  paragraph  14 of  Statement  No. 133 to  beneficial  interests in
securitized financial assets. In response to the inquiries, Implementation Issue
D1 indicated that,  pending issuance of further guidance,  entities may continue
to apply  the  guidance  related  to  accounting  for  beneficial  interests  in
paragraphs 14 and 362 of Statement No. 140. Those  paragraphs  indicate that any
security that can be  contractually  prepaid or otherwise  settled in such a way
that the  holder of the  security  would not  recover  substantially  all of his
recorded  investment  should be subsequently  measured like  investments in debt
securities  classified as available-for-sale or trading under FASB Statement No.
115, Accounting for Certain  Investments in Debt and Equity Securities,  and may
not  be  classified  as  held-to-maturity.   Further,  Implementation  Issue  D1
indicated that holders of beneficial  interests in securitized  financial assets
that are not  subject  to  paragraphs  14 and 362 of  Statement  No. 140 are not
required to apply Statement No. 133 to those beneficial  interests until further
guidance is issued.  The Company believes the adoption of new standards will not
have a material effect on its financial  position,  results of operations,  cash
flows, or previously issued financial reports.



                                       37

<PAGE>

         In March 2006,  the FASB issued SFAS No. 156,  Accounting for Servicing
of  Financial  Assets  ("SFAS  156").  SFAS 156 amends FASB  Statement  No. 140,
Accounting for Transfers and Servicing of Financial  Assets and  Extinguishments
of  Liabilities,  with  respect  to the  accounting  for  separately  recognized
servicing  assets and  servicing  liabilities.  In SFAS 156 the board decided to
broaden the scope of the project to include all  servicing  assets and servicing
liabilities.  Servicing  assets  and  servicing  liabilities  may be  subject to
significant  interest rate and prepayment risks, and many entities use financial
instruments to mitigate those risks.  Currently,  servicing assets and servicing
liabilities  are amortized  over the expected  period of estimated net servicing
income or loss and  assessed for  impairment  or  increased  obligation  at each
reporting  date.  The board  acknowledged  that the  application of the lower of
carrying amount or fair value measurement  attribute to servicing assets results
in asymmetrical  recognition of economic events, because it requires recognition
of all decreases in fair value but limits recognition of increases in fair value
to the original carrying amount.

         SFAS 156 requires that all separately  recognized  servicing assets and
servicing  liabilities be initially measured at fair value, if practicable.  The
board concluded that fair value is the most relevant  measurement  attribute for
the initial  recognition  of all  servicing  assets and  servicing  liabilities,
because it represents  the best measure of future cash flows.  SFAS 156 permits,
but does not  require,  the  subsequent  measurement  of  servicing  assets  and
servicing liabilities at fair value. An entity that uses derivative  instruments
to mitigate the risks inherent in servicing assets and servicing  liabilities is
required to account for those derivative  instruments at fair value.  Under SFAS
156, an entity can elect  subsequent  fair value  measurement  of its  servicing
assets and servicing  liabilities by class,  thus simplifying its accounting and
providing for income statement  recognition of the potential  offsetting changes
in fair  value of the  servicing  assets,  servicing  liabilities,  and  related
derivative instruments.  An entity that elects to subsequently measure servicing
assets and servicing liabilities at fair value is expected to recognize declines
in  fair  value  of  the  servicing   assets  and  servicing   liabilities  more
consistently  than by reporting  other-than-temporary  impairments.  The Company
believes the adoption of new  standards  will not have a material  effect on its
financial  position,  results of operations,  cash flows,  or previously  issued
financial reports.

         In September 2006, the FASB issued SFAS No. 158, Employers'  Accounting
for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R) ("SFAS 158").  Under SFAS 158,  companies
must  recognize a net  liability  or asset to report the funded  status of their
defined benefit pension and other postretirement  benefit plans on their balance
sheets.  The effective date of the  recognition  and  disclosure  provisions for
calendar-year  public  companies is for calendar years ending after December 15,
2006. The Company is currently evaluating the impact of this new standard but it
is not  expected  to have a  significant  effect on the  Company's  consolidated
financial statements.

         In  September   2006,   the  FASB  issued  SFAS  No.  157,  Fair  Value
Measurements ("SFAS 157"). SFAS 157 defines fair value,  establishes a framework
for measuring fair value, and expands disclosures about fair value measurements.
SFAS 157  will be  applied  prospectively  and is  effective  for  fiscal  years
beginning  after  November 15,  2007,  and interim  periods  within those fiscal
years.  SFAS 157 is not  expected  to have a  material  impact on the  Company's
consolidated financial statements.

         In February  2007,  the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial  Liabilities,  including an amendment of FASB
Statement No. 115 ("SFAS 159").  SFAS 159 permits companies to choose to measure
many  financial  instruments  and certain other items at fair value that are not
currently  required to be measured at fair value,  and establishes  presentation
and disclosure requirements designed to facilitate comparisons between companies
that choose  different  measurement  attributes  for similar types of assets and
liabilities.  SFAS 159 is effective  on January 1, 2008,  and is not expected to
have a material effect on the Company's consolidated financial statements.

         In  December  2007,   the  FASB  issued  SFAS  No.   141(R),   Business
Combinations   ("SFAS  141R").   SFAS  141R   establishes   the  principles  and
requirements  for how an  acquirer  recognizes  and  measures  in its  financial
statements the  identifiable  assets  acquired,  the  liabilities  assumed,  any
noncontrolling  interest in the acquiree,  and the goodwill acquired.  SFAS 141R
also establishes disclosure  requirements to enable the evaluation of the nature
and  financial  effects of the business  combination.  SFAS 141R is effective on
January 1, 2009, and is not expected to have a material  effect on the Company's
consolidated financial statements.

         In  December  2007,  the  FASB  issued  SFAS  No.  160,  Noncontrolling
Interests  in  Consolidated  Financial  Statements,  an  amendment of ARB No. 51
("SFAS  160").  SFAS 160 will change the  accounting  and reporting for minority
interests,  which  will  be  recharacterized  as  noncontrolling  interests  and
classified  as a  component  of  equity.  This  new  consolidation  method  will
significantly  change the accounting  for  transactions  with minority  interest
holders. SFAS 160 is effective on January 1, 2009, and is not expected to have a
material effect on the Company's consolidated financial statements.



                                       38
<PAGE>

Item 7. Financial Statements


                        PARADIGM MEDICAL INDUSTRIES, INC.
                              FINANCIAL STATEMENTS
                           DECEMBER 31, 2007 AND 2006















<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   INDEX TO FINANCIAL STATEMENTS

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




                                                                            PAGE
                                                                            ----


Report of Independent Registered Public Accounting Firm                     F-2


Balance Sheet                                                               F-3


Statements of Operations                                                    F-4


Statements of Stockholders' Equity                                          F-5


Statements of Cash Flows                                                    F-6


Notes to Financial Statements                                               F-7








--------------------------------------------------------------------------------
                                                                             F-1

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and shareholders
Paradigm Medical Industries, Inc.
Salt Lake City, Utah

         We have  audited the  accompanying  balance  sheet of Paradigm  Medical
Industries,  Inc.  (the  Company)  as of  December  31,  2007,  and the  related
statements  of  operations,  stockholders'  deficit and cash flows for the years
ended  December  31,  2007  and  2006.   These  financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

         We conducted our audits in  accordance  with the standards of the PCAOB
(United States).  Those standards require that we plan and perform the audits to
obtain reasonable  assurance about whether the financial  statements are free of
material misstatement.  The Company is not required to have, nor were we engaged
to perform, audits of its internal control over financial reporting.  Our audits
included  consideration of internal control over financial  reporting as a basis
for designing audit  procedures that are appropriate in the  circumstances,  but
not for the  purpose  of  expressing  an  opinion  on the  effectiveness  of the
Company's internal control over financial reporting.  Accordingly, we express no
such  opinion.  An audit also  includes  examining,  on a test  basis,  evidence
supporting the amounts and  disclosures in the financial  statements,  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, 2007,  and the results of their  operations
and  their  cash  flows for the  years  ended  December  31,  2007 and 2006,  in
conformity with accounting principles generally accepted in the United States of
America.

         The accompanying  financial  statements have been prepared assuming the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 2 to the
financial statements, the Company has a working capital deficit and has suffered
recurring operating losses,  which raises substantial doubt about its ability to
continue as a going concern.  Management's  plans in regard to these matters are
also  described  in  Note  2.  The  financial  statements  do  not  include  any
adjustments that might result from the outcome of these uncertainties.

         As discussed in Note 18 to the financial statements,  there were errors
in reporting the Company's  accounting for the embedded derivatives and warrants
issued in connection with the Compan's  convertible  notes in the balance sheets
and  the   statements  of  operations   that  were   discovered  by  management.
Accordingly, the financial statements have been restated to correct the errors.

Chisholm, Bierwolf & Nilson LLC
Bountiful, Utah
May 15, 2008 except for Notes 1, 6, 8, 13 and 18 dated May 18, 2008.





--------------------------------------------------------------------------------
                                                                             F-2
<PAGE>
<TABLE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                                   BALANCE SHEET

                                                               DECEMBER 31, 2007
--------------------------------------------------------------------------------
<S>                                                              <C>
ASSETS

Current assets:
   Cash                                                          $      321,000
   Receivables, net                                                     624,000
   Inventories, net                                                     847,000
Prepaid and other assets                                                 27,000
                                                                 ---------------

Total current assets                                                  1,819,000

Property and equipment, net                                              16,000
Goodwill                                                                339,000
                                                                 ---------------

Total assets                                                     $    2,174,000
                                                                 ===============

LIABILITIES AND STOCKHOLDERS' (DEFICIT)

Current liabilities:
   Accounts payable                                              $      370,000
   Related party payable                                                 46,000
   Accrued liabilities                                                  644,000
                                                                 ---------------

Total current liabilities                                             1,060,000
                                                                 ---------------

   Convertible notes payable, net of debt discount
     of $889,000                                                      3,039,000
   Derivative liabilities                                               215,000
                                                                 ---------------
Total long-term liabilities                                           3,254,000
                                                                 ===============
Total liabilities                                                     4,314,000
Commitments and contingencies                                                 -

Stockholders' (Deficit):
Preferred stock, $.001 par value, 5,000,000 shares
   authorized, 612,497 shares issued and outstanding
   (aggregate liquidation preference of $456,000)                         1,000
Common stock, $.001 par value, 800,000,000 shares
   authorized, 544,986,907 shares issued and outstanding                545,000
Additional paid-in capital                                           58,435,000
Accumulated deficit                                                 (61,121,000)
                                                                 ---------------

Total stockholders' (Deficit)                                        (2,140,000)
                                                                 ---------------

Total liabilities and stockholders' (Deficit)                    $    2,174,000
                                                                 ===============


    The accompanying notes are an integral part of these financial statements

--------------------------------------------------------------------------------
                                                                             F-3

<PAGE>

                                                           PARADIGM MEDICAL INDUSTRIES, INC.
                                                                    STATEMENTS OF OPERATIONS

                                                                    YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------

                                                                   2007                2006
                                                                                  (RESTATED)

Sales                                                  $      1,872,000    $      2,195,000
Cost of sales                                                 1,020,000           1,277,000
                                                       -----------------   -----------------

Gross profit                                                    852,000             918,000
                                                       -----------------   -----------------

Operating expenses:
      General and administrative                             (1,012,000)           (792,000)
      Professional fees-related party                                 -            (187,000)
      Marketing and selling                                    (662,000)           (434,000)
      Research and development                                 (344,000)           (250,000)
      Gain on settlement of liabilities                          91,000              34,000
                                                       -----------------   -----------------

Total operating expenses                                     (1,927,000)         (1,629,000)
                                                       -----------------   -----------------

Operating loss                                               (1,075,000)           (712,000)
                                                       -----------------   -----------------
Other income (expense):
      Other income                                                    -             109,000
      Interest expense - Accretion of debt discount            (864,000)           (952,000)
      Interest income                                            11,000                   -
      Interest expense                                         (221,000)           (214,000)
      Gain on derivative valuation                              418,000             570,000
                                                                      -                   -
                                                       -----------------   -----------------

Total other income (expense)                                   (656,000)           (487,000)
                                                       -----------------   -----------------

Income (loss) before provision for income taxes              (1,731,000)         (1,198,000)
Provision for income taxes                                            -                   -
                                                       -----------------   -----------------

Net (loss)                                             $     (1,731,000)   $     (1,198,000)
                                                       =================   =================

Earnings (loss) per common share - basic               $          (0.01)   $          (0.01)
                                                       -----------------   -----------------
Earnings (loss) per common share - diluted             $          (0.01)   $          (0.01)
                                                       -----------------   -----------------
Weighted average common shares - basic                      264,736,000         175,034,000
                                                       -----------------   -----------------
Weighted average common shares - diluted                    264,736,000         175,034,000
                                                       =================   =================


          The accompanying notes are an integral part of these financial statements

--------------------------------------------------------------------------------------------
                                                                                         F-4
<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                      STATEMENTS OF STOCKHOLDERS' EQUITY

                                                                FOR THE PERIOD JANUARY 1, 2006 THROUGH DECEMBER 31, 2007
------------------------------------------------------------------------------------------------------------------------

                                                PREFERRED                                   ADDITIONAL
                                                    STOCK         COMMONS                      PAID-IN     ACCUMULATED
                                              (SEE NOTE 8)         SHARES      AMOUNT          CAPITAL         DEFICIT
                                            ---------------------------------------------------------------------------

BALANCE AT JANUARY 1, 2006 (RESTATED)               1,000      96,389,295      96,000       58,086,000     (58,191,000)

Issuance of common stock for:

Stock option valuation                                  -               -           -           23,000               -
Conversion of convertible debentures                    -     105,529,700     106,000          275,000               -
Conversion of preferred stock                           -          39,999           -                -               -
Net loss                                                -               -           -                -      (1,199,000)
                                            ---------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 2006 (RESTATED)             1,000     201,958,994     202,000       58,384,000     (59,390,000)

Issuance of common stock for:

Stock option valuation                                  -               -           -           14,000               -
Conversion of convertible debentures                    -     343,017,246     343,000           37,000               -
Conversion of preferred stock                           -          10,667           -                -               -
Net loss                                                -               -           -                -      (1,731,000)

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

BALANCE AT DECEMBER 31, 2007                        1,000     544,986,907     545,000       58,435,000     (61,121,000)
                                            ===========================================================================


                        The accompanying notes are an integral part of these financial statements

------------------------------------------------------------------------------------------------------------------------
                                                                                                                     F-5
<PAGE>

                                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                                        STATEMENTS OF CASH FLOWS

                                                                        YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------

                                                                      2007             2006
                                                                                    (Restated)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                 $ (1,731,000)    $ (1,198,000)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
          Depreciation and amortization                                  5,000           31,000
          Stock option valuation                                        14,000           23,000
          Change in fair value of derivative liabilities              (418,000)        (570,000)
          Accretion of debt discount                                   865,000          952,000
          Provision for losses on receivables                           56,000          (28,000)
          Provision for losses on inventory                                  -          (37,000)
          (Gain) loss on settlement of liabilities                     (91,000)         (34,000)
(Increase) decrease in:
          Accounts Receivables                                        (251,000)          19,000
          Inventories                                                   98,000          (55,000)
          Prepaid and other assets                                     (16,000)               -
Increase (decrease) in:
          Accounts payable                                              17,000          (30,000)
          Accrued liabilities                                          317,000           99,000
                                                                  ------------     ------------
NET CASH USED IN OPERATING ACTIVITIES                               (1,135,000)        (828,000)
                                                                  ------------     ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
          Acquisition of property and equipment                              -          (20,000)
                                                                  ------------     ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                          -          (20,000)
                                                                  ------------     ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
          Principal payments on notes payable and long-term debt             -          (12,000)
          Proceeds from issuance of convertible notes                1,250,000        1,000,000
                                                                  ------------     ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                  1,250,000          988,000
                                                                  ------------     ------------

Net change in cash                                                     115,000          140,000

Cash, beginning of year                                                206,000           66,000
                                                                  ------------     ------------

CASH, END OF YEAR                                                 $    321,000     $    206,000
                                                                  ============     ============


            The accompanying notes are an integral part of these financial statements

------------------------------------------------------------------------------------------------
                                                                                             F-6

<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

                                                      DECEMBER 31, 2007 AND 2006
--------------------------------------------------------------------------------

1. ORGANIZATION           ORGANIZATION
   AND SIGNIFICANT
   ACCOUNTING POLICIES    Paradigm  Medical  Industries, Inc.(the  Company) is a
                          Delaware Corporation incorporated in October 1989. The
                          Company  is  engaged  in  the   design,   development,
                          manufacture,  and sale of high technology surgical and
                          diagnostic eye care products.  Its surgical  equipment
                          is designed  to perform  minimally  invasive  cataract
                          surgery  and is  comprised  of  surgical  devices  and
                          related   instruments   and   accessories,   including
                          disposable products. Its diagnostic products include a
                          Blood  Flow  Analyzer,  a  pachymeter,  an  A/B  Scan,
                          ultrasound  biomicroscopes,  perimeters, and a corneal
                          topographer.

                          FAIR VALUE OF FINANCIAL INSTRUMENTS
                          The  fair  value  of  the  Company's   cash  and  cash
                          equivalents, receivables, accounts payable and accrued
                          liabilities  approximate carrying value based on their
                          effective  interest  rates  compared to current market
                          prices.

                          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  accounts  and  believes it is not exposed to any
                          significant credit risk on cash and cash equivalents.

                          The Company's  financial  instruments consist of cash,
                          receivables, payables, and notes payable. The carrying
                          amount of cash,  receivables and payables approximates
                          fair value because of the  short-term  nature of these
                          items.  The  carrying  amount  of  the  notes  payable
                          approximates  fair value as the individual  borrowings
                          bear interest at market interest rates.

                          ACCOUNTS RECEIVABLE
                          Accounts  receivable  are carried at original  invoice
                          amount less an estimate made for doubtful  receivables
                          based  on a review  of all  outstanding  amounts  on a
                          monthly  basis.  Specific  reserves  are  estimated by
                          management based on certain assumptions and variables,
                          including the customer's financial  condition,  age of
                          the  customer's  receivables,  and  changes in payment
                          histories.  Trade  receivables  are  written  off when
                          deemed  uncollectible.

--------------------------------------------------------------------------------
                                                                             F-7
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

1. ORGANIZATION           Recoveries of trade receivables previously written off
   AND SIGNIFICANT        are  recorded  when received. A  trade  receivable  is
   ACCOUNTING POLICIES    considered  to be  past  due  if  any  portion  of the
   CONTINUED              receivable  balance  has  not  been  received  by  the
                          contractual pay date.  Interest is not charge on trade
                          receivables that are past due.

                          ALLOWANCE FOR DOUBTFUL ACCOUNTS:
                          The Company records an allowance for doubtful accounts
                          to offset estimated uncollectible accounts receivable.
                          Bad debt expense  associated with the increases in the
                          allowance for doubtful accounts is recorded as part of
                          general  and  administrative  expense.  The  Company's
                          accounting  policy generally is to record an allowance
                          for receivables  over 90 days past due unless there is
                          significant evidence to support that the receivable is
                          collectible.

                          Also during  2007,  the Company  collected  $22,000 in
                          receivables  that  were  previously   allowed  in  the
                          allowance  for doubtful  accounts.  During  2007,  the
                          Company  increased net allowance for doubtful accounts
                          by $56,000.

                          The Company has taken measures to reduce the amount of
                          uncollectible   accounts   receivable   such  as  more
                          thorough  and  stringent  credit  approval,   improved
                          training  and  instruction  by  sales  personnel,  and
                          frequent  direct   communication   with  the  customer
                          subsequent  to delivery of the system.  The  allowance
                          for  doubtful  accounts  was15%  of total  outstanding
                          receivables  as of  December  31,  2007  and 15% as of
                          December 31, 2006. The allowance for doubtful accounts
                          increased   from  $72,000  at  December  31,  2006  to
                          $109,000 at December 31, 2007.

                          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, usually between 3-7 years.  Expenditures
                          for maintenance and repairs are expensed when incurred
                          and betterments are capitalized.

--------------------------------------------------------------------------------
                                                                             F-8
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

1. ORGANIZATION           PROPERTY AND EQUIPMENT
   AND SIGNIFICANT        Gains and losses on sale of property and equipment are
   ACCOUNTING POLICIES    reflected  in  operations. Leasehold  improvements are
   CONTINUED              depreciated over the lesser of the term of the lease
                          or the useful  life of the related  asset.  During the
                          years 2007 and 2006  depreciation  expense  was $5,000
                          and $30,000  respectively.  Newly acquired assets that
                          have a value of  $3,000  or more are  capitalized  and
                          included on the depreciation schedule.

                          GOODWILL
                          As of December 31,  2007,  the Company had recorded on
                          their books goodwill related to the purchase of Ocular
                          Blood Flow, Ltd., during 2001. In accordance with SFAS
                          142, "Goodwill and Other Intangible  Assets,  goodwill
                          is not  amortized.  The  Company  performs  tests  for
                          impairment of goodwill  annually or more frequently if
                          events or circumstances indicate it might be impaired.
                          Such  tests  include  comparing  the  fair  value of a
                          reporting  unit  with its  carrying  value,  including
                          goodwill.  The  analysis  of the  impairment  test  of
                          goodwill did not result in a charge to the  statements
                          of  operations  for  impairment  for the  years  ended
                          December 31, 2007 and 2006, respectively.

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

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

--------------------------------------------------------------------------------
                                                                             F-9
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

1. ORGANIZATION           INCOME TAXES
   AND SIGNIFICANT        Deferred   income   taxes   are   provided  in amounts
   ACCOUNTING POLICIES    sufficient to give  effect  to  temporary  differences
   CONTINUED              between   financial  and  tax  reporting,  principally
                          related   to   net   operating   loss   carryforwards,
                          depreciation,  impairment of intangible assets,  stock
                          compensation expense, and accrued liabilities.

                          STOCK - BASED COMPENSATION
                          On January 1, 2006,  the Company  adopted SFAS No. 123
                          (revised 2004),  SHARE-BASED PAYMENT,  ("SFAS 123(R)")
                          which  establishes  standards  for the  accounting  of
                          transactions  in which an entity  exchanges its equity
                          instruments for goods or services,  primarily focusing
                          on accounting for transactions where an entity obtains
                          employee services in share-based payment transactions.
                          SFAS  123(R)  requires a public  entity to measure the
                          cost of employee  services received in exchange for an
                          award of equity instruments,  including stock options,
                          based on the grant-date fair value of the award and to
                          recognize it as  compensation  expense over the period
                          the  employee  is  required  to  provide   service  in
                          exchange for the award, usually the vesting period. In
                          March 2005, the SEC issued Staff  Accounting  Bulletin
                          No.  107 ("SAB  107")  relating  to SFAS  123(R).  The
                          Company has applied the  provisions  of SAB 107 in its
                          adoption of SFAS 123(R).
                          Stock-based compensation expense recognized during the
                          period  is  based  on  the  value  of the  portion  of
                          share-based payment awards that is ultimately expected
                          to vest  during the period.  Stock-based  compensation
                          expense  recognized  in  the  Company's   consolidated
                          statement of  operations  for the year ended  December
                          31,  2007  included   compensation   expense  for  the
                          share-based  payment awards granted based on the grant
                          date  fair  value  estimated  in  accordance  with the
                          provisions  of SFAS 123(R).  Stock based  compensation
                          expense for the years ended December 31, 2007 and 2006
                          was $14,000 and $23,000, respectively.

                          EARNINGS PER SHARE (RESTATED)
                          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 conversion of
                          preferred stock to common stock, the conversion of the
                          Company's   convertible   debentures,   and  from  the
                          exercise  of stock  options and  warrants  outstanding
                          using the treasury stock method and the average market
                          price per share  during the year.  Shares  potentially
                          issuable from the conversion of convertible debentures
                          and preferred stock  conversion of  3,637,280,000  and
                          862,438 shares of common stock, respectively,  as well
                          as, options and warrants to purchase 65,534,392 shares
                          of common  of  common  stock  were  considered  in the
                          computation   of  earnings  per  share  but  were  not
                          included  because  their  inclusion  would  have  been
                          anti-dilutive.

--------------------------------------------------------------------------------
                                                                            F-10
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

1. ORGANIZATION           The  following  table  is  a  reconciliation  of basic
   AND SIGNIFICANT        earnings per share for the  years ended  December  31,
   ACCOUNTING POLICIES    2007 and 2006.
   CONTINUED
                                                       YEARS ENDED DECEMBER 31,
                                                      --------------------------
                                                             2007          2006
                                                      --------------------------

                          Basic weighted average
                            shares outstanding        264,736,000   175,034,000

                          Net loss                     (1,731,000)   (1,199,000)

                          Per share amount                  (0.01)        (0.01)
                                                      ==========================

                          REVENUE RECOGNITION
                          Revenues for sales of products  that require  specific
                          installation   and  acceptance  by  the  customer  are
                          recognized  upon such  installation  and acceptance by
                          the  customer.  Revenues  for sales of other  surgical
                          systems, ultrasound diagnostic devices, and disposable
                          products are recognized when the product is shipped. A
                          signed purchase  agreement and a deposit or payment in
                          full  from  customers  is  required  before a  product
                          leaves the premises.  Title passes at time of shipment
                          (F.O.B.  shipping point).  The products of the Company
                          contain both  hardware and  software  components.  The
                          Company  does not  recognize  revenue for the software
                          components  of the products  separate from the product
                          as a whole  because the software is  incidental to the
                          product, as defined in paragraph 2 of SOP 97-2.

                          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.   The  total  research  and  development
                          expenses  for the years ended  December  2007 and 2006
                          was $344,000 and $250,000, respectively.

--------------------------------------------------------------------------------
                                                                            F-11
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

1. ORGANIZATION           CONCENTRATION OF RISK
   AND SIGNIFICANT        The market for  ophthalmic  lasers is subject to rapid
   ACCOUNTING POLICIES    technological change, including advances in laser  and
   CONTINUED              other technologies and the  potential  development  of
                          alternative  surgical techniques or new pharmaceutical
                          products.  Development  by others  of new or  improved
                          products,  processes or technologies may make products
                          developed by the Company obsolete or less competitive.

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

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

                          During the year ended  December  31, 2007 and 2006 one
                          single  customer,  Grafton Optical Company Ltd. in the
                          United Kingdom, represented more than 10% of total net
                          sales for the years ended. Accounts receivable are due
                          from medical distributors, surgery centers, hospitals,
                          optometrists and  ophthalmologists  located throughout
                          the  U.S.  and a  number  of  foreign  countries.  The
                          receivables  are  generally due within thirty days for
                          domestic  customers  with  extended  terms offered for
                          some international customers. The Company maintains an
                          allowance  for  estimated  potentially   uncollectible
                          amounts.

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

--------------------------------------------------------------------------------
                                                                            F-12
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

1. ORGANIZATION
   AND SIGNIFICANT        WARRANTY ACCRUALS
   ACCOUNTING POLICIES                                 YEARS ENDED DECEMBER 31,
   CONTINUED                                          --------------------------
                                                             2007          2006
                                                      --------------------------

                          Beginning warranty
                            liability balance             155,000       125,000

                          Less: Reductions for
                            payments                      (20,000)      (10,000)

                          Plus: Increase for accrual       92,000        40,000
                                                      --------------------------

                          Ending warranty liability
                            balance                       227,000       155,000
                                                      ==========================

                          USE OF  ESTIMATES  IN  THE  PREPARATION  OF  FINANCIAL
                          STATEMENTS The preparation of financial  statements in
                          conformity   with  accounting   principles   generally
                          accepted  in the  United  States of  America  requires
                          management  to make  estimates  and  assumptions  that
                          affect the reported  amounts of assets and liabilities
                          and disclosure of contingent assets and liabilities at
                          the date of the financial  statements and the reported
                          amounts of revenues and expenses  during the reporting
                          period.   Actual   results  could  differ  from  those
                          estimates.

                          RECLASSIFICATIONS
                          No amounts in the 2007 financial  statements have been
                          reclassified  to  conform to the  presentation  of the
                          current year financial statements.

                          CONTINGENCIES
                          The Company has adopted the  guidance in  Statement of
                          Financial  Accounting Standards No. 5, "Accounting for
                          Contingencies,"  when booking for loss  contingencies.
                          The  Company  accrues  a  charge  to  income  when (1)
                          information   available   prior  to  issuance  of  the
                          financial  statements  indicates  that it is  probable
                          that an asset has been  impaired  or a  liability  has
                          been incurred at the date of the financial statements,
                          and  (2)  the   amount  of  loss  can  be   reasonably
                          estimated.  Loss  contingencies  related to litigation
                          for the year ended December 31, 2007 were $255,000.


--------------------------------------------------------------------------------
                                                                            F-13
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

1.  ORGANIZATION          DERIVATIVE FINANCIAL INSTRUMENTS (RESTATED)
    AND SIGNIFICANT       The Company's derivative financial instruments consist
    ACCOUNTING POLICIES   of  embedded   derivatives   related  to  the  Secured
    CONTINUED             Convertible  Term Notes  ("the  Notes")  entered  into
                          agreements on April 27, 2005;  June 23, 2005; June 30,
                          2005;  February  28, 2006;  June 28,  2006;  April 30,
                          2007;  June 11, 2007;  December 24, 2007; and December
                          31, 2007.  These Notes contain  interrelated  embedded
                          derivatives,   which  include  the  fixed   conversion
                          feature,  the  variable  conversion  feature,  and the
                          variable interest feature. Based on the complex nature
                          of these terms the Company  chose to employ a binomial
                          lattice  model to value  these  features.  The Company
                          used the  lattice  model  because  it  allows  for the
                          consideration of the dynamic and  interrelated  nature
                          of the unique terms of these securities. It takes into
                          consideration  that in each discrete  period of time a
                          stock  can  either  go up or  down  (described  as its
                          "volatility") and produces a range of potential future
                          stock prices (and thus multiple values at those future
                          points in time). A binomial  lattice model assumes the
                          price of the stock  underlying the derivative  follows
                          one of the two price paths  (stock price can either go
                          up  or  down).   There  are  three  general  steps  in
                          constructing a binomial lattice model: (1) calculation
                          of the stock price  lattice,  (2)  calculation  of the
                          potentially  applicable  option  values  at each  node
                          based on the  terms  and  conditions  of the  specific
                          security,   and  (3)  progressively   calculating  the
                          security  value at each node  starting at the maturity
                          of the  security  and  working  back  to  the  present
                          testing for the greater of the current period value or
                          the   probability   weighted   holding  value  of  the
                          security.  The  following  key inputs and  assumptions
                          were used to calculate the fair values of the embedded
                          derivatives and the warrants:

                            o  Stock  Price:  This is the stock  price as of the
                               respective valuation date.

                            o  Fixed  Conversion  Price:  The  fixed  conversion
                               price  used  in the  valuation  analysis  was set
                               equal to fixed  conversion  price  (ranging  from
                               $0.2 to $0.09)  per share for each of the  Notes.
                               This is the fixed price at which the Investor can
                               convert the Note into common stock.


--------------------------------------------------------------------------------
                                                                            F-14
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

1.  ORGANIZATION            o  Volatility:   Volatility  is  a  measure  of  the
    AND SIGNIFICANT            standard  deviation  of the  stocks  continuously
    ACCOUNTING POLICIES        compounded  return over the life of the security.
    CONTINUED                  The ideal volatility for an accurate  calculation
                               of fair  value is the  future  volatility  of the
                               security. This cannot be known with certainty, so
                               an  approximation  is  derived  using  historical
                               return  volatility  for a period of time equal to
                               the remaining  life of the instrument as a proxy,
                               and  professional   judgment.   As  part  of  our
                               valuation, we performed extensive analysis of the
                               historical   volatility   of   returns   for  the
                               Company's stock. Based on our analysis,  we chose
                               a standard deviation of 200% as our best estimate
                               of future volatility.

                            o  Risk-Free Rate: The appropriate risk free rate is
                               the interest rate of a U.S.  treasury note with a
                               maturity  equal to the maturity of the respective
                               security.  As of December 31, 2007, the risk free
                               interest rates ranged from 3.06% to 3.49%.  As of
                               December 31, 2006,  the risk free interest  rates
                               ranged from 4.78% to 4.91%.

                            o  Time  to  Maturity:   The  time  to  maturity  is
                               measured  based  on  the  remaining  term  of the
                               security as of the valuation date.

                            o  20-day Minimum Price vs. Closing Stock Price: The
                               variable  conversion  feature allows the Investor
                               to  convert  the Notes at a price  equal to 60% -
                               50%  (ranges  per  note)  of the  average  of the
                               lowest  three  trading  prices  during the twenty
                               trading days  preceding a conversion  notice.  We
                               analyzed the historical  relationship between the
                               common stock closing price and the lowest trading
                               price. Based on this analysis, we determined that


--------------------------------------------------------------------------------
                                                                            F-15
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

1.  ORGANIZATION               on average the lowest trading price in any 20-day
    AND SIGNIFICANT            period  during  the  time  period   analyzed  was
    ACCOUNTING POLICIES        approximately  70% of the closing price.  We used
    CONTINUED                  this as a  conservative  proxy for the average of
                               the three lowest closing prices during the 20-day
                               period.  This  result was used in the test of the
                               stock  price  relative  to the  fixed  conversion
                               price.

                            o  Monthly  Intraday  Trading  Price:  The  variable
                               interest  rate  provision  waives  interest for a
                               given month if the intraday  trading price of the
                               common   stock   exceeds   $0.0945   or   $0.0275
                               (depending  on Note)  per  share  for  every  day
                               within a given month. We assumed that our various
                               node  prices  were  equivalent  to this  intraday
                               trading price.

                            o  Trading Liquidity: We assumed that adequate stock
                               trading  liquidity is available for the Investors
                               to sell converted / exercised shares.

                          The  warrants  were  valued  using  the  Black-Scholes
                          Option  Pricing Model with the  following  assumptions
                          for 2007 and 2006, respectively:  dividend yield of 0%
                          and 0%; annual  volatility of 200% and 200%;  and risk
                          free interest  rates ranging from of 3.06% to 3.7% and
                          4.72% to 4.74%.

                          The  accounting  treatment of  derivative  instruments
                          requires that the Company record the  derivatives  and
                          related  warrants  at  their  fair  values  as of  the
                          inception date of the agreement and at a fair value of
                          each subsequent balance sheet date. In addition, under
                          the  provisions  of  SFAS  No.  133,  "Accounting  for
                          Derivative  Instruments and Hedging Activities",  as a
                          result of  entering  into the  Notes,  the  Company is
                          required  to  classify  all other  non-employee  stock
                          options and  warrants as  derivative  liabilities  and
                          mark them to market at each reporting date. Any change
                          in the fair value will be recorded  as  non-operating,
                          non-cash  income or expense at each reporting date. If
                          the  fair  value  of the  derivatives  is lower at the
                          subsequent balance sheet date, the Company will record
                          a non-operating, non-cash income.



--------------------------------------------------------------------------------
                                                                            F-16
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

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

3. DETAIL OF CERTAIN        Receivables
   BALANCE SHEET              Trade Receivables                    $    733,000
   ACCOUNTS                   Allowance for doubtful accounts          (109,000)
                                                                   -------------

                                                                   $    624,000
                                                                   =============

                            Inventories:
                              Raw Materials                        $    558,000
                              Finished goods                            533,000
                              Reserve for obsolescence                 (244,000)
                                                                   -------------

                                                                   $    847,000
                                                                   =============

                            Accrued liabilities:
                              Consulting and litigation reserve    $    283,000
                              Payroll and employment benefits            64,000
                              Sales tax payable                          20,000
                              Customer deposits                          20,000
                              Accrued royalties                           3,000
                              Warranty and return allowance             227,000
                              Other accrued expenses                     27,000
                                                                   -------------

                                                                   $    644,000
                                                                   =============

--------------------------------------------------------------------------------
                                                                            F-17
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------


4. PROPERTY AND           Property and equipment consists of the following:
   EQUIPMENT
                            Machinery and equipment                $    765,000
                            Computer equipment and software             663,000
                            Furniture and fixtures                      252,000
                            Leasehold improvements                      166,000
                                                                   -------------

                                                                      1,846,000
                            Accumulated depreciation and
                              amortization                           (1,830,000)
                                                                   -------------

                                                                   $     16,000
                                                                   =============

5. LEASE OBLIGATIONS      During the years ended December 31, 2007 and 2006, the
                          Company did not lease equipment  under  noncancellable
                          capital leases.  Any leases previously issued provided
                          the Company the option to purchase  the leased  assets
                          at the end of the  initial  lease term.  Assets  under
                          capital  leases  included  in fixed  assets and are as
                          follows:

                            Computer and other equipment           $    291,000

                            Less accumulated amortization              (291,000)
                                                                   -------------

                                                                   $          -
                                                                   =============

--------------------------------------------------------------------------------
                                                                            F-18
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

5. LEASE OBLIGATIONS      Amortization  expense on assets under  capital  leases
   CONTINUED              during the years ended  December 31, 2007 and 2006 was
                          $5,000 and $31,000, respectively.

                          The Company leases office and warehouse space under an
                          operating  lease  agreement.   Future  minimum  rental
                          payments under the  noncancellable  operating lease as
                          of December 31, 2007 are approximately as follows:

                            YEAR ENDING DECEMBER 31,                   AMOUNT
                                                                   -------------
                                     2007                          $    108,000
                                     2008                               110,000
                                                                   -------------

                                     Total future minimum
                                       rental payments             $    218,000
                                                                   =============

                          Rent expense related to noncancelable operating leases
                          was approximately  $108,000 and $108,000 for the years
                          ended December 31, 2007 and 2006, respectively.

6. INCOME TAXES           INCOME TAXES (RESTATED)
                          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,
                                                      --------------------------
                                                             2007          2006
                                                      --------------------------
                          Income tax (provision)
                            benefit at statutory
                            rate                      $   588,000   $   408,000
                          NOL adjustment                                      -
                          Taxable temporary
                            differences                   (16,700)      (22,000)
                          Deductible temporary
                            differences                   374,000        38,000
                          Non-deductible expenses        (151,600)     (172,000)
                          Change in valuation
                            allowance                    (793,700)     (252,000)
                                                      --------------------------

                                                      $         -   $         -
                                                      ==========================

--------------------------------------------------------------------------------
                                                                            F-19
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

6. INCOME TAXES           Deferred tax assets (liabilities) are comprised of the
   CONTINUED              following:

                                                      --------------------------
                                                             2007          2006
                                                      --------------------------
                          Net operating loss
                            carryforward              $15,887,700   $14,720,000
                          Depreciation, amortization,
                            and impairment                      -             -
                          Allowance and reserves        2,065,000     2,439,000
                          Research and development
                            tax Credit                     56,000        56,000
                                                      --------------------------
                                                       18,008,700    17,215,000

                          Valuation allowance         (18,008,700)  (17,215,000)
                                                      --------------------------

                                                      $         -   $         -
                                                      ==========================

                          A valuation allowance has been established for the net
                          deferred  tax  asset  due  to the  uncertainty  of the
                          Company's ability to realize such asset.

                          At December  31, 2007,  the Company had net  operating
                          loss carryforwards of approximately  $55.8 million and
                          research and development tax credit  carryforwards  of
                          approximately  $55.8 million.  These carryforwards are
                          available to offset future  taxable  income and expire
                          in  2006  through  2021.  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.

7. CAPITAL STOCK          CAPITAL STOCK
                          The  Company  has  established  a series of  preferred
                          stock with a total of 5,000,000  authorized shares and
                          a par value of $.001,  and one series of common  stock
                          with a par value of $.001  and a total of  800,000,000
                          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:

--------------------------------------------------------------------------------
                                                                            F-20
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

7. CAPITAL STOCK          1.  The  holders  of   the   shares  are   entitled to
   CONTINUED                  dividends at the rate of twenty-four  cents ($.24)
                              per share  per  annum,  payable  in cash only from
                              surplus  earnings of the Company or in  additional
                              shares of Series A Preferred  Stock. The dividends
                              are non-cumulative  and therefore  deficiencies in
                              dividend  payments  from one year are not  carried
                              forward to the next year.

                          2.  Upon the liquidation of the Company,  the  holders
                              of the Series A  Preferred  Stock are  entitled to
                              receive,  prior to any  distribution of any assets
                              or  surplus  funds to the  holders  of  shares  of
                              common stock or any other  stock,  an amount equal
                              to $1.00 per share,  plus any  accrued  and unpaid
                              dividends related to the fiscal year in which such
                              liquidation occurs.  Total liquidation  preference
                              at December 31, 2007 was $6,000.

                          3.  The shares  are convertible at  the  option of the
                              holder at any time into common shares, based on an
                              initial  conversion  rate of one share of Series A
                              Preferred Stock for 1.2 common shares.

                          4.  The holders of the shares have no voting rights.

                          5.  The Company may, at  its option, redeem all of the
                              then outstanding  shares 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.

                          SERIES B PREFERRED STOCK
                          On May 9, 1994,  the Company  established  a series of
                          non-voting preferred shares designated as 12% Series B
                          Preferred  Stock,  consisting  of 500,000  shares with
                          $.001 par value.  The Series B Preferred Stock has the
                          following rights and privileges:

                          1.  The  holders  of  the   shares  are   entitled  to
                              dividends at the rate of forty-eight  cents ($.48)
                              per share  per  annum,  payable  in cash only from
                              surplus  earnings of the Company or in  additional
                              shares of Series B Preferred  Stock. The dividends
                              are non-cumulative  and therefore  deficiencies in
                              dividend  payments  from one year are not  carried
                              forward to the next year.

                          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

--------------------------------------------------------------------------------
                                                                            F-21
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

7. CAPITAL STOCK          any accrued and unpaid dividends related to the fiscal
   CONTINUED              year in which such  liquidation  occurs.  Such  right,
                          however,  is  subordinate to the rights of the holders
                          of Series A Preferred  Stock to receive a distribution
                          of $1.00 per share plus accrued and unpaid  dividends.
                          Total liquidation  preference at December 31, 2007 was
                          $36,000.

                          2.  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.

                          3.  The holders of the shares have no voting rights.

                          4.  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.

                          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.  As of
                          December  31,  2007 there  were no Series C  Preferred
                          Stock issued and  outstanding.  The Series C Preferred
                          Stock have the following rights and privileges:

                          1.  The  holders  of  the   shares  are   entitled  to
                              dividends  at the rate of 12% per  share per annum
                              of the aggregate  stated value.  The dividends are
                              non-cumulative  and,  therefore,  deficiencies  in
                              dividend  payments  from one year are not  carried
                              forward to the next year.

                          2.  Upon  the liquidation of the  Company, the holders
                              of the Series C  Preferred  Stock are  entitled to
                              receive an amount per share  equal to the  greater
                              of (a) the amount they would have received if they
                              had  converted  the shares  into  shares of Common
                              Stock  immediately  prior to such liquidation plus
                              declared but unpaid  dividends;  or (b) the stated
                              value, subject to adjustment.

                          3.  Each share was convertible, at  the  option of the
                              holder at any time until  January  1,  2002,  into
                              approximately  57.14  shares of common stock at an
                              initial  conversion price,  subject to adjustments
                              for stock  splits,  stock  dividends  and  certain
                              combination  or  recapitalization  of  the  common
                              stock, equal to $1.75 per share of common stock.

                          4.  The holders of the shares have no voting rights.

--------------------------------------------------------------------------------
                                                                            F-22
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

7. CAPITAL STOCK          SERIES D PREFERRED STOCK
   CONTINUED              In January  1999,  the  Company's  Board of  Directors
                          authorized the issuance of a total of 1,140,000 shares
                          of Series D  Preferred  Stock  $.001 par value,  $1.75
                          stated  value.  The Series D  Preferred  Stock has the
                          following rights and privileges:

                          1.  The  holders  of  the   shares  are   entitled  to
                              dividends  at the rate of 10% per  share per annum
                              of the aggregate  stated value.  The dividends are
                              non-cumulative  and,  therefore,  deficiencies  in
                              dividend  payments  from one year are not  carried
                              forward to the next year.

                          2.  Upon  the  liquidation of the Company, the holders
                              of the Series D  Preferred  Stock are  entitled to
                              receive an amount per share  equal to the  greater
                              of (a) the amount  they would  have  received  had
                              they   converted  the  shares  into  Common  Stock
                              immediately  prior  to such  liquidation  plus all
                              declared but unpaid  dividends;  or (b) the stated
                              value,  subject to adjustment.  Total  liquidation
                              preference at December 31, 2007 was $9,000.

                          3.  Each  share  was convertible, at the option of the
                              holder at any time until January 1, 2002, into one
                              share of  Common  Stock at an  initial  conversion
                              price,   subject  to  adjustment.   The  Series  D
                              Preferred  Stock shall be converted into one share
                              of the Common Stock subject to  adjustment  (a) on
                              January 1, 2002 or (b) upon 30 days written notice
                              by the Company to the  holders of the  Shares,  at
                              any time after (i) the 30-day  anniversary  of the
                              registration  statement  on which  the  shares  of
                              Common  Stock  issuable  upon  conversion  of  the
                              Series D Preferred  Stock were registered and (ii)
                              the average  closing price of the Common Stock for
                              the 20-day period immediately prior to the date on
                              which notice of redemption is given by the Company
                              to the holders of the Series D Preferred  Stock is
                              at least  $3.50 per  share.  The  Company  in 1999
                              recorded  $872,000  as  a  beneficial   conversion
                              feature   related  to  the   differences   in  the
                              conversion  price of the preferred stock to common
                              stock.

                            4.   The holders of the shares have no voting
                                 rights.

--------------------------------------------------------------------------------
                                                                            F-23
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

7. CAPITAL STOCK          SERIES E PREFERRED STOCK
   CONTINUED              In May 2001, the Company  authorized the issuance of a
                          total of 50,000  shares of  Series E  Preferred  Stock
                          $.001 par  value,  $100  stated  value.  The  Series E
                          Preferred   Stock  has  the   following   rights   And
                          privileges:

                          1.  The  holders  of   the   shares  are  entitled  to
                              dividends at the rate of 8% per share per annum of
                              the  aggregate  stated  value.  The  dividends are
                              non-cumulative  and,  therefore,  deficiencies  in
                              dividend  payments  from one year are not  carried
                              forward to the next year.

                          2.  Upon  the  liquidation of the Company, the holders
                              of the Series E  Preferred  Stock are  entitled to
                              receive an amount per share  equal to the  greater
                              of (a) the amount  they would  have  received  had
                              they   converted  the  shares  into  Common  Stock
                              immediately  prior  to such  liquidation  plus all
                              declared but unpaid  dividends;  or (b) the stated
                              value,  subject to adjustment.  Total  liquidation
                              preference at December 31, 2007 was $13,000.

                          3.  Each  share  is  convertible, at the option of the
                              holder at any time until  January  1,  2005,  into
                              approximately  53.33  shares of Common Stock at an
                              initial  conversion  price,  subject to adjustment
                              for stock  splits,  stock  dividends  and  certain
                              combination  or  recapitalization  of  the  common
                              stock,  equal to $1.875 per share of common stock.
                              The Series E Preferred  Stock  shall be  converted
                              into Common  Stock  subject to  adjustment  (a) on
                              January 1, 2005 or (b) upon 30 days written notice
                              by the Company to the  holders of the  Shares,  at
                              any time after (i) the 30-day  anniversary  of the
                              registration  statement  on which  the  shares  of
                              Common  Stock  issuable  upon  conversion  of  the
                              Series E Preferred  Stock were registered and (ii)
                              the average  closing price of the Common Stock for
                              the 20-day period immediately prior to the date on
                              which notice of redemption is given by the Company
                              to the holders of the Series E Preferred  Stock is
                              at least  $3.50 per  share.  The  Company  in 2001
                              recorded  $1,482,000  as a  beneficial  conversion
                              feature   related  to  the   differences   in  the
                              conversion  price of the preferred stock to common
                              stock.

                          4.  The holders of the shares have no voting rights.

                          5.  The  holders  of   the   shares  also  were issued
                              warrants to purchase  shares of common stock equal
                              to 1,000  warrants for every 200 shares  purchased
                              at an  exercise  price of $4.00  per  share.  Each
                              warrant is exercisable until May 23, 2006.

--------------------------------------------------------------------------------
                                                                            F-24
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

7. CAPITAL STOCK          SERIES F PREFERRED STOCK
   CONTINUED              In August 2001, the Company authorized the issuance of
                          a total of 50,000  shares of Series F Preferred  Stock
                          $.001 par  value,  $100  stated  value.  The  Series F
                          Preferred   Stock  has  the   following   rights   and
                          privileges:

                          1.  The   holders   of  the  shares  are  entitled  to
                              dividends at the rate of 8% per share per annum of
                              the  aggregate  stated  value.  The  dividends are
                              non-cumulative  and,  therefore,  deficiencies  in
                              dividend  payments  from one year are not  carried
                              forward to the next year.

                          2.  Upon  the  liquidation of the Company, the holders
                              of the Series F  Preferred  Stock are  entitled to
                              receive an amount per share  equal to the  greater
                              of (a) the amount  they would  have  received  had
                              they   converted  the  shares  into  Common  Stock
                              immediately  prior  to such  liquidation  plus all
                              declared but unpaid  dividends;  or (b) the stated
                              value,  subject to adjustment.  Total  liquidation
                              preference at December 31, 2007 was $235,000.

                          3.  Each share  is convertible, at  the  option of the
                              holder at any time until  January  1,  2005,  into
                              approximately  53.33  shares of Common Stock at an
                              initial  conversion  price,  subject to adjustment
                              for stock  splits,  stock  dividends  and  certain
                              combination  or  recapitalization  of  the  common
                              stock,  equal to $1.875 per share of common stock.
                              The Series F Preferred  Stock  shall be  converted
                              into Common  Stock  subject to  adjustment  (a) on
                              January 1, 2005 or (b) upon 30 days written notice
                              by the Company to the  holders of the  Shares,  at
                              any time after (i) the 30-day  anniversary  of the
                              registration  statement  on which  the  shares  of
                              Common  Stock  issuable  upon  conversion  of  the
                              Series F Preferred  Stock were registered and (ii)
                              the average  closing price of the Common Stock for
                              the 20-day period immediately prior to the date on
                              which notice of redemption is given by the Company
                              to the holders of the Series F Preferred  Stock is
                              at least  $3.50 per  share.  The  Company  in 2001
                              recorded  $1,105,000  as a  beneficial  conversion
                              feature   related  to  the   differences   in  the
                              conversion  price of the preferred stock to common
                              stock.

--------------------------------------------------------------------------------
                                                                            F-25
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

                          4.  The holders of the shares have no voting rights.

7. CAPITAL STOCK          SERIES G PREFERRED STOCK
   CONTINUED              In August 2003, the Company authorized the issuance of
                          a total of  2,000,000  shares  of  Series G  Preferred
                          Stock $.001 par value,  $1.00 stated value. The Series
                          G  Preferred  Stock  has  the  following   rights  and
                          privileges:

                          1.  The   holders   of   the  shares  are  entitled to
                              dividends at the rate of 7% per share per annum of
                              the  aggregate  stated  value.  The  dividends are
                              non-cumulative  and,  therefore,  deficiencies  in
                              dividend  payments  from one year are not  carried
                              forward to the next YEAR.

                          2.  Upon  the  liquidation of the Company, the holders
                              of the Series G  Preferred  Stock are  entitled to
                              receive an amount per share  equal to the  greater
                              of (a) the amount  they would  have  received  had
                              they   converted  the  shares  into  Common  Stock
                              immediately  prior  to such  liquidation  plus all
                              declared but unpaid  dividends;  or (b) the stated
                              value of $.25 per share plus  declared  but unpaid
                              dividends.   Total   liquidation   preference   at
                              December 31, 2007 was $147,000.

                          3.  Each  share  is  convertible, at the option of the
                              holder at any time until  August 1,  2005,  into 1
                              share of  common  stock at an  initial  conversion
                              price, subject to adjustment for dividends,  equal
                              to one  share of common  stock  for each  share of
                              Series G Preferred  Stock.  The Series G Preferred
                              Stock shall be converted into common stock subject
                              to adjustment (a) on August 1, 2005 or (b) upon 30
                              days written  notice by the Company to the holders
                              of the  shares,  at any time  after (i) the 30-day
                              anniversary of the registration statement on which
                              the   shares  of  common   stock   issuable   upon
                              conversion  of the Series G  Preferred  Stock were
                              registered  and (ii) the average  closing price of
                              the common stock for the 15-day period immediately
                              prior to the date in which notice of redemption is
                              given by the  Company to the holders of the Series
                              G Preferred  Stock is at least $.50 per share.  In
                              2003, the Company recorded a beneficial conversion
                              feature of $217,000  related to the differences in
                              the  conversion  price of the  preferred  stock to
                              common stock.

                          4.  The holders of the shares have no voting rights.

--------------------------------------------------------------------------------
                                                                            F-26
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

7. CAPITAL STOCK          The  following   table   summarizes  preferred   stock
   CONTINUED              activity during the years ended  December 31, 2007 and
                          2006:

                                    SERIES A             SERIES B            SERIES C               SERIES D
                                SHARES    AMOUNT     SHARES    AMOUNT     SHARES    AMOUNT      SHARES    AMOUNT

Balance at January 1, 2006       5,627    $    -      8,986   $     -         -     $    -       5,000    $    -

Issuance of Series G
  preferred stock for cash           -         -          -         -         -          -           -         -
Conversion of preferred stock        -         -          -         -         -          -           -         -
                               --------------------------------------------------------------------------------------
Balance at December 31, 2006     5,627         -      8,986         -         -          -       5,000         -

Issuance of Series G
  preferred stock for cash           -         -          -         -         -          -           -         -

Conversion of preferred stock        -         -          -         -         -          -           -         -
                               --------------------------------------------------------------------------------------
Balance at December 31, 2007     5,627    $    -      8,986   $     -         -     $    -       5,000    $    -
                               --------------------------------------------------------------------------------------

Authorized                     500,000              500,000              30,000              1,140,000
                               --------------------------------------------------------------------------------------
Liquidation preference                    $6,000              $36,000               $    -                $9,000
                               --------------------------------------------------------------------------------------


                                    SERIES E              SERIES F              SERIES G
                                SHARES    AMOUNT      SHARES    AMOUNT      SHARES    AMOUNT

Balance at January 1, 2006       1,000   $     -    4,598.75  $      -     588,235  $  1,000

Issuance of Series G
  preferred stock for cash           -         -           -         -           -         -
Conversion of preferred stock  (750.00)        -           -         -           -         -
                               -------------------------------------------------------------
Balance at December 31, 2006       250         -    4,598.75         -     588,235     1,000

Issuance of Series G
  preferred stock for cash           -         -           -         -           -         -

Conversion of preferred stock        -         -        (200)        -           -         -
                               -------------------------------------------------------------
Balance at December 31, 2007       250   $     -    4,398.75  $      -     588,235  $  1,000
                               -------------------------------------------------------------

Authorized                      50,000                50,000             2,000,000
                               -------------------------------------------------------------
Liquidation preference                   $13,000              $235,000              $147,000
                               -------------------------------------------------------------

--------------------------------------------------------------------------------
                                                                            F-27
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8. CONVERTIBLE NOTES      CONVERTIBLE NOTES (RESTATED)

                          APRIL 27, 2005 SALE OF $2,500,000 IN CALLABLE  SECURED
                          CONVERTIBLE NOTES: To obtain funding for the Company's
                          ongoing   operations,   the  Company  entered  into  a
                          securities  purchase  agreement  with four  accredited
                          investors  on  April  27,  2005  for  the  sale of (i)
                          $2,500,000 in  convertible  notes and (ii) warrants to
                          purchase  16,534,392  shares of its common stock.  The
                          sale of the convertible notes and warrants is to occur
                          in three  traunches  and the  investors  provided  the
                          Company with an aggregate of $2,500,000 as follows:

                          o $850,000 was disbursed on April 27, 2005;
                          o $800,000  was  disbursed  on June 23, 2005 after the
                          Company  filed a  registration  statement  on June 22,
                          2005 to register the shares of common  stock  issuable
                          upon conversion of the convertible  notes and exercise
                          of warrants; and
                          o  $850,000  was  disbursed  on  June  30,  2005,  the
                          effective date of the registration statement.

                          Under the terms of the securities  purchase agreement,
                          the  Company  agreed it would not,  without  the prior
                          written  consent  of  a  majority-in-interest  of  the
                          investors,  negotiate  or  contract  with any party to
                          obtain  additional  equity  financing  (including debt
                          financing with an equity  component) that involves (i)
                          the  issuance  of common  stock at a  discount  to the
                          market  price  of the  common  stock  on the  date  of
                          issuance   (taking  into  account  the  value  of  any
                          warrants  or  options  to  acquire   common  stock  in
                          connection   therewith),    (ii)   the   issuance   of
                          convertible  securities that are  convertible  into an
                          indeterminate  number of shares  of common  stock,  or
                          (iii) the  issuance  of  warrants  during the  lock-up
                          period  beginning  April  27,  2005 and  ending on the
                          later of (a) 270 days from April 27, 2005,  or (b) 180
                          days  from  the  date the  registration  statement  is
                          declared effective.

                          In  addition,  the  Company  agreed not to conduct any
                          equity  financing  (including  debt  financing with an
                          equity  component)  during the period  beginning April
                          27,  2005 and  ending  two years  after the end of the
                          above  lock-up  period  unless it first  provided each
                          investor  an option  to  purchase  its pro rata  share
                          (based on the ratio of each investor's  purchase under
                          the securities  purchase  agreement) of the securities
                          being offered in any proposed equity  financing.  Each
                          investor must be provided  written  notice  describing
                          any  proposed  equity  financing  at least 20 business
                          days  prior to the  closing  of such  proposed  equity
                          financing  and the  option  must be  extended  to each
                          investor during the 15-day period  following  delivery
                          of such notice.

--------------------------------------------------------------------------------
                                                                            F-28
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8. CONVERTIBLE NOTES      The $2,500,000 in  convertible  notes bear interest at
   CONTINUED              8% per annum from the date of  issuance.  Interest  is
                          computed on the basis of a 365-day year and is payable
                          quarterly in cash, with six months of interest payable
                          up front. The interest rate resets to zero percent for
                          any  month in which the stock  price is  greater  than
                          125% of the initial market price, or $.0945,  for each
                          trading day during that month. Any amount of principal
                          or interest on the convertible  notes that is not paid
                          when due  will  bear  interest  at the rate of 15% per
                          annum from the date due  thereof  until such amount is
                          paid. The notes mature in three years from the date of
                          issuance,  and  are  convertible  into  the  Company's
                          common stock at the noteholders'  option, at the lower
                          of (i) $.09 or (ii) 60% of the  average  of the  three
                          lowest intraday trading prices for the common stock on
                          the OTC Bulletin  Board for the 20 trading days before
                          but not including the  conversion  date.  Accordingly,
                          there  is  no  limit  on  the  number  of shares  into
                          which the notes may be  converted.

                          The  convertible  notes are  secured by the  Company's
                          assets,  including the Company's  inventory,  accounts
                          receivable and intellectual  property.  Moreover,  the
                          Company  has a call  option  under  the  terms  of the
                          notes.  The call option  provides the Company with the
                          right to  prepay  all of the  outstanding  convertible
                          notes  at any  time,  provided  there  is no  event of
                          default  by the  Company  and the  Company's  stock is
                          trading  at or  below  $.09  per  share.  An  event of
                          default includes the failure by the Company to pay the
                          principal  or  interest  on the  notes  when due or to
                          timely file a  registration  statement  as required by
                          the   Company   or  obtain   effectiveness   with  the
                          Securities and Exchange Commission of the registration
                          statement.  Prepayment  of the  notes is to be made in
                          cash  equal  to  either  (a)  125% of the  outstanding
                          principal   and  accrued   interest  for   prepayments
                          occurring  within 30 days  following the issue date of
                          the notes;  (b) 130% of the outstanding  principal and
                          accrued interest for prepayments  occurring between 31
                          and 60 days following the issue date of the notes;  or
                          (c)  145% of the  outstanding  principal  and  accrued
                          interest for prepayments  occurring after the 60th day
                          following the issue date of the notes.

                          The warrants are exercisable until five years from the
                          date of  issuance  at a  purchase  price  of $.20  per
                          share.  The  investors  may exercise the warrants on a
                          cashless   basis  if  the   shares  of  common   stock

--------------------------------------------------------------------------------
                                                                            F-29
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8. CONVERTIBLE NOTES      underlying the warrants are not registered pursuant to
   CONTINUED              an effective registration  statement. In the event the
                          investors  exercise the warrants on a cashless  basis,
                          the Company will not receive any  proceeds  therefrom.
                          In addition,  the exercise  price of the warrants will
                          be  adjusted in the event the  Company  issues  common
                          stock at a price below  market,  with the exception of
                          any  securities  issued as of the date of the warrants
                          or  issued in  connection  with the  callable  secured
                          convertible  notes issued  pursuant to the  securities
                          purchase agreement.

                          The noteholders  have agreed to restrict their ability
                          to convert their  convertible  notes or exercise their
                          warrants and receive  shares of the  Company's  common
                          stock such that the  number of shares of common  stock
                          held by them in the  aggregate  and  their  affiliates
                          after  such  conversion  or  exercise  does not exceed
                          4.99% of the then  issued  and  outstanding  shares of
                          common stock.  However, the noteholders may repeatedly
                          sell shares of common  stock in order to reduce  their
                          ownership   percentage,   and   subsequently   convert
                          additional convertible notes.

                          FEBRUARY  28,  2006  SALE OF  $1,500,000  IN  CALLABLE
                          SECURED   CONVERTIBLE   NOTES:  To  obtain  additional
                          funding  for the  Company's  ongoing  operations,  the
                          Company  entered  into a  second  securities  purchase
                          agreement  on  February  28,  2006  with the same four
                          accredited investors for the sale of (i) $1,500,000 in
                          convertible   notes  and  (ii)  warrants  to  purchase
                          12,000,000 shares of its common stock. The sale of the
                          convertible  notes and  warrants  is to occur in three
                          traunches  and the  investors are obligated to provide
                          the  Company  with  an  aggregate  of   $1,500,000  as
                          follows:

                          o $500,000 was disbursed on February 28, 2006;
                          o $500,000  was  disbursed  on June 28, 2006 after the
                          Company  filed a  registration  statement  on June 15,
                          2006 to register the shares of common stock underlying
                          the convertible notes. The registration  statement was
                          subsequently  withdrawn  on July  25,  2006  and a new
                          registration statement was filed on September 15, 2006
                          to register 60,000,000 shares of common stock issuable
                          upon conversion of the notes.
                          o $500,000 was  disbursed  on April 30, 2007,  the day
                          prior  to  the  effective  date  of  the  registration
                          statement on May 1, 2007.

--------------------------------------------------------------------------------
                                                                            F-30
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8. CONVERTIBLE NOTES      Under the terms of the securities  purchase agreement,
   CONTINUED              the  Company  also  agreed it would not,  without  the
                          prior written consent of a majority-in-interest of the
                          investors,  negotiate  or  contract  with any party to
                          obtain  additional  equity  financing  (including debt
                          financing with an equity  component) that involves (i)
                          the  issuance  of common  stock at a  discount  to the
                          market  price  of the  common  stock  on the  date  of
                          issuance   (taking  into  account  the  value  of  any
                          warrants  or  options  to  acquire   common  stock  in
                          connection   therewith),    (ii)   the   issuance   of
                          convertible  securities that are  convertible  into an
                          indeterminate  number of shares  of common  stock,  or
                          (iii) the  issuance  of  warrants  during the  lock-up
                          period  beginning  February 28, 2006 and ending on the
                          later of (a) 270 days from  February 28, 2006,  or (b)
                          180 days from the date the  registration  statement is
                          declared effective.

                          In  addition,  the  Company  agreed not to conduct any
                          equity  financing  (including  debt  financing with an
                          equity component) during the period beginning February
                          28,  2006 and  ending  two years  after the end of the
                          above  lock-up  period  unless it first  provided each
                          investor  an option  to  purchase  its pro rata  share
                          (based on the ratio of each investor's  purchase under
                          the securities  purchase  agreement) of the securities
                          being offered in any proposed equity  financing.  Each
                          investor must be provided  written  notice  describing
                          any  proposed  equity  financing  at least 20 business
                          days  prior to the  closing  of such  proposed  equity
                          financing  and the  option  must be  extended  to each
                          investor during the 15-day period  following  delivery
                          of such notice.

                          The $1,500,000 in  convertible  notes bear interest at
                          8% per annum from the date of  issuance.  Interest  is
                          computed on the basis of a 365-day year and is payable
                          quarterly in cash, with six months of interest payable
                          up front. The interest rate resets to zero percent for
                          any  month in which the stock  price is  greater  than
                          125% of the initial market price, or $.0275,  for each
                          trading day during that month. Any amount of principal
                          or interest on the convertible  notes that is not paid
                          when due  will  bear  interest  at the rate of 15% per
                          annum from the date due  thereof  until such amount is
                          paid. The notes mature in three years from the date of
                          issuance,  and  are  convertible  into  the  Company's
                          common stock at the noteholders'  option, at the lower
                          of (i) $.02 or (ii) 60% of the  average  of the  three
                          lowest intraday trading prices for the common stock on
                          the OTC Bulletin  Board for the 20 trading days before
                          but not including the  conversion  date.  Accordingly,
                          there is no limit on the  number of shares  into which
                          the notes may be converted.

--------------------------------------------------------------------------------
                                                                            F-31
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8. CONVERTIBLE NOTES      The  convertible  notes are  secured by the  Company's
   CONTINUED              assets,  including the Company's  inventory,  accounts
                          receivable and intellectual  property.  Moreover,  the
                          Company  has a call  option  under  the  terms  of the
                          notes.  The call option  provides the Company with the
                          right to  prepay  all of the  outstanding  convertible
                          notes  at any  time,  provided  there  is no  event of
                          default  by the  Company  and the  Company's  stock is
                          trading  at or  below  $.02  per  share.  An  event of
                          default includes the failure by the Company to pay the
                          principal  or  interest  on the  notes  when due or to
                          timely file a  registration  statement  as required by
                          the   Company   or  obtain   effectiveness   with  the
                          Securities and Exchange Commission of the registration
                          statement.  Prepayment  of the  notes is to be made in
                          cash  equal  to  either  (a)  125% of the  outstanding
                          principal   and  accrued   interest  for   prepayments
                          occurring  within 30 days  following the issue date of
                          the notes;  (b) 130% of the outstanding  principal and
                          accrued interest for prepayments  occurring between 31
                          and 60 days following the issue date of the notes;  or
                          (c)  145% of the  outstanding  principal  and  accrued
                          interest for prepayments  occurring after the 60th day
                          following the issue date of the notes.

                          The warrants are exercisable until five years from the
                          date of  issuance  at a  purchase  price  of $.10  per
                          share.  The  investors  may exercise the warrants on a
                          cashless   basis  if  the   shares  of  common   stock
                          underlying the warrants are not registered pursuant to
                          an effective registration  statement. In the event the
                          investors  exercise the warrants on a cashless  basis,
                          then  the  Company   will  not  receive  any  proceeds
                          therefrom.  In  addition,  the  exercise  price of the
                          warrants  will be  adjusted  in the event the  Company
                          issues common stock at a price below market,  with the
                          exception of any  securities  issued as of the date of
                          the  warrants or issued in  connection  with the notes
                          issued pursuant to the securities purchase agreement.

                          The noteholders  have agreed to restrict their ability
                          to convert their callable secured convertible notes or
                          exercise  their  warrants  and  receive  shares of the
                          Company's  common stock such that the number of shares
                          of  common  stock  held by them in the  aggregate  and
                          their  affiliates  after such  conversion  or exercise
                          does  not  exceed   4.99%  of  the  then   issued  and
                          outstanding  shares  of  common  stock.  However,  the
                          noteholders may repeatedly sell shares of common stock
                          in order to reduce  their  ownership  percentage,  and
                          subsequently convert additional convertible notes.

--------------------------------------------------------------------------------
                                                                            F-32
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8. CONVERTIBLE NOTES      JUNE 11, 2007 SALE OF  $500,000  IN  CALLABLE  SECURED
   CONTINUED              CONVERTIBLE  NOTES:  To obtain further funding for the
                          Company's ongoing operations, the Company entered into
                          a third securities purchase agreement on June 11, 2007
                          with the same four  accredited  investors for the sale
                          of (i) $500,000 in callable secured  convertible notes
                          and (ii) warrants to purchase 10,000,000 shares of its
                          common stock. The investors  disbursed $500,000 to the
                          Company on June 11, 2007.

                          Under  the  terms  of the  June  11,  2007  securities
                          purchase  agreement,  the Company agreed that it would
                          not,   without   the  prior   written   consent  of  a
                          majority-in-interest  of the  investors,  negotiate or
                          contract  with any party to obtain  additional  equity
                          financing  (including  debt  financing  with an equity
                          component)  that  involves  (i) the issuance of common
                          stock at a discount to the market  price of the common
                          stock on the date of issuance (taking into account the
                          value of any  warrants  or options  to acquire  common
                          stock in connection  therewith),  (ii) the issuance of
                          convertible  securities that are  convertible  into an
                          indeterminate  number of shares  of common  stock,  or
                          (iii) the  issuance  of  warrants  during the  lock-up
                          period beginning June 11, 2007 and ending on the later
                          of (a) 270 days  from June 11,  2007,  or (b) 180 days
                          from the date the  registration  statement is declared
                          effective.

                          In  addition,  the  Company  agreed not to conduct any
                          equity  financing  (including  debt  financing with an
                          equity component) during the period beginning June 11,
                          2007 and ending  two years  after the end of the above
                          lock-up  period unless it first provided each investor
                          an option to purchase its pro-rata share (based on the
                          ratio of each investor's purchase under the securities
                          purchase agreement) of the securities being offered in
                          any proposed equity  financing.  Each investor must be
                          provided written notice describing any proposed equity
                          financing  at  least  20  business  days  prior to the
                          closing  of such  proposed  equity  financing  and the
                          option must be extended  to each  investor  during the
                          15-day period following delivery of such notice.

                          The $500,000 in convertible  notes bear interest at 8%
                          per  annum  from the  date of  issuance.  Interest  is
                          computed on the basis of a 365-day year and is payable
                          quarterly in cash, with six months of interest payable
                          up front. The interest rate resets to zero percent for
                          any  month in which the stock  price is  greater  than
                          125% of the initial market price, or $.0275,  for each
                          trading day during that month. Any amount of principal
                          or interest on the callable secured  convertible notes

--------------------------------------------------------------------------------
                                                                            F-33
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8. CONVERTIBLE NOTES      that is not paid  when due will bear  interest  at the
   CONTINUED              rate of 15% per annum from the date due thereof  until
                          such amount is paid. The  convertible  notes mature in
                          three  years  from  the  date  of  issuance,  and  are
                          convertible  into the  Company's  common  stock at the
                          noteholders'  option, at the lower of (i) $.02 or (ii)
                          50%  of  the  average  of the  three  lowest  intraday
                          trading  prices  for  the  common  stock  on  the  OTC
                          Bulletin  Board for the 20 trading days before but not
                          including the conversion date.  Accordingly,  there is
                          no limit on the number of shares  into which the notes
                          may be converted.

                          The $500,000 in  convertible  notes are secured by the
                          Company's assets,  including the Company's  inventory,
                          accounts   receivable   and   intellectual   property.
                          Moreover,  the  Company  has a call  option  under the
                          terms of the  notes.  The  call  option  provides  the
                          Company   with  the  right  to   prepay   all  of  the
                          outstanding  convertible  notes at any time,  provided
                          there is no event of  default by the  Company  and its
                          stock is trading at or below $.10 per share.  An event
                          of default  includes the failure by the Company to pay
                          the  principal  or interest on the  convertible  notes
                          when due or to timely file a registration statement as
                          required by the Company or obtain  effectiveness  with
                          the   Securities   and  Exchange   Commission  of  the
                          registration statement.  Prepayment of the convertible
                          notes is to be made in cash  equal to either  (a) 125%
                          of the outstanding  principal and accrued interest for
                          prepayments  occurring  within 30 days  following  the
                          issue date of the notes;  (b) 130% of the  outstanding
                          principal   and  accrued   interest  for   prepayments
                          occurring  between 31 and 60 days  following the issue
                          date of the  notes;  or (c)  145%  of the  outstanding
                          principal   and  accrued   interest  for   prepayments
                          occurring  after the 60th day following the issue date
                          of the notes.

                          The  warrants are  exercisable  until seven years from
                          the date of issuance at a purchase  price of $.005 per
                          share.  The  investors  may exercise the warrants on a
                          cashless   basis  if  the   shares  of  common   stock
                          underlying  the  warrants  are  not  then   registered
                          pursuant to an effective  registration  statement.  In
                          the event the  investors  exercise  the  warrants on a
                          cashless  basis,  the  Company  will not  receive  any
                          proceeds therefrom. In addition, the exercise price of
                          the warrants will be adjusted in the event the Company
                          issues common stock at a price below market,  with the
                          exception of any  securities  issued as of the date of
                          the  warrants  or  issued  in   connection   with  the
                          convertible  notes issued  pursuant to the  securities
                          purchase agreement.

--------------------------------------------------------------------------------
                                                                            F-34
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8. CONVERTIBLE NOTES      The noteholders  have agreed to restrict their ability
   CONTINUED              to convert their  convertible  notes or exercise their
                          warrants and receive  shares of the  Company's  common
                          stock such that the  number of shares of common  stock
                          held by them in the  aggregate  and  their  affiliates
                          after  such  conversion  or  exercise  does not exceed
                          4.99% of the then  issued  and  outstanding  shares of
                          common stock.  However, the noteholders may repeatedly
                          sell shares of common  stock in order to reduce  their
                          ownership   percentage,   and   subsequently   convert
                          additional convertible notes, provided,  however, that
                          such  conversions  do not exceed  $75,000 per calendar
                          month,  or the average daily dollar volume  calculated
                          during  the ten  business  days  prior  to  conversion
                          multiplied  by the  number  of  trading  days  of that
                          calendar month, per calendar month.

                          The Company is required to register  the shares of its
                          common  stock  issuable  upon  the  conversion  of the
                          convertible  notes and the  exercise  of the  warrants
                          that were  issued to the  noteholders  pursuant to the
                          securities  purchase  agreement the Company entered in
                          to on June 11, 2007. The  registration  statement must
                          be filed with the Securities  and Exchange  Commission
                          within 60 days of the June 11, 2007  closing  date and
                          the  effectiveness of the registration is to be within
                          135 days of such closing date.  Penalties of 2% of the
                          outstanding principal balance of the convertible notes
                          plus accrued interest are to be applied for each month
                          the  registration is not effective within the required
                          time.  The penalty may be paid in cash or stock at the
                          Company's option.

                          DECEMBER 24, 2007 SALE OF $250,000 IN CALLABLE SECURED
                          CONVERTIBLE  NOTES:  To obtain further funding for the
                          Company's ongoing operations, the Company entered into
                          a fourth securities purchase agreement on December 24,
                          2007 with the same four  accredited  investors for the
                          sale of (i) $250,000 in callable  secured  convertible
                          notes and (ii) warrants to purchase  15,000,000 shares
                          of its common stock. The investors  disbursed $250,000
                          to the Company on December 24, 2007.

                          Under the terms of the  December  24, 2007  securities
                          purchase  agreement,  the Company agreed that it would
                          not,   without   the  prior   written   consent  of  a
                          majority-in-interest  of the  investors,  negotiate or
                          contract  with any party to obtain  additional  equity
                          financing  (including  debt  financing  with an equity
                          component)  that  involves  (i) the issuance of common
                          stock at a discount to the market  price of the common

--------------------------------------------------------------------------------
                                                                            F-35
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8. CONVERTIBLE NOTES      stock on the date of issuance (taking into account the
   CONTINUED              value of any  warrants  or options  to acquire  common
                          stock in connection  therewith),  (ii) the issuance of
                          convertible  securities that are  convertible  into an
                          indeterminate  number of shares  of common  stock,  or
                          (iii) the  issuance  of  warrants  during the  lock-up
                          period  beginning  December 24, 2007 and ending on the
                          later of (a) 270 days from  December 24, 2007,  or (b)
                          180 days from the date the  registration  statement is
                          declared effective.

                          In  addition,  the  Company  agreed not to conduct any
                          equity  financing  (including  debt  financing with an
                          equity component) during the period beginning December
                          24,  2007 and  ending  two years  after the end of the
                          above  lock-up  period  unless it first  provided each
                          investor  an option to  purchase  its  pro-rata  share
                          (based on the ratio of each investor's  purchase under
                          the securities  purchase  agreement) of the securities
                          being offered in any proposed equity  financing.  Each
                          investor must be provided  written  notice  describing
                          any  proposed  equity  financing  at least 20 business
                          days  prior to the  closing  of such  proposed  equity
                          financing  and the  option  must be  extended  to each
                          investor during the 15-day period  following  delivery
                          of such notice.

                          The $250,000 in convertible  notes bear interest at 8%
                          per  annum  from the  date of  issuance.  Interest  is
                          computed on the basis of a 365-day year and is payable
                          quarterly in cash, with six months of interest payable
                          up front. The interest rate resets to zero percent for
                          any  month in which the stock  price is  greater  than
                          125% of the initial market price, or $.0275,  for each
                          trading day during that month. Any amount of principal
                          or interest on the callable secured  convertible notes
                          that is not paid  when due will bear  interest  at the
                          rate of 15% per annum from the date due thereof  until
                          such amount is paid. The  convertible  notes mature in
                          three  years  from  the  date  of  issuance,  and  are
                          convertible  into the  Company's  common  stock at the
                          noteholders'  option, at the lower of (i) $.02 or (ii)
                          50%  of  the  average  of the  three  lowest  intraday
                          trading  prices  for  the  common  stock  on  the  OTC
                          Bulletin  Board for the 20 trading days before but not
                          including the conversion date.  Accordingly,  there is
                          no limit on the number of shares  into which the notes
                          may be converted.

                          The $250,000 in  convertible  notes are secured by the
                          Company's assets,  including the Company's  inventory,
                          accounts   receivable   and   intellectual   property.
                          Moreover,  the  Company  has a call  option  under the
                          terms of the  notes.  The  call  option  provides  the
                          Company   with  the  right  to   prepay   all  of  the

--------------------------------------------------------------------------------
                                                                            F-36
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8. CONVERTIBLE NOTES      outstanding  convertible  notes at any time,  provided
   CONTINUED              there is no event of  default by the  Company  and its
                          stock is trading at or below $.10 per share.  An event
                          of default  includes the failure by the Company to pay
                          the  principal  or interest on the  convertible  notes
                          when due or to timely file a registration statement as
                          required by the Company or obtain  effectiveness  with
                          the   Securities   and  Exchange   Commission  of  the
                          registration statement.  Prepayment of the convertible
                          notes is to be made in cash  equal to either  (a) 125%
                          of the outstanding  principal and accrued interest for
                          prepayments  occurring  within 30 days  following  the
                          issue date of the notes;  (b) 130% of the  outstanding
                          principal   and  accrued   interest  for   prepayments
                          occurring  between 31 and 60 days  following the issue
                          date of the  notes;  or (c)  145%  of the  outstanding
                          principal   and  accrued   interest  for   prepayments
                          occurring  after the 60th day following the issue date
                          of the notes.

                          The  warrants are  exercisable  until seven years from
                          the date of issuance at a purchase  price of $.001 per
                          share.  The  investors  may exercise the warrants on a
                          cashless   basis  if  the   shares  of  common   stock
                          underlying  the  warrants  are  not  then   registered
                          pursuant to an effective  registration  statement.  In
                          the event the  investors  exercise  the  warrants on a
                          cashless  basis,  the  Company  will not  receive  any
                          proceeds therefrom. In addition, the exercise price of
                          the warrants will be adjusted in the event the Company
                          issues common stock at a price below market,  with the
                          exception of any  securities  issued as of the date of
                          the  warrants  or  issued  in   connection   with  the
                          convertible  notes issued  pursuant to the  securities
                          purchase agreement.

                          The noteholders  have agreed to restrict their ability
                          to convert their  convertible  notes or exercise their
                          warrants and receive  shares of the  Company's  common
                          stock such that the  number of shares of common  stock
                          held by them in the  aggregate  and  their  affiliates
                          after  such  conversion  or  exercise  does not exceed
                          4.99% of the then  issued  and  outstanding  shares of
                          common stock.  However, the noteholders may repeatedly
                          sell shares of common  stock in order to reduce  their
                          ownership   percentage,   and   subsequently   convert
                          additional convertible notes, provided,  however, that
                          such  conversions  do not exceed  $75,000 per calendar
                          month,  or the average daily dollar volume  calculated
                          during  the ten  business  days  prior  to  conversion
                          multiplied  by the  number  of  trading  days  of that
                          calendar month, per calendar month.

--------------------------------------------------------------------------------
                                                                            F-37
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8. CONVERTIBLE NOTES      The Company is required to register  the shares of its
   CONTINUED              common  stock  issuable  upon  the  conversion  of the
                          convertible  notes and the  exercise  of the  warrants
                          that were  issued to the  noteholders  pursuant to the
                          securities  purchase  agreement the Company entered in
                          to on December 24, 2007.  The  registration  statement
                          must  be  filed  with  the   Securities  and  Exchange
                          Commission  within 60 days of the  December  24,  2007
                          closing date and the effectiveness of the registration
                          is to  be  within  135  days  of  such  closing  date.
                          Penalties of 2% of the outstanding  principal  balance
                          of the convertible  notes plus accrued interest are to
                          be  applied  for each  month the  registration  is not
                          effective within the required time. The penalty may be
                          paid in cash or stock at the Company's option.

                          DECEMBER  19,  2007  ISSUANCE  OF $389,010 IN CALLABLE
                          SECURED  CONVERTIBLE  NOTES:  On December 19, 2007 the
                          Company was notified by the holders of the convertible
                          notes that there was a past due interest  owing on the
                          outstanding  convertible  notes.  The total  amount of
                          interest  was  $389,010.  To  pay  the  interest,  the
                          noteholders   were  willing  to  accept   $389,010  in
                          additional convertible notes due on December 31, 2010.
                          Accordingly,  on December 19, 2007, the Company issued
                          $389,010 in  convertible  notes to the  noteholders as
                          full payment of the past due interest.

                          The $389,000 in convertible  notes bear interest at 2%
                          per  annum  from the  date of  issuance.  Interest  is
                          computed on the basis of a 365-day year and is payable
                          quarterly in cash, with six months of interest payable
                          up front. The interest rate resets to zero percent for
                          any  month in which the stock  price is  greater  than
                          125% of the initial market price, or $.0275,  for each
                          trading day during that month. Any amount of principal
                          or interest on the callable secured  convertible notes
                          that is not paid  when due will bear  interest  at the
                          rate of 15% per annum from the date due thereof  until
                          such amount is paid. The  convertible  notes mature on
                          December  31,  2007,  and  are  convertible  into  the
                          Company's common stock at the noteholders'  option, at
                          the  lower of (i) $.02 or (ii) 50% of the  average  of
                          the  three  lowest  intraday  trading  prices  for the
                          common  stock  on the OTC  Bulletin  Board  for the 20
                          trading days before but not including  the  conversion
                          date. Accordingly,  there is no limit on the number of
                          shares into which the notes may be converted.

                          The  $389,000 in  convertible  notes has a call option
                          under the terms of the notes. The call option provides
                          the  Company  with  the  right  to  prepay  all of the

--------------------------------------------------------------------------------
                                                                            F-38
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8. CONVERTIBLE NOTES      outstanding  convertible  notes at any time,  provided
   CONTINUED              there is no event of  default by the  Company  and its
                          stock is trading at or below $.04 per share.  An event
                          of default  includes the failure by the Company to pay
                          the  principal  or interest on the  convertible  notes
                          when due. Prepayment of the convertible notes is to be
                          made  in  cash   equal  to  either  (a)  135%  of  the
                          outstanding   principal   and  accrued   interest  for
                          prepayments  occurring  within 30 days  following  the
                          issue date of the notes;  (b) 145% of the  outstanding
                          principal   and  accrued   interest  for   prepayments
                          occurring  between 31 and 60 days  following the issue
                          date of the  notes;  or (c)  150%  of the  outstanding
                          principal   and  accrued   interest  for   prepayments
                          occurring  after the 60th day following the issue date
                          of the notes.

                          The noteholders  have agreed to restrict their ability
                          to convert their  convertible notes and receive shares
                          of the Company's  common stock such that the number of
                          shares of common  stock held by them in the  aggregate
                          and their affiliates after such conversion or exercise
                          does  not   exceed   4.9%  of  the  then   issued  and
                          outstanding  shares  of  common  stock.  However,  the
                          noteholders may repeatedly sell shares of common stock
                          in order to reduce  their  ownership  percentage,  and
                          subsequently  convert  additional  convertible  notes,
                          provided, however, that such conversions do not exceed
                          the average daily dollar volume  calculated during the
                          ten business  days prior to  conversion  multiplied by
                          the number of treading  days of that  calendar  month,
                          per calendar month.

                          The Notes include certain features that are considered
                          embedded  derivative  financial   instruments.   These
                          features are described below, as follows:

                            o  The fixed  conversion  feature  which  allows the
                               investor  to convert  the Notes at a fixed  price
                               per share;

                            o  The variable conversion feature, which allows the
                               investor  to  convert  the  Notes at a  specified
                               percentage  of the  market  price  at the time of
                               conversion;

                            o  The variable  interest rate  provision that calls
                               for no  interest  to be paid if the  stock  price
                               exceeds  a  predetermined   amount  for  a  given
                               months;

                            o  The value of the warrants  issued in  conjunction
                               with each funding.

--------------------------------------------------------------------------------
                                                                            F-39
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8. CONVERTIBLE NOTES      The  initial  fair  value  assigned  to  the  embedded
   CONTINUED              derivatives   and  warrants  was   $4,169,000,   which
                          consisted   of  the  fair   values  of  the   embedded
                          derivatives  of  $2,588,000  and the fair value of the
                          warrants of $1,582,000. The Company recorded the first
                          $2,500,000  of  fair  value  of  the  derivatives  and
                          warrants to debt discount (equal to the total proceeds
                          received as of June 30, 2005), which will be amortized
                          to interest  expense  over the term of the Notes.  The
                          remaining  balance of $1,669,000  was recorded as loss
                          of derivative  valuation for the period ended June 30,
                          2005.

                          As of December  31, 2005,  the carrying  amount on the
                          Notes  was  $339,000,  net  of  the  unamortized  debt
                          discount of $1,699,000.  Interest expense on the Notes
                          totaled  $1,171,000  for the period ended December 31,
                          2005,  which  consisted  of  $462,000  related  to the
                          conversion  of a portion of the Notes into  66,880,000
                          shares of the Company's  common  stock.  The remaining
                          $709,000  recorded as interest  expense,  consisted of
                          $339,000 of normal accretion of the Note discount, and
                          $370,000 of accrued  interest on the outstanding  Note
                          balance for the period. The fair value of the embedded
                          derivatives and warrants  decreased to $195,000 during
                          the year ended December 31, 2005,  which consists of a
                          fair value of the embedded derivatives of $137,000 and
                          the  fair  value  of  the  warrants  of  $58,000.  The
                          corresponding   decrease  in   derivative   value  was
                          reflected  as a gain on  derivative  valuation  on the
                          statements of operations in the amount of $3,975,000.

                          During   2006,   the  Company   entered  into  another
                          securities    purchase   agreement   in   the   amount
                          $1,000,000.  The  initial  fair value  assigned to the
                          embedded  derivatives  and warrants was $541,000,  for
                          this Note,  which  consisted of the fair values of the
                          embedded derivatives of $464,000 and the fair value of
                          the  warrants of $77,000.  The  Company  recorded  the
                          $541,000 of fair value of the derivatives and warrants
                          to debt discount,  which will be amortized to interest
                          expense over the term of the Notes.

--------------------------------------------------------------------------------
                                                                            F-40
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8. CONVERTIBLE NOTES      As of December  31, 2006,  the carrying  amount on the
   CONTINUED              Notes  was  $1,367,000,  net of the  unamortized  debt
                          discount of $1,288,000.  Interest expense on the Notes
                          totaled  $1,159,000  for the period ended December 31,
                          2006,  which  consisted  of  $383,000  related  to the
                          conversion of a portion of the Notes into  105,570,000
                          shares of the Company's  common  stock.  The remaining
                          $776,000  recorded as interest  expense,  consisted of
                          $569,000 of normal accretion of the Note discount, and
                          $207,000 of accrued  interest on the outstanding  Note
                          balance for the period. The fair value of the embedded
                          derivatives  and  warrants  decreased  by a  total  of
                          $570,000  during the year  ended  December  31,  2006,
                          which  consists of a decrease in the fair value of the
                          embedded derivatives of $485,000 and the fair value of
                          the  warrants  of  $85,000.  Accordingly,  the Company
                          recorded  a  gain  on  derivative   valuation  to  the
                          statement of operations of $570,000 for the year ended
                          December 31, 2006.

                          During 2007, the Company  entered into four securities
                          purchase   agreements  in  the  aggregate   amount  of
                          $1,639,000.  The  initial  fair value  assigned to the
                          embedded  derivatives  and warrants was $466,000,  for
                          these Notes, which consisted of the fair values of the
                          embedded derivatives of $344,000 and the fair value of
                          the  warrants  of  $122,000.   The  Company   recorded
                          $466,000 of fair value of the derivatives and warrants
                          to debt discount,  which will be amortized to interest
                          expense over the term of the Notes.

                          At December 31, 2007, the carrying amount on the Notes
                          was $3,039,000,  net of the unamortized  debt discount
                          of  $889,000.  Interest  expense on the Notes  totaled
                          $1,084,000  for the period  ended  December  31, 2007,
                          which consisted of $366,000  related to the conversion
                          of a portion of the Notes into  343,017,000  shares of
                          the  Company's  common stock.  The remaining  $718,000
                          recorded as interest expense, consisted of $499,000 on
                          normal accretion of the Note discount, and $219,000 of
                          accrued  interest on the outstanding  Note balance for
                          the period. The fair value of the embedded derivatives
                          and warrants  decreased by a total of $418,000  during
                          the  year  ended  December  Accordingly,  the  Company
                          recorded a 31, 2007,  which  consists of a decrease in
                          the fair value of the embedded derivatives of $444,000
                          and the fair value of the warrants of  $22,000.gain on
                          derivative valuation to the statement of operations of
                          $418,000 for the year ended December 31, 2007.

                          The  market  price  of  the  Company's   common  stock
                          significantly  impacts the extent to which the Company
                          may be  required  or may be  permitted  to convert the
                          unrestricted and restricted  portion of the Notes into

--------------------------------------------------------------------------------
                                                                            F-41
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8. CONVERTIBLE NOTES      shares of the Company's  common  stock.  The lower the
   CONTINUED              market  price  of the  Company's  common  stock at the
                          respective  times of  conversion,  the more shares the
                          Company  will need to issue to convert  the  principal
                          and interest  payments  then due on the Notes.  If the
                          market price of the company's common stock falls below
                          certain  thresholds,  the  Company  will be  unable to
                          convert any such  repayments of principal and interest
                          into  equity,  and the Company  will be forced to make
                          such  repayments  in cash.  The  Company's  operations
                          could be  materially  impacted,  in an adverse way, if
                          the Company is forced to make  repeated  cash payments
                          on the Notes.

9. STOCK OPTION PLAN      The Option Plan  provides  for the grant of  incentive
   AND WARRANTS           stock  options  and  non-qualified  stock  options  to
                          employees  and  directors  of the  Company.  Incentive
                          stock  options may be granted only to  employees.  The
                          Option Plan is  administered by the Board of Directors
                          or a  Compensation  Committee,  which  determines  the
                          terms of options granted including the exercise price,
                          the number of shares  subject to the  option,  and the
                          exercisability of the option.

                          The Company granted the following options and warrants
                          to  non-employees  during the year ended  December 31,
                          2006:

                               o       Options to  employees,  officers  and the
                                       board of directors to purchase  4,700,000
                                       shares  of  common  stock at an  exercise
                                       price ranging from $0.01 to $0.02.

                               o       Warrants to purchase  8,000,000 shares of
                                       common  stock  at an  exercise  price  of
                                       $0.10 per share in return for the sale of
                                       callable secure convertible notes.

                          The Company granted the following options and warrants
                          to  non-employees  during the year ended  December 31,
                          2007:

                               o       Warrants to purchase  4,000,000 shares of
                                       common  stock  at an  exercise  price  of
                                       $0.10 per share in return for the sale of
                                       callable   secure    convertible   notes,
                                       exercisable through April 26, 2012.

                               o       Warrants to purchase 10,000,000 shares of
                                       common  stock  at an  exercise  price  of
                                       $0.005  per share in return  for the sale
                                       of  callable  secure  convertible  notes,
                                       exercisable through June 11, 2012.

--------------------------------------------------------------------------------
                                                                            F-42
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

9. STOCK OPTION PLAN           o       Warrants to purchase 15,000,000 shares of
   AND WARRANTS                        common  stock  at an  exercise  price  of
   CONTINUED                           $0.001  per share in return  for the sale
                                       of  callable  secure  convertible  notes,
                                       exercisable  through December 24, 2014.

                               o       Options to the  Company's  President  and
                                       Chief   Executive   Officer  to  purchase
                                       4,500,000  share  of  common  stock at an
                                       exercise  price  of  $0.01,   exercisable
                                       through July 1, 2010.

                          A schedule of the options and warrants is as follows:

                                                   NUMBER OF          EXERCISE
                                            -----------------------   PRICE PER
                                              OPTIONS     WARRANTS      SHARE
                                            ------------------------------------
                          Outstanding at
                            January 1, 2006   3,932,500  19,582,190  $0.10-12.98
                              Granted         4,700,000   8,000,000   0.01-0.10
                              Exercised               -           -           -
                              Expired          (225,000) (2,522,798)  0.50-7.50
                              Forfeited      (1,402,500)          -   0.10-2.75

                          Outstanding at
                            December 31,
                            2006              7,005,000  25,059,392   0.01-6.75
                            Granted           4,500,000  29,000,000  0.001-0.10
                            Exercised                 -           -           -
                            Expired                   -     (25,000)  0.15-0.15
                            Forfeited            (5,000)          -   0.10-0.10
                                            ------------------------------------
                          Outstanding at
                            December 31,
                            2007             11,500,000  54,034,392 $0.001-6.75
                                            ====================================

                          The following table summarizes information about stock
                          options and warrants outstanding at December 31, 2007:

                                                    OUTSTANDING                    EXERCISABLE
                                       -----------------------------------   -----------------------
                                                     WEIGHTED
                                                     AVERAGE
                                                    REMAINING     WEIGHTED                 WEIGHTED
                            RANGE OF                CONTRACTUAL   AVERAGE                  AVERAGE
                            EXERCISE      NUMBER       LIFE       EXERCISE     NUMBER      EXERCISE
                             PRICES    OUTSTANDING    (YEARS)      PRICE     EXERCISABLE    PRICE
                          ------------------------------------------------   -----------------------

                          $0.001-0.75   64,459,392     0.31       $0.0036      2,759,339    $ 0.17
                            2.00-5.00    1,025,000     2.30          3.11      1,027,500      3.14
                            6.00-8.13       50,000     2.92          6.75         50,000      6.75
                                12.98            -        -         12.98              -     12.98
                          ------------------------------------------------   -----------------------

                          $0.001-12.98  65,534,392     0.34       $  0.06      3,836,839    $ 1.14
                          =================================================  =======================

--------------------------------------------------------------------------------
                                                                            F-43
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

9. STOCK OPTION           The  fair  value of each  option  and  warrant  grant,
   PLAN AND               outside of those granted in conjunction with the Notes
   WARRANTS               are   estimated   at  the  date  of  grant  using  the
   CONTINUED              Black-Scholes  option pricing model with the following
                          assumptions:

                                                             DECEMBER 31,
                                                      --------------------------
                                                             2007          2006
                                                      --------------------------
                            Expected dividend yield   $         -   $         -
                            Expected stock price
                              Volatility                210%-210%     216%-210%
                            Risk-free interest rate   4.14%-5.37%   4.30%-5.18%
                            Expected life of options    3-5 years     3-5 years

                          The  weighted  average  fair value of options  granted
                          during   2007   and   2006  are   $0.01   and   $0.01,
                          respectively.

10. GAIN ON SETTLEMENT    Due to the Company's  ongoing cash flow  difficulties,
    OF LIABILITIES        during 2007 and 2006 most vendors and  suppliers  were
                          contacted with attempts to negotiate  reduced payments
                          and  settlements of outstanding  accounts  payable and
                          accrued  expenses.   While  some  vendors  refused  to
                          negotiate and demanded  payment in full,  some vendors
                          were  willing  to  settle  for a reduced  amount.  The
                          accounts payable forgiven by vendors and suppliers and
                          accrued expenses settled resulted in a gain of $91,000
                          and $34,000 in 2007 and 2006, respectively.

11. RELATED PARTY         A law  firm,  of which  the  chairman  of the board of
    TRANSACTIONS          directors  of  the  Company  is  a  shareholder,   has
                          rendered  legal  services to the Company.  The Company
                          paid this firm  $156,000 and  $148,000,  for the years
                          ended December 31, 2007 and 2006, respectively.  As of
                          December 31, 2007, the Company owed this firm $46,000,
                          which is included in accounts payable.

--------------------------------------------------------------------------------
                                                                            F-44
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

12.  SUPPLEMENTAL         During the year ended December 31, 2007, the Company:
     FLOW CASH
     INFORMATION               o       Incurred paid obligation of approximately
                                       $20,000  for the  settlement  of  accrued
                                       liabilities of approximately $111,000 and
                                       recorded a corresponding gain of $91,000.

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

                                                             YEARS ENDED
                                                             DECEMBER 31,
                                                      --------------------------
                                                             2007          2006
                                                      --------------------------

                          Interest                    $    11,000   $     7,000
                                                      ==========================

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

13. EXPORT SALES          In  accordance   with  Paragraph  38(a)  of  SFAS  131
    (RESTATED)            "Disclosures  about  Segments  of  an  Enterprise  and
                          Related  Information,"  The company has the  following
                          information  regarding revenues to external customers.
                          Revenues are attributed to countries based on location
                          of customer.

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

--------------------------------------------------------------------------------
                                                                            F-45
<PAGE>

                                                                PARADIGM MEDICAL INDUSTRIES, INC.
                                                                    NOTES TO FINANCIAL STATEMENTS
                                                                                        CONTINUED
-------------------------------------------------------------------------------------------------

13.  EXPORT SALES                                                    Years Ended December 31,
     CONTINUED                                                 ----------------------------------
                          GEOGRAPHIC AREA                           2007                2006
                                                               ----------------------------------

                          EUROPE:
                          Belgium                              $            -      $          650
                          Bulgaria                                     28,400               4,900
                          France                                       34,224               6,250
                          Germany                                           -               7,200
                          Greece                                       11,750              75,455
                          Italy                                        38,040              17,725
                          Poland                                       37,000              12,650
                          Russia                                      204,540             158,620
                          Spain                                         7,200              32,550
                          Turkey                                      102,940              57,750
                          United Kingdom                              255,717             293,240
                                                               --------------      --------------
                                     SUB TOTAL                        719,811             666,340
                                                               --------------      --------------

                          FAR EAST:
                          Bangladesh                           $          560      $       29,850
                          China                                        91,600              74,544
                          India                                        16,800               63300
                          Pakistan                                      8,200                   -
                          South Korea                                  42,500             175,656
                          Taiwan                                       32,650              31,050
                          Thailand                                          -              32,250
                          Vietnam                                      80,600                   -
                                                               --------------      --------------
                                     SUB TOTAL                        272,910             406,650
                                                               --------------      --------------

                          MIDDLE EAST:
                          Egypt                                $        9,540      $       27,200
                          Israel                                        2,800               2,150
                          Jordan                                            -               5,100
                          Saudi Arabia                                 65,700              33,950
                          UAE                                          10,600                   -
                                     SUB TOTAL                         88,640              68,400

                          NORTH AMERICA:
                          Canada                           $           44,750  $           99,402
                          Mexico                                            -               6,800
                          USA                                         636,879              894758
                                                               --------------      --------------
                                     SUB TOTAL                        681,629           1,000,960
                                                               --------------      --------------


-------------------------------------------------------------------------------------------------
                                                                                             F-46

<PAGE>

                                                                PARADIGM MEDICAL INDUSTRIES, INC.
                                                                    NOTES TO FINANCIAL STATEMENTS
                                                                                        CONTINUED
-------------------------------------------------------------------------------------------------

13.  EXPORT SALES
     CONTINUED            CENTRAL, SOUTH AMERICA,
                          AND CARIBBEAN:
                          Argentina                        $           21,915 $                 -
                          Brazil                                       36,698               9,500
                          El Salvador                                   8,749              12,650
                          Guatemala                                         -               8,300
                          Honduras                                          -               5,150
                          Puerto Rico                                  26,798              10,825
                          Venezuela                                    14,850                   -
                          Colombia                                          -               5,900
                                                               --------------      --------------
                                     SUB TOTAL                        109,010              52,325
                                                               --------------      --------------

                                                               --------------      --------------
                                       TOTAL              $         1,872,000  $        2,195,000
                                                               --------------      --------------





-------------------------------------------------------------------------------------------------
                                                                                             F-47

<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

13.  EXPORT SALES
     CONTINUED            --------------------- ------------------------------------------- -------------- --------------
                          PRODUCT               MODEL                                               2,006          2,007
                          --------------------- ------------------------------------------- -------------- --------------

                          Humphrey Systems:      P55 & A/Pachymeter (P55), A/B Scan (P37)        (314,227)      (548,902)
                          MEDA Systems           P2000, P2200, P2500, P2700, P3700                     14%            29%

                          Dicon diagnostic:      Perimeter and corneal topographer               (855,800)      (388,179)
                                                 LD, TKS, CT                                           39%            21%

                          UBM biomicroscope:                                                     (546,793)      (512,644)
                                                 P40, P45, P60                                         25%            27%

                          Blood Flow Analyzer:                                                   (210,929)      (256,511)
                                                 BFA                                                   10%            14%

                                                                                            -----------------------------
                                                    SUB-TOTAL                                  (1,927,748)    (1,706,236)
                                                                                            -----------------------------
                                                                                                        1              1
                          Cataract removal sales (Precisionist and SIStem)                          5,856              -
                                                 PHO, SIS (Surgical)                                    0%             0%

                          Service, parts, disposables, and other                                 (273,577)      (165,318)
                                                                                                       12%             9%

                                                                                            -----------------------------
                                                    TOTAL YTD SALES                            (2,195,469)    (1,871,554)
                                                                                            =============================
                                                                                                      100%           100%

14. 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    nondiscriminatory    no   matching
                          contributions  at this time.  During  the years  ended
                          December  31,  2007  and  2006,  the  Company  made no
                          contributions to the Plan.

15. COMMITMENTS           AGREEMENTS
    AND                   On June 12, 2006, the Company entered into a Worldwide
    CONTINGENCIES         OEM  Agreement  with MEDA Co.,  Ltd.,  one of  China's
                          leading   developers   and   producers  of  ultrasound
                          devices. Under the terms of the agreement, MEDA agrees
                          to  jointly  engineer,  develop  and  manufacture  the

--------------------------------------------------------------------------------
                                                                            F-48

<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

                          Company's   next    generation   of   the   Ultrasound
                          BioMicroscope,   as  well  as  other  proprietary  new
                          products  and  enhancement  of the  Company's  current
                          products.  The products to be manufactured by MEDA, at
                          agreed  upon  costs,  and  supplied to the Company for
                          resale   include  the  following   new  products:   an
                          ultrasound biomicroscope,  two ultrasound A/B Scans, a
                          biometric A-Scan and a pachymeter.

                          The agreement provides that the Company and MEDA agree
                          to jointly  develop and collaborate in the improvement
                          and enhancement of the Company's  products and, in the
                          interest  of  product  development,   enhancement  and
                          differentiation,  MEDA agrees to give consideration to
                          potential  software  development or enhancements  made
                          available to the Company for its  products.  Moreover,
                          in the interest of product improvement, MEDA agrees to
                          collaborate   with  the  Company  and  its  designated
                          engineers,  employees and  consultants to consider and
                          potentially  implement  jointly  or  individually  the
                          development of product  Contingencies  enhancements to
                          the Company's products to be manufactured by MEDA.

                          The  software  and  hardware   modifications  designed
                          jointly by the Company and MEDA will be considered the
                          joint  intellectual  property  of the Company and MEDA
                          and may be used, without restriction, unless otherwise
                          previously  agreed  to,  by  either  party.  MEDA also
                          agrees  to  provide  a twelve  month  warranty  on all
                          products  that it  manufactures  for the  Company.  If
                          defects   cannot  be   corrected   at  the   Company's
                          facilities,  the  products may be returned to MEDA for
                          the purposes of carrying out such repairs as required,
                          and MEDA agrees to return the repaired products to the
                          Company or its designated agent or distributor  within
                          ten  working  days  from  the date of  receiving  such
                          products, at no cost to the Company, and MEDA will pay
                          return freight costs.

                          MEDA   further   agrees  to  endeavor  to  answer  any
                          technical  inquiries  concerning  the  products it has
                          manufactured.  MEDA also agrees to train the Company's
                          technical    service    engineers    and    designated
                          international  distributors  as soon as possible after
                          the  signing of this  agreement,  and as future  needs
                          arise  and as MEDA can  reasonably  fit such  training
                          into the  regular  schedules  of its  employees.  MEDA
                          agrees to  determine  the need for future  training on
                          new products as necessary and will offer such training
                          in Tiangin,  China.  For  training  conducted  outside
                          China,  the  Company  or its  designated  distributors

--------------------------------------------------------------------------------
                                                                            F-49

<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

                          and/or  service  centers will be  responsible  for the
                          traveling,   living  and  hotel  expenses  for  MEDA's
                          engineers.  Training  is at no charge to the  Company.
                          The  training  will  also  be  made  available  to the
                          Company's  designated  repair  agencies  in  order  to
                          provide service and repair on a worldwide basis.  Such
                          agencies   will  be   considered   authorized   repair
                          facilities for the products manufactured by MEDA.

                          MEDA  provides  the Company  with  several  ultrasound
                          devices.  These  devices  include the P37-II A/B Scan,
                          the P2000 A-Scan Biometric Analyzer,  P2200 Pachymeter
                          and  the  P2500,   which  is  a  combined  A-Scan  and
                          pachymeter.  MEDA also manufactures the P2700,  P3700,
                          and   P37-II   A/B  Scans   and  the  P50   Ultrasound
                          Biomicroscope.   The  agreement   provides   exclusive
                          distribution  rights to the Company throughout most of
                          the world,  including  the United  States and  Canada,
                          once FDA approval is received on these devices.

                          The agreement  shall be effective for three years from
                          date of execution.  At the end of the three year term,
                          representatives of the Company and MEDA will confer to
                          determine whether to extend the term of the agreement.
                          This will have a  practical  effect of  extending  the
                          term of the agreement  for an additional  120 days. If
                          mutual   agreement  for  extending  the  term  of  the
                          Contingencies agreement is not reached within 120 days
                          after the end of the three year Continued  term,  then
                          the agreement will be deemed terminated.  However,  if
                          within  the 120  day  period,  the  Company  and  MEDA
                          mutually  agree to extend  the term of the  agreement,
                          then   thereafter   either  party  may  terminate  the
                          agreement by providing at least twelve  months'  prior
                          written  notice to the other  party.  All  outstanding
                          orders at the time of  notification  will be  supplied
                          under  the  terms  of the  agreement,  and  MEDA  will
                          continue to fulfill all orders from the Company  until
                          the twelve month notice period has expired.

                          On  January  31 and  February  1,  2007,  the  Company
                          received  FDA  510(k)  premarket  approval  for  a new
                          generation of ultrasound devices. This approval allows
                          the new devices to be sold in the United  States.  The
                          new ultrasound  devices,  which are to be manufactured
                          by MEDA and sold by the Company in the United  States,
                          include the P2000 A-Scan (used to measure axial length
                          of the eye), the P2200  Pachymeter (used for measuring
                          corneal  thickness),  the P2500  A-Scan/Pachymeter  (a
                          combination of the two stand alone devices), the P2700
                          AB/Scan (an  ultrasound  imaging  device for detecting

--------------------------------------------------------------------------------
                                                                            F-50

<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

15. COMMITMENTS           abnormalities  within  the eye) and the P37-II (a more
    AND                   advanced  AB/Scan  used  to  provide  portability  for
    CONTINGENCIES         ophthalmology  veterinary  applications)  and  the P50
    CONTINUED             Ultrasound Biomicroscope for high frequency imaging of
                          the anterior chamber of the eye.

                          On  September  25,  2006,  the Company  entered into a
                          Worldwide  OEM Agreement  with Tinsley,  a division of
                          Hartest  Precision  Instruments  Limited,  and  one of
                          Europe's  leading  developers  and producers of visual
                          fields analysis devices or perimeters. Under the terms
                          of the agreement,  Tinsley agrees to engineer, develop
                          and manufacture the Company's  newest  perimeter,  the
                          LD700  Visual  Fields  Analyzer.  The product is to be
                          manufactured  by  Tinsley  at  agreed  upon  costs and
                          supplied to the Company for resale.

                          On  August  14,  2007,  the  Company  entered  into an
                          agreement with Equity Source Partners, LLC of Jericho,
                          New York.  Under the  terms of the  agreement,  Equity
                          Source  Partners will act as the  exclusive  financial
                          advisor to the  Company and will assist the Company in
                          raising  private  capital,  creating  a  strategy  for
                          growing  its  core  business,  pursuing  a  follow  on
                          offering,  and providing general  strategic  corporate
                          advice.  Among the strategic  advisory services Equity
                          Source   Partners   will  provide  are  to  assist  in
                          identifying  and  introducing  the  Company  to  third
                          parties  in  connection   with   potential   strategic
                          relationships,   provide  advice   concerning   issues
                          relating to  potential  strategic  relations,  capital
                          raises and potential investment banking contacts,  and
                          establish   contact  with  prospective   providers  of
                          capital.  Among the financing  services  Equity Source
                          Partners  will  perform  is  to  solicit   prospective
                          providers of capital on the Company's behalf.

                          The term of the  agreement is for twelve months unless
                          extended by mutual consent.  As  compensation  for its
                          services,  the Company agrees to provide equity Source
                          Partners with an advisory fee equal to an aggregate of
                          3% of the outstanding  shares of the Company's  common
                          stock.  In addition,  the Company agrees to pay Equity
                          Source  Partners a cash fee equal to 7.5% of the gross
                          proceeds from the sale of securities to investors that
                          were  introduced  to  the  Company  by  Equity  Source
                          Partners  and a cash  fee  equal  to 3% of  the  gross
                          proceeds  received  from  the  sale of  securities  to
                          investors  that were not  introduced  by Equity Source
                          Partners.

--------------------------------------------------------------------------------
                                                                            F-51

<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

15. COMMITMENTS           LEGAL PROCEEDINGS
    AND                   On  December  27,  2007,  the Company  entered  into a
    CONTINGENCIES         settlement  agreement  with Larry  Hicks to settle the
    CONTINUED             lawsuit  Mr.  Hicks  brought  against  the Company for
                          payments  due under a  consulting  agreement  with the
                          Company  (Third  Judicial  District  Court,  Salt Lake
                          County, State of Utah, Civil No. 030922220). Under the
                          terms of the agreement,  the Company agrees to pay Mr.
                          Hicks a total of  $20,000,  of which  $10,000 has been
                          paid.  The remaining  amount owing of $10,000 is to be
                          paid in quarterly installments of $2,500 each prior to
                          the end of the next four  consecutive  quarters,  with
                          the next payment due on or before June 30, 2008.

                          An action was brought against the Company on September
                          11, 2000 by PhotoMed International, Inc. and Daniel M.
                          Eichenbaum,  M.D. in the Third  District Court of Salt
                          Lake  County,  State of Utah.  The action  involves an
                          amount of royalties  that are  allegedly due and owing
                          to PhotoMed  International,  Inc.  and Dr.  Eichenbaum
                          under a license  agreement  dated July 7,  1993,  with
                          respect to the sale of certain  equipment,  plus costs
                          and attorney's fees. Certain discovery has taken place
                          and the Company has paid  royalties of $15,717,  which
                          the Company believes brings all payments current as of
                          the date of last  payment  on  January  7,  2005.  The
                          Company  has  been  working  with   PhotoMed  and  Dr.
                          Eichenbaum to ensure that the  calculations  have been
                          correctly  made on the  royalties  paid as well as the
                          proper method of calculation for the future.

                          It is  anticipated  that once the parties can agree on
                          the correct  calculations on the royalties,  the legal
                          action  will  be   dismissed.   An  issue  in  dispute
                          concerning  the  method of  calculating  royalties  is
                          whether   royalties   should   be  paid  on   returned
                          equipment.  Since  July 1, 2001,  only one  Photon(TM)
                          laser  system has been sold and no  systems  returned.
                          Thus,  the amount of royalties  due,  according to the
                          Company's  calculations,  is $981.  The  Company  made
                          payment of this amount to Photomed and Dr.  Eichenbaum
                          on January 5, 2005 and, as a result, seeks to have the
                          legal action  dismissed.  However,  if the parties are
                          unable to agree on a method for calculating royalties,
                          there is a risk that PhotoMed and Dr. Eichenbaum might
                          amend their  complaint to request  termination  of the
                          license  agreement  and,  if  successful,  the Company
                          would  lose  its  right  to  manufacture  and sell the
                          Photon(TM) laser system.

                          An  action  was filed on June 20,  2003,  in the Third

--------------------------------------------------------------------------------
                                                                            F-52

<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

15. COMMITMENTS           Judicial  District Court,  Salt Lake County,  State of
    AND                   Utah (Civil No. 030914195) by CitiCorp Vendor Finance,
    CONTINGENCIES         Inc.,  formerly  known as Copelco  Capital,  Inc.  The
    CONTINUED             complaint claims that $49,626 plus interest is due for
                          the leasing of three copy machines that were delivered
                          to the Company's Salt Lake City facilities on or about
                          April  of  2000.  The  action  also  seeks an award of
                          attorney's  fees and costs incurred in the collection.
                          The Company filed an answer to the complaint disputing
                          the amounts allegedly owed due to machine problems and
                          a claimed  understanding  with the vendor. The Company
                          returned two of the machines.  The Company was engaged
                          in settlement  discussions with CitiCorp until counsel
                          for CitiCorp  withdrew from the case.  New counsel for
                          CitiCorp was appointed.  After an initial meeting with
                          new counsel,  the Company provided initial disclosures
                          to the new counsel.

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

                          EMPLOYMENT AGREEMENTS
                          The Company entered into an employment  agreement with
                          Raymond P.L.  Cannefax,  which commenced on January 5,
                          2006 and  expired on January 5, 2007.  The  employment
                          agreement    requires    Mr.    Cannefax   to   devote
                          substantially all of his working time as the Company's
                          President and Chief Executive Officer,  providing that
                          he may be  terminated  for "cause" (as provided in the
                          agreement)  and prohibits him from  competing with the
                          Company for two years following the termination of his
                          employment   agreement.   The   employment   agreement
                          provides  for the payment of an initial base salary of
                          $125,000.  The employment  agreement also provides for
                          salary increases and bonuses as shall be determined at
                          the  discretion  of the Board of  Directors,  with the
                          first  review  of the  annual  salary to be made as of
                          June  30,  2006.  The  employment   agreement  further
                          provides for the issuance of stock options to purchase
                          4,500,000 shares of the Company's common stock at $.01
                          per share.  The options vest in twelve  equal  monthly
                          installments of 375,000 shares,  beginning on February
                          5, 2006 until such shares are vested.

                          In the event of a change of  control  of the  Company,
                          then all  outstanding  stock  options  granted  to Mr.
                          Cannefax  shall be  immediately  vested.  A change  of
                          control  shall be  deemed  to have  occurred  if (i) a

--------------------------------------------------------------------------------
                                                                            F-53

<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

15. COMMITMENTS           tender  offer  shall be made and  consummated  for the
    AND                   ownership   of  more   than   25%  of  the   Company's
    CONTINGENCIES         outstanding  shares;  (ii) the Company shall be merged
    CONTINUED             or  consolidated  with another  corporation  and, as a
                          result, less than 25% of the outstanding common shares
                          of the  surviving  corporation  shall  be owned in the
                          aggregate by the Company's former shareholders, as the
                          same  shall  have  listed  prior  to  such  merger  or
                          consolidation;  (iii) the  Company  shall  sell all or
                          substantially all of its assets to another corporation
                          that is not a wholly owned  subsidiary  or  affiliate;
                          (iv) as a result  of any  contested  election  for the
                          Board of Directors,  or any tender or exchange  offer,
                          merger of business  combination or sale of assets, the
                          persons who were  directors of the Company before such
                          a transaction  shall cease to constitute a majority of
                          the Board of Directors;  or (v) a person other than an
                          officer or director of the Company  shall acquire more
                          than 20% of the outstanding  shares of common stock of
                          the Company.

                          Effective  July 1, 2007,  the Company  entered into an
                          amendment  of  the   employment   agreement  with  Mr.
                          Cannefax,  which  extends  the term of the  employment
                          agreement  until  January 5, 2009.  Under the terms of
                          the  amendment,  Mr.  Cannefax's  annual  base  salary
                          increased to $150,000.  The initial base salary in the
                          employment   agreement   dated  January  5,  2006  was
                          $125,000,  which the Board of  Directors  increased to
                          $140,000  as of  July  1,  2006.  The  amendment  also
                          provides for the granting of additional  stock options
                          to Mr.  Cannefax to purchase an  additional  4,500,000
                          shares  of the  Company's  common  stock  at $.01  per
                          share.  These  options  vest in twelve  equal  monthly
                          installments  of 375,000  shares  beginning on June 1,
                          2007 until such shares are vested.

                          RETIREMENT AGREEMENT
                          On May 6,  1999,  the  Company's  Board  of  Directors
                          approved  resolutions  relating to the  retirement  of
                          John M.  Hemmer,  then Vice  President  of Finance and
                          Chief  Financial  Officer  of the  Company.  The board
                          resolutions  provided that Mr.  Hemmer's annual salary
                          of $120,000  per annum was to  continue  until June 1,
                          1999, at which time his employment contract and change
                          of control  agreement with the Company would terminate
                          and he would become an  independent  consultant to the
                          Company. As a consultant, Mr. Hemmer was to receive an
                          initial   payment  of  $12,500  with  annual  payments
                          thereafter of $25,000 payable on January 1, 2000, 2001
                          and 2002,  and a final  payment of $12,500  payable on
                          January 1, 2003,  for a total  consulting  contract of
                          $100,000.

--------------------------------------------------------------------------------
                                                                            F-54

<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

15. COMMITMENTS           In addition,  the board resolutions  provided that the
    AND                   Company  was  to  issue  to  Mr.  Hemmer  warrants  to
    CONTINGENCIES         purchase  125,000  shares of common stock at $2.63 per
    CONTINUED             share,  exercisable  for a period of five  years,  and
                          warrants to purchase  75,000 shares of common stock at
                          $7.50  per  share,  exercisable  for a period  of five
                          years,  but such  warrants were not to be issued until
                          Mr.  Hemmer  exercised all of the warrants to purchase
                          125,000 common shares at $2.63 per share.  The Company
                          has paid a total of  $87,500 to Mr.  Hemmer  under the
                          consulting agreement.

                          On May 30, 2006, the Company entered into an agreement
                          with Mr.  Hemmer  in which  he  acknowledged  that the
                          Company owed him a total of $12,500 for past  services
                          he rendered to the Company, including as a consultant,
                          and the  Company  agreed to pay him the sum of $12,500
                          in twelve  monthly  installments  of $1,000 each and a
                          final  monthly  payment of $500.  The Company has paid
                          $7,000  to Mr.  Hemmer  under  this  agreement,  as of
                          December 31, 2007.

16. RECENT                RECENT ACCOUNTING PRONOUNCEMENTS
    ACCOUNTING            In September 2006, the Financial  Accounting Standards
    PRONOUNCE-            Board  issued   Statement   of  Financial   Accounting
    MENTS                 Standards No. 158, "Employers'  Accounting for Defined
                          Benefit  Pension and Other  Postretirement  Plans,  an
                          amendment of FASB Statements No. 87, 88, 106 and 132R"
                          ("SFAS 158"). SFAS 158 requires employers that sponsor
                          defined  benefit pension and  postretirement  plans to
                          recognize previously unrecognized actuarial losses and
                          prior  service  costs in the  statement  of  financial
                          position  and to  recognize  future  changes  in these
                          amounts  in the year in which  changes  occur  through
                          comprehensive  income.  As a result,  the statement of
                          financial position will reflect funded status of those
                          plans  as  an  asset   or   liability.   Additionally,
                          employers are required to measure the funded status of
                          a plan as of the date of their year-end  statements of
                          financial position and provide additional disclosures.
                          SFAS 158 is effective for financial  statements issued
                          for fiscal years  ending  after  December 15, 2006 for
                          companies whose  securities are publicly  traded.  The
                          Company  does not expect the  adoption  of SFAS 158 to
                          have a significant effect on its financial position or
                          results of operation.

                          In September 2006, the Financial  Accounting Standards

--------------------------------------------------------------------------------
                                                                            F-55

<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

16. RECENT                Board  issued   Statement   of  Financial   Accounting
    ACCOUNTING            Standards No. 157,  "Fair Value  Measurements"  ("SFAS
    PRONOUNCE-            157"),   which  defines  fair  value,   establishes  a
    MENTS                 framework  for  measuring   fair  value  in  generally
    CONTINUED             accepted accounting  principles ("GAAP"),  and expands
                          disclosures  about  fair  value  measurements.   Where
                          applicable,  SFAS 157 simplifies and codifies  related
                          guidance within GAAP and does not require any new fair
                          value   measurements.   SFAS  157  is  effective   for
                          financial statements issued for fiscal years beginning
                          after  November 15, 2007,  and interim  periods within
                          those fiscal years.  Earlier  adoption is  encouraged.
                          The Company  does not expect the  adoption of SFAS 157
                          to have a significant effect on its financial position
                          or results of operation.

                          In June 2006, the Financial Accounting Standards Board
                          issued FASB  Interpretation  No. 48,  "Accounting  for
                          Uncertainty  in Income  Taxes - an  interpretation  of
                          FASB Statement No. 109" ("FIN 48"), which prescribes a
                          recognition  threshold and  measurement  attribute for
                          the financial statement recognition and measurement of
                          a tax position  taken or expected to be taken in a tax
                          return.    FIN   48   also   provides    guidance   on
                          de-recognition,     classification,    interest    and
                          penalties,  accounting in interim periods,  disclosure
                          and  transition.  FIN 48 is effective for fiscal years
                          beginning  after  December 15, 2006.  The Company does
                          not expect the  adoption  of FIN 48 to have a material
                          impact on its financial reporting,  and the Company is
                          currently  evaluating the impact, if any, the adoption
                          of FIN 48 will have on its disclosure requirements.

                          In March  2006,  the  Financial  Accounting  Standards
                          Board  issued   Statement   of  Financial   Accounting
                          Standards  No.  156,   "Accounting  for  Servicing  of
                          Financial Assets -- an Amendment of FASB Statement No.
                          140 ("SFAS 156")." This  statement  requires an entity
                          to recognize a servicing asset or servicing  liability
                          each time it  undertakes  an  obligation  to service a
                          financial asset by entering into a servicing  contract
                          in any of the following situations:  a transfer of the
                          servicer's    financial    assets   that   meets   the
                          requirements  for sale  accounting;  a transfer of the
                          servicer's    financial   assets   to   a   qualifying
                          special-purpose   entity  in  a  guaranteed   mortgage
                          securitization in which the transferor  retains all of
                          the resulting securities and classifies them as either
                          available-for-sale  securities or trading  securities;
                          or an  acquisition  or  assumption of an obligation to
                          service a  financial  asset  that  does not  relate to
                          financial  assets of the  service or its  consolidated
                          affiliates. The statement also requires all separately

--------------------------------------------------------------------------------
                                                                            F-56

<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

16. RECENT                recognized servicing assets and servicing  liabilities
    ACCOUNTING            to  be   initially   measured   at  fair   value,   if
    PRONOUNCE-            practicable,  and  permits an entity to choose  either
    MENTS                 the  amortization  or fair value method for subsequent
    CONTINUED             measurement  of each  class of  servicing  assets  and
                          liabilities.  The statement  further  permits,  at its
                          initial  adoption,  a  one-time   reclassification  of
                          available-for-sale securities to trading securities by
                          entities with  recognized  servicing  rights,  without
                          calling   into   question   the   treatment  of  other
                          available-for-sale    securities    under    Financial
                          Accounting Standards Board Statement No. 115, provided
                          that the available-for-sale  securities are identified
                          in some manner as offsetting the entity's  exposure to
                          changes in fair value of servicing assets or servicing
                          liabilities  that a  services  elects to  subsequently
                          measure   at  fair   value   and   requires   separate
                          presentation   of  servicing   assets  and   servicing
                          liabilities subsequently measured at fair value in the
                          statement   of  financial   position  and   additional
                          disclosures  for all separately  recognized  servicing
                          assets  and   servicing   liabilities.   SFAS  156  is
                          effective for fiscal  Continued  years beginning after
                          September 15, 2006,  with early adoption  permitted as
                          of  the   beginning   of  an  entity's   fiscal  year.
                          Management believes the adoption of SFAS 156 will have
                          no  immediate   impact  on  the  Company's   financial
                          condition or results of operations.

                          In February 2006, the Financial  Accounting  Standards
                          Board  issued   Statement   of  Financial   Accounting
                          Standards  No. 155,  "Accounting  for  Certain  Hybrid
                          Financial   Instruments   -  an   amendment   of  FASB
                          Statements  No.  133 and  140"  ("SFAS  155"),  to (a)
                          permit  fair  value   re-measurement  for  any  hybrid
                          financial   instrument   that   contains  an  embedded
                          derivative that otherwise  would require  bifurcation,
                          (b)   clarify    which    interest-only    strip   and
                          principal-only   strip   are   not   subject   to  the
                          requirements   of  Statement   133,  (c)  establish  a
                          requirement  to  evaluate   interests  in  securitized
                          financial  assets  to  identify   interests  that  are
                          freestanding  derivatives or that are hybrid financial
                          instruments   that  contain  an  embedded   derivative
                          requiring bifurcation, (d) clarify that concentrations
                          of credit  risk in the form of  subordination  are not
                          embedded  derivatives,  and (e) amend Statement 140 to
                          eliminate  the  prohibition  on a  qualifying  special
                          purpose  entity from  holding a  derivative  financial
                          instrument  that  pertains  to a  beneficial  interest
                          other than another  derivative  financial  instrument.
                          This  statement is effective for financial  statements
                          for fiscal years  beginning  after September 15, 2006.
                          Earlier  adoption of SFAS 155 is  permitted  as of the
                          beginning  of an entity's  fiscal  year,  provided the

--------------------------------------------------------------------------------
                                                                            F-57

<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

16. RECENT                entity has not yet issued any financial statements for
    ACCOUNTING            that fiscal year.  Management  believes  SFAS 155 will
    PRONOUNCE-            have no  impact  on the  financial  statements  of the
    MENTS                 Company once adopted.
    CONTINUED
                          In December 2007, the Financial  Accounting  Standards
                          Board  ("FASB")  issued  SFAS  No.  141(R),  "Business
                          Combinations" ("SFAS 141R"). SFAS 141R establishes the
                          principles  and   requirements  for  how  an  acquirer
                          recognizes  and measures in its  financial  statements
                          the  identifiable  assets  acquired,  the  liabilities
                          assumed, any noncontrolling  interest in the acquiree,
                          and the goodwill acquired.  SFAS 141R also establishes
                          disclosure  requirements  to enable the  evaluation of
                          the  nature  and  financial  effects  of the  business
                          combination.  SFAS 141R is effective for us on January
                          1, 2009, and is not expected to have a material effect
                          on our consolidated financial statements.  In December
                          2007,  the FASB issued  SFAS No. 160,  "Noncontrolling
                          Interests in  Consolidated  Financial  Statements,  an
                          amendment  of ARB No. 51 ("SFAS  160").  SFAS 160 will
                          change the  accounting  and reporting for minority 16.
                          Recent  interests,  which will be  recharacterized  as
                          noncontrolling  interests and Accounting classified as
                          a component of equity.  This new consolidation  method
                          will  Pronounce-  significantly  change the accounting
                          for transactions with minority interest ments holders.
                          SFAS 160 is effective  for us on January 1, 2009,  and
                          is not Continued expected to have a material effect on
                          our consolidated financial statements.

                          In  February  2007,  the FASB issued SFAS No. 159 "The
                          Fair Value Option for  Financial  Assets and Financial
                          Liabilities,  including an amendment of FASB Statement
                          No. 115" ("SFAS 159").  SFAS 159 permits  companies to
                          choose  to  measure  many  financial  instruments  and
                          certain  other  items  at  fair  value  that  are  not
                          currently  required to be measured at fair value,  and
                          establishes  presentation and disclosure  requirements
                          designed to facilitate  comparisons  between companies
                          that  choose  different  measurement   attributes  for
                          similar types of assets and  liabilities.  SFAS 159 is
                          effective  for  us on  January  1,  2008,  and  is not
                          expected to have a material effect on our consolidated
                          financial statements.

                          The   implementation   of  the   provisions  of  these
                          pronouncements  is not expected to have a  significant
                          effect  on  the   Company's   consolidated   financial
                          statement presentation.

--------------------------------------------------------------------------------
                                                                            F-58

<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

17. SUBSEQUENT            SUBSEQUENT EVENTS
    EVENTS                On  January  16,  2008,  the  Company  entered  into a
                          consulting  agreement with Corcoran  Consulting Group,
                          which specializes in medical  reimbursement issues for
                          optometry and ophthalmology. The Company plans to work
                          with Corcoran  Consulting Group to create a new common
                          procedure   technology,   or  CPT  code  number,   for
                          reimbursement     purposes    for    physicians    and
                          practitioners  using the Blood Flow  Analyzer(TM).  In
                          addition,  the  Company  plans to work  with  Corcoran
                          Consulting  Group to offer  educational  seminars  for
                          physicians  and  practitioners  who purchase the Blood
                          Flow Analyzer(TM).

                          On  January  28,  2008,  the  Company  entered  into a
                          Distribution  Agreement with LACE  Elettronica  srl to
                          distribute    its   Glaid   device,    a   proprietary
                          electrophysiology  instrument for the early  detection
                          of  glaucoma  by  means  of  measuring   the  physical
                          condition of the retina's  ganglion  cells,  including
                          retinal  ganglion  cell  loss.  The Glaid  device  was
                          approved  by  the  FDA  in  2005  and  has   undergone
                          extensive  testing and clinical  studies in the United
                          States,  Canada and Italy,  including at Bascom Palmer
                          Eye Institute, University of California at San Diego's
                          Hamilton  Glaucoma Center,  and New York State College
                          of Optometry

                          Under the terms of the agreement,  the Company has the
                          exclusive  right to distribute the Glaid device in the
                          United States and Canada. The Company also has a first
                          right of refusal  for  distribution  of the product to
                          countries  outside the United  States and Canada where
                          LACE  is  not  currently   selling  or  marketing  the
                          product.  These  additional  distribution  rights  are
                          subject  to  reasonable   new  minimum   quotas.   The
                          Distribution   Agreement   requires   the  Company  to
                          purchase  the Glaid device from LACE at an agreed upon
                          price and to then sell the product in compliance  with
                          minimum order  requirements.  The five year quotas for
                          the Glaid  device are 27 units,  60 units,  100 units,
                          120 units, and 120 units for years one through five of
                          the agreement.  Paradigm sales for quota  requirements
                          are  to  begin  as  soon  as  the   product  is  fully
                          completed,  with all accessories and consumables,  and
                          ready for delivery.

                          The  Distribution  Agreement  is for the  term of five
                          years.   At   the   end  of  the   five   year   term,
                          representatives of the Company and LACE will determine
                          whether to extend the term of the agreement. If mutual

--------------------------------------------------------------------------------
                                                                            F-59

<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

17. SUBSEQUENT            agreement  for  continuation  of the  agreement is not
    EVENTS                reached within 120 days thereafter, the agreement will
    CONTINUED             be deemed terminated.  However,  if within the 120 day
                          period,   the  Company  and  LACE  mutually  agree  to
                          continue   the   agreement,   then  either  party  may
                          terminate  the  agreement  at any time  thereafter  by
                          providing at least twelve months' prior written notice
                          to the other party. All outstanding orders at the time
                          of  notification  will be supplied  under the terms of
                          the  agreement,  and LACE will continue to fulfill all
                          orders from the Company  until the twelve month notice
                          period has expired.

                          LACE also  agrees to provide a twelve  month  warranty
                          from the day of delivery on all Glaid devices supplied
                          to the Company.  If the defects cannot be corrected at
                          the  Company's  facilities  or at  the  facilities  of
                          trained Company repair centers, the products must then
                          be returned to LACE for  purposes of carrying out such
                          repairs  as  required,  and LACE  agrees to return the
                          repaired  products  to the  Company or its  designated
                          agent or distributor  within ten working days from the
                          date of  receiving  such  products,  at no cost to the
                          Company,  and LACE will pay return freight costs.  The
                          Company    additionally    agrees   to   arrange   for
                          installation  of the Glaid  device at no cost to LACE.
                          The Company  further  agrees to provide  Company brand
                          specific  labeling  to be applied to the LACE  devices
                          shipped directly to the Company's customers.





--------------------------------------------------------------------------------
                                                                            F-60

<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

18.  RESTATEMENT          We have restated our annual  financial  statements for
     AND                  the years ended  December  31, 2006 and 2005,  and our
     RECLASSIFICA-        quarterly  financial  statements for the quarter ended
     TION                 March 31,  June 30, and  September  30, 2007 and 2006,
                          respectively.  These  restatements have been performed
                          to  reflect  issues  identified  during  a  regulatory
                          review of our financial  statements  associated with a
                          filing  with  the  SEC.  Management  and the  board of
                          directors  concluded these restatements were necessary
                          to reflect the changes described below.

                            o  We  erroneously  treated  the  conversion-related
                               derivatives  and  warrants  associated  with  the
                               Company's Callable Secured  Convertible Notes for
                               the years ended December 31, 2005, 2006 and 2007.
                               The  correct   presentation  is  as  a  liability
                               adjusted  for  changes  in  fair  value,  at each
                               balance  sheet date,  through the  statements  of
                               operations,   as   provided   by  SFAS  No.  133,
                               "Accounting   for  Derivative   Instruments   and
                               Hedging Activities."

                            o  We have also expanded  footnote  disclosures  and
                               added  disclosures  to help  clarify  the amounts
                               recorded  in  the  financial  statements  of  the
                               Company.

                          A  summary  of the  effects  of  these  changes  is as
                          follows:




--------------------------------------------------------------------------------
                                                                            F-61

<PAGE>

                                                                                     PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                         NOTES TO FINANCIAL STATEMENTS
                                                                                                             CONTINUED
----------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                          BALANCE SHEET                             AS PREVIOUSLY
                        DECEMBER 31, 2005                              REPORTED        AS RESTATED         CHANGE
                                                                   ---------------   ---------------   ---------------

ASSETS

Current assets:
   Cash                                                            $       66,000    $       66,000    $            -
   Receivables, net                                                       401,000           401,000                 -
   Inventories, net                                                       853,000           853,000                 -
Prepaid and other assets                                                   11,000            11,000                 -
                                                                   ---------------   ---------------   ---------------
Total current assets                                                    1,331,000         1,331,000                 -

Property and equipment, net                                                32,000            32,000                 -
Goodwill                                                                  339,000           339,000                 -
                                                                   ---------------   ---------------   ---------------

Total assets                                                       $    1,702,000    $    1,702,000    $            -
                                                                   ===============   ===============   ===============

LIABILITIES AND STOCKHOLDERS' (DEFICIT)

Current liabilities:
   Accounts payable                                                $      459,000    $      459,000    $            -
   Accrued liabilities                                                    704,000           704,000                 -
   Current portion of capital lease obligations                            14,000            14,000                 -
                                                                   ---------------   ---------------   ---------------
Total current liabilities                                               1,177,000         1,177,000                 -
                                                                   ---------------   ---------------   ---------------

   Convertible notes payable, net of discount $1,699,000                2,038,000           339,000        (1,699,000) a
   Derivative liabilities                                                       -           195,000           195,000  b
                                                                   ---------------   ---------------   ---------------
Total long-term liabilities                                             2,038,000           534,000        (1,504,000)
                                                                   ---------------   ---------------   ---------------
Total liabilities                                                       3,215,000         1,711,000        (1,504,000)
Commitments and contingencies                                                   -                 -                 -

Stockholders' (Deficit):
Preferred stock, $.001 par value, 5,000,000 shares authorized,
   613,447 shares issued and outstanding (aggregate liquidation
   preference of $496,000)                                                  1,000             1,000                 -
Common stock, $.001 par value, 250,000,000 shares authorized,
   96,389,295 shares issued and outstanding                                96,000            96,000                 -
Additional paid-in capital                                             60,586,000        58,086,000        (2,500,000) c
Accumulated deficit                                                   (62,196,000)      (58,192,000)        4,004,000  d
                                                                   ---------------   ---------------   ---------------

Total stockholders' (Deficit)                                          (1,513,000)           (9,000)        1,504,000
                                                                   ---------------   ---------------   ---------------

Total liabilities and stockholders' (Deficit)                      $    1,702,000    $    1,702,000    $            -
                                                                   ===============   ===============   ===============


a   To properly record debt discount in accordance with SFAS 133
b   Fair valuation of embedded derivatives associated with Notes
c   Reclassification of fully expensed beneficial conversion feature in 2005
d   Effect of properly accounting for embedded derivatives

----------------------------------------------------------------------------------------------------------------------
                                                                                                                 F-62

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                     STATEMENTS OF OPERATIONS                       AS PREVIOUSLY
               TWELVE MONTHS ENDED DECEMBER 31, 2005                   REPORTED        AS RESTATED         CHANGE
                                                                   ---------------   ---------------   ---------------

Sales                                                              $    2,201,000    $    2,201,000    $            -
Cost of sales                                                           1,599,000         1,599,000                 -
                                                                   ---------------   ---------------   ---------------

Gross profit                                                              602,000           602,000                 -
                                                                   ---------------   ---------------   ---------------

Operating expenses:
      General and administrative                                       (1,298,000)       (1,298,000)                -
      Marketing and selling                                              (641,000)         (641,000)                -
      Research and development                                           (855,000)         (855,000)                -
      Gain on settlement of liabilities                                    12,000            12,000                 -
                                                                   ---------------   ---------------   ---------------

Total operating expenses                                               (2,782,000)       (2,782,000)                -
                                                                   ---------------   ---------------   ---------------

Operating loss                                                         (2,180,000)       (2,180,000)                -
                                                                   ---------------   ---------------   ---------------
Other income (expense):
      Other income                                                         16,000            16,000                 -
      Other expenses                                                   (2,870,000)                -         2,870,000  a
      Interest expense-Accetion of debt discount                                -          (801,000)         (801,000) b
      Gain and loss on derivative valuation                                     -         3,974,000         3,974,000  c
      Initial fair value of derivative and warrant                              -        (1,669,000)       (1,669,000) a
      Interest expense                                                    (15,000)         (385,000)         (370,000) d
      Impairment of intangible assets                                    (340,000)         (340,000)                -
                                                                   ---------------   ---------------   ---------------

Total other income (expense)                                           (3,209,000)          795,000         4,004,000
                                                                   ---------------   ---------------   ---------------

Income (loss) before provision for income taxes                        (5,389,000)       (1,385,000)        4,004,000
Provision for income taxes                                                      -                 -                 -
                                                                   ---------------   ---------------   ---------------

Net (loss)                                                         $   (5,389,000)   $   (1,385,000)   $    4,004,000
                                                                   ===============   ===============   ===============

Earnings (loss) per common share - basic                           $        (0.13)   $        (0.03)   $         0.11
                                                                   ---------------   ---------------   ---------------
Earnings (loss) per common share - diluted                         $        (0.13)   $        (0.03)   $         0.10
                                                                   ===============   ===============   ===============
Weighted average common shares - basic                                 42,033,000        42,033,000                 -
                                                                   ---------------   ---------------   ---------------
Weighted average common shares - diluted                               42,942,000        42,033,000                 -
                                                                   ===============   ===============   ===============

a    Reclassification and effect of properly accounting for embedded derivatives
b    Properly record accretion on Notes
c    Effect of valuation of embedded derivatives
d    Reclassification of interest

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-63

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                     STATEMENTS OF CASH FLOWS                       AS PREVIOUSLY
                        DECEMBER 31, 2005                              REPORTED        AS RESTATED         CHANGE
                                                                   ---------------   ---------------   ---------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                  $   (5,389,000)   $   (1,385,000)   $    4,004,000 a
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
          Depreciation and amortization                                    77,000            77,000                 -
          Issuance of common stock for satisfaction of penalty             53,000            53,000                 -
          Issuance of common stock for services                            23,000            23,000                 -
          Change in fair value of derivative liabilities                        -        (2,305,000)       (2,305,000) b
          Beneficial conversion interest                                2,009,000           801,000        (1,208,000) c
          Issuance of stock  options and warrants for services            491,000                 -          (491,000) d
          Provision for losses on receivables                              (1,000)           (1,000)                -
          Provision for losses on inventory                               (61,000)          (61,000)                -
          Impairment of Intangibles and investments                       340,000           340,000                 -
          (Gain) loss on settlement of liabilities                        (12,000)          (12,000)                -
(Increase) decrease in:
          Accounts Receivables                                            257,000           257,000                 -
          Inventories                                                     (72,000)          (72,000)                -
          Prepaid and other assets                                         56,000            56,000                 -
Increase (decrease) in:
          Accounts payable                                               (291,000)         (291,000)                -
          Accrued liabilities                                            (148,000)         (148,000)                -
                                                                   ---------------   ---------------   ---------------
NET CASH USED IN OPERATING ACTIVITIES                                  (2,668,000)       (2,668,000)                -
                                                                   ---------------   ---------------   ---------------


CASH FLOWS FROM INVESTING ACTIVITIES:
                                                                   ---------------   ---------------   ---------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                             -                 -                 -
                                                                   ---------------   ---------------   ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
          Principal payments on notes payable and long-term debt          (47,000)          (47,000)                -
          Proceeds from issuance of common stock                          150,000           150,000                 -
          Proceeds from issuance of convertible notes                   2,500,000         2,500,000                 -
                                                                   ---------------   ---------------   ---------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                     2,603,000         2,603,000                 -
                                                                   ---------------   ---------------   ---------------

Net change in cash                                                        (65,000)          (65,000)                -

Cash, beginning of year                                                   131,000           131,000                 -
                                                                   ---------------   ---------------   ---------------

CASH, END OF YEAR                                                  $       66,000    $       66,000    $            -
                                                                   ===============   ===============   ===============


a    Effect of properly accounting for embedded derivatives
b    Effect of valuation of embedded derivatives
c    To properly record accretion on Notes
d    Reclassification of improperly recorded warrant expense

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-64

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                          BALANCE SHEET                             AS PREVIOUSLY
                         MARCH 31, 2006                                REPORTED        AS RESTATED         CHANGE
                          (Unaudited)                              ---------------   ---------------   ---------------

ASSETS

Current assets:
   Cash                                                            $      400,000    $      400,000    $            -
   Receivables, net                                                       319,000           319,000                 -
   Inventories, net                                                       820,000           820,000                 -
Prepaid and other assets                                                   61,000            61,000                 -
                                                                   ---------------   ---------------   ---------------
Total current assets                                                    1,600,000         1,600,000                 -

Property and equipment, net                                                21,000            21,000                 -
Goodwill                                                                  339,000           339,000                 -
                                                                   ---------------   ---------------   ---------------

Total assets                                                       $    1,960,000    $    1,960,000    $            -
                                                                   ===============   ===============   ===============

LIABILITIES AND STOCKHOLDERS' (DEFICIT)

Current liabilities:
   Accounts payable                                                $      432,000    $      432,000    $            -
   Accrued liabilities                                                    732,000           732,000                 -
   Current portion of capital lease obligations                             5,000             5,000                 -
                                                                   ---------------   ---------------   ---------------
Total current liabilities                                               1,169,000         1,169,000                 -
                                                                   ---------------   ---------------   ---------------

   Convertible notes payable, net of discount $1,741,000                2,343,000           602,000        (1,741,000) a
   Derivative liabilities                                                       -           816,000           816,000  b
                                                                   ---------------   ---------------   ---------------
Total long-term liabilities                                             2,343,000         1,418,000          (925,000)
                                                                   ===============   ===============   ===============
Total liabilities                                                       3,512,000         2,587,000          (925,000)
Commitments and contingencies                                                   -                 -                 -

Stockholders' (Deficit):
Preferred stock authorized:
   5,000,000 shares, $0.001  par value                                      1,000             1,000                 -
Common stock authorized:
   250,000,000 shares, $.001 par value, 160,800,324 shares
   issued and outstanding at March 31, 2006                               161,000           161,000                 -
Additional paid-in capital                                             61,238,000        58,238,000        (3,000,000) c
Accumulated deficit                                                   (62,952,000)      (59,027,000)        3,925,000  d
                                                                   ---------------   ---------------   ---------------

Total stockholders' (Deficit)                                          (1,552,000)         (627,000)          925,000
                                                                   ---------------   ---------------   ---------------

Total liabilities and stockholders' (Deficit)                      $    1,960,000    $    1,960,000    $            -
                                                                   ===============   ===============   ===============

a   To properly record debt discount in accordance with SFAS 133
b   Fair valuation of embedded derivatives associated with Notes
c   Reclassification of fully expensed beneficial conversion feature in 2005
d   Effect of properly accounting for embedded derivatives

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-65

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                     STATEMENTS OF OPERATIONS                       AS PREVIOUSLY
                THREE MONTHS ENDED MARCH 31, 2006                      REPORTED        AS RESTATED         CHANGE
                         (Unaudited)                               ---------------   ---------------   ---------------

Sales                                                              $      463,000    $      463,000    $            -
Cost of sales                                                             222,000           222,000                 -
                                                                   ---------------   ---------------   ---------------

Gross profit                                                              241,000           241,000                 -
                                                                   ---------------   ---------------   ---------------

Operating expenses:
      General and administrative                                         (250,000)         (250,000)                -
      Marketing and selling                                               (78,000)          (78,000)                -
      Research and development                                           (124,000)         (124,000)                -
                                                                   ---------------   ---------------   ---------------

Total operating expenses                                                 (452,000)         (452,000)                -
                                                                   ---------------   ---------------   ---------------

Operating loss                                                           (211,000)         (211,000)                -
                                                                   ---------------   ---------------   ---------------
Other income (expense):
      Other income                                                          2,000             2,000                 -
      Other expenses                                                     (544,000)                -           544,000  a
      Interest expense-Accetion of debt discount                                -          (349,000)         (349,000) b
      Gain and loss on derivative valuation                                     -          (230,000)         (230,000) c
      Interest expense                                                     (3,000)          (47,000)          (44,000) d
                                                                   ---------------   ---------------   ---------------

Total other income (expense)                                             (545,000)         (624,000)          (79,000)
                                                                   ---------------   ---------------   ---------------

Income (loss) before provision for income taxes                          (756,000)         (835,000)          (79,000)
Provision for income taxes                                                      -                 -                 -
                                                                   ---------------   ---------------   ---------------

Net (loss)                                                         $     (756,000)   $     (835,000)   $      (79,000)
                                                                   ===============   ===============   ===============

Earnings (loss) per common share - basic                           $        (0.01)   $        (0.01)   $           (0)
                                                                   ---------------   ---------------   ---------------
Earnings (loss) per common share - diluted                         $        (0.01)   $        (0.01)   $           (0)
                                                                   ===============   ===============   ===============
Weighted average common shares - basic                                124,647,000       124,647,000                 -
                                                                   ---------------   ---------------   ---------------
Weighted average common shares - diluted                              124,647,000       124,647,000                 -
                                                                   ===============   ===============   ===============

a    Reclassification and effect of properly accounting for embedded derivatives
b    Properly record accretion on Notes
c    Effect of valuation of embedded derivatives
d    Reclassification of interest

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-66

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                     STATEMENTS OF CASH FLOWS                       AS PREVIOUSLY
                           MARCH 31, 2006                              REPORTED        AS RESTATED         CHANGE
                            (Unaudited)                            ---------------   ---------------   ---------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                  $     (756,000)   $     (835,000)   $      (79,000) a
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
          Depreciation and amortization                                    16,000            16,000                 -
          Stock option valuation                                           23,000            23,000                 -
          Change in fair value of derivative liabilities                        -           230,000           230,000  b
          Beneficial conversion interest                                  482,000           349,000          (133,000) c
          Issuance of stock  options and warrants for services             18,000                 -           (18,000) d
          Provision for losses on receivables                               1,000             1,000                 -
          Provision for losses on inventory                                25,000            25,000                 -
(Increase) decrease in:
          Accounts Receivables                                             80,000            80,000                 -
          Inventories                                                       8,000             8,000                 -
          Prepaid and other assets                                        (50,000)          (50,000)                -
Increase (decrease) in:
          Accounts payable                                                (27,000)          (27,000)                -
          Accrued liabilities                                              28,000            28,000                 -
                                                                   ---------------   ---------------   ---------------
NET CASH USED IN OPERATING ACTIVITIES                                    (152,000)         (152,000)                -

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

CASH FLOWS FROM INVESTING ACTIVITIES:
          Acquisition of property and equipment                            (5,000)           (5,000)                -
                                                                   ---------------   ---------------   ---------------
Net cash provided by (used in) investing activities                        (5,000)           (5,000)                -
                                                                   ---------------   ---------------   ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
          Principal payments on notes payable and long-term debt           (9,000)           (9,000)                -
          Proceeds from issuance of convertible notes                     500,000           500,000                 -
                                                                   ---------------   ---------------   ---------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                       491,000           491,000                 -
                                                                   ---------------   ---------------   ---------------

Net change in cash                                                        334,000           334,000                 -

Cash, beginning of period                                                  66,000            66,000                 -
                                                                   ---------------   ---------------   ---------------

Cash, end of period                                                $      400,000    $      400,000    $            -
                                                                   ===============   ===============   ===============

Supplemental disclosure of cash flow information:
          Cash paid for interest                                   $        1,000    $        1,000
                                                                   ---------------   ---------------
          Cash paid for income taxes                               $            -    $            -
                                                                   ---------------   ---------------

a   Effect of properly accounting for embedded derivatives
b   Effect of valuation of embedded derivatives
c   To properly record accretion on Notes
d   Reclassification of improperly recorded warrant expense

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-67

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                          BALANCE SHEET                             AS PREVIOUSLY
                          JUNE 30, 2006                                REPORTED        AS RESTATED         CHANGE
                           (Unaudited)                             ---------------   ---------------   ---------------

ASSETS

Current assets:
   Cash                                                            $      591,000    $      591,000    $            -
   Receivables, net                                                       486,000           486,000                 -
   Inventories, net                                                       786,000           786,000                 -
Prepaid and other assets                                                   49,000            49,000                 -
                                                                   ---------------   ---------------   ---------------
Total current assets                                                    1,912,000         1,912,000                 -

Property and equipment, net                                                24,000            24,000                 -
Goodwill                                                                  339,000           339,000                 -
                                                                   ---------------   ---------------   ---------------

Total assets                                                       $    2,275,000    $    2,275,000    $            -
                                                                   ===============   ===============   ===============

LIABILITIES AND STOCKHOLDERS' (DEFICIT)

Current liabilities:
   Accounts payable                                                $      390,000    $      390,000    $            -
   Accrued liabilities                                                    848,000           848,000                 -
   Current portion of capital lease obligations                             1,000             1,000                 -
                                                                   ---------------   ---------------   ---------------
Total current liabilities                                               1,239,000         1,239,000                 -
                                                                   ---------------   ---------------   ---------------

   Convertible notes payable, net of discount $1,579,000                2,670,000         1,091,000        (1,579,000) a
   Derivative liabilities                                                       -           440,000           440,000  b
                                                                   ---------------   ---------------   ---------------
Total long-term liabilities                                             2,670,000         1,531,000        (1,139,000)
                                                                   ---------------   ---------------   ---------------
Total liabilities                                                       3,909,000         2,770,000        (1,139,000)
Commitments and contingencies                                                   -                 -                 -

Stockholders' (Deficit):
Preferred stock authorized:
   5,000,000 shares, $0.001  par value                                      1,000             1,000                 -
Common stock authorized:
   250,000,000 shares, $.001 par value, 196,956,828 shares
   issued and outstanding at June 30, 2006                                197,000           197,000                 -
Additional paid-in capital                                             61,873,000        58,373,000        (3,500,000) c
Accumulated deficit                                                   (63,705,000)      (59,066,000)        4,639,000  d
                                                                   ---------------   ---------------   ---------------

Total stockholders' (Deficit)                                          (1,634,000)         (495,000)        1,139,000
                                                                   ---------------   ---------------   ---------------

Total liabilities and stockholders' (Deficit)                      $    2,275,000    $    2,275,000    $            -
                                                                   ===============   ===============   ===============

a   To properly record debt discount in accordance with SFAS 133
b   Fair valuation of embedded derivatives associated with Notes
c   Reclassification of fully expensed beneficial conversion feature in 2005 and 2006
d   Effect of properly accounting for embedded derivatives

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-68

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                     STATEMENTS OF OPERATIONS                       AS PREVIOUSLY
                 THREE MONTHS ENDED JUNE 30, 2006                      REPORTED        AS RESTATED         CHANGE
                        (Unaudited)                                ---------------   ---------------   ---------------

Sales                                                              $      718,000    $      718,000    $            -
Cost of sales                                                             416,000           416,000                 -
                                                                   ---------------   ---------------   ---------------

Gross profit                                                              302,000           302,000                 -
                                                                   ---------------   ---------------   ---------------

Operating expenses:
      General and administrative                                         (263,000)         (263,000)                -
      Marketing and selling                                              (108,000)         (108,000)                -
      Research and development                                           (132,000)         (132,000)                -
                                                                   ---------------   ---------------   ---------------

Total operating expenses                                                 (503,000)         (503,000)                -
                                                                   ---------------   ---------------   ---------------

Operating loss                                                           (201,000)         (201,000)                -
                                                                   ---------------   ---------------   ---------------
Other income (expense):
      Other expenses (Financing cost)                                    (553,000)                -           553,000 a
      Interest expense-Accetion of debt discount                                -          (312,000)         (312,000)b
      Gain and loss on derivative valuation                                     -           526,000           526,000 c
      Interest expense                                                     (1,000)          (54,000)          (53,000)d
                                                                   ---------------   ---------------   ---------------

Total other income (expense)                                             (554,000)          160,000           714,000
                                                                   ---------------   ---------------   ---------------

Income (loss) before provision for income taxes                          (755,000)          (41,000)          714,000
Provision for income taxes                                                      -                 -                 -
                                                                   ---------------   ---------------   ---------------

Net (loss)                                                         $     (755,000)   $      (41,000)   $      714,000
                                                                   ===============   ===============   ===============

Earnings (loss) per common share - basic                           $        (0.00)   $        (0.00)   $            0
                                                                   ---------------   ---------------   ---------------
Earnings (loss) per common share - diluted                         $        (0.00)   $        (0.00)   $            0
                                                                   ===============   ===============   ===============
Weighted average common shares - basic                                175,402,000       175,402,000                 -
                                                                   ---------------   ---------------   ---------------
Weighted average common shares - diluted                              175,402,000       175,402,000                 -
                                                                   ===============   ===============   ===============

a   Reclassification and effect of properly accounting for embedded derivatives
b   Properly record accretion on Notes
c   Effect of valuation of embedded derivatives
d   Reclassification of interest

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-69

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                     STATEMENTS OF OPERATIONS                       AS PREVIOUSLY
                  SIX MONTHS ENDED JUNE 30, 2006                       REPORTED        AS RESTATED         CHANGE
                                                                   ---------------   ---------------   ---------------

Sales                                                              $    1,182,000    $    1,182,000    $            -
Cost of sales                                                             638,000           638,000                 -
                                                                   ---------------   ---------------   ---------------

Gross profit                                                              544,000           544,000                 -
                                                                   ---------------   ---------------   ---------------

Operating expenses:
      General and administrative                                         (514,000)         (514,000)                -
      Marketing and selling                                              (185,000)         (185,000)                -
      Research and development                                           (257,000)         (257,000)                -
                                                                   ---------------   ---------------   ---------------

Total operating expenses                                                 (956,000)         (956,000)                -
                                                                   ---------------   ---------------   ---------------

Operating loss                                                           (412,000)         (412,000)                -
                                                                   ---------------   ---------------   ---------------
Other income (expense):
      Other income                                                          2,000             2,000                 -
      Other expenses (Financing cost)                                  (1,097,000)                -         1,097,000  a
      Interest expense-Accetion of debt discount                                -          (661,000)         (661,000) b
      Gain and loss on derivative valuation                                     -           296,000           296,000  c
      Interest expense                                                     (4,000)         (101,000)          (97,000) d
                                                                   ---------------   ---------------   ---------------

Total other income (expense)                                           (1,099,000)         (464,000)          635,000
                                                                   ---------------   ---------------   ---------------

Income (loss) before provision for income taxes                        (1,511,000)         (876,000)          635,000
Provision for income taxes                                                      -                 -                 -
                                                                   ---------------   ---------------   ---------------

Net (loss)                                                         $   (1,511,000)   $     (876,000)   $      635,000
                                                                   ===============   ===============   ===============

Earnings (loss) per common share - basic                           $        (0.01)   $        (0.01)   $            0
                                                                   ---------------   ---------------   ---------------
Earnings (loss) per common share - diluted                         $        (0.01)   $        (0.01)   $            0
                                                                   ===============   ===============   ===============
Weighted average common shares - basic                                150,164,000       150,164,000                 -
                                                                   ---------------   ---------------   ---------------
Weighted average common shares - diluted                              150,164,000       150,164,000                 -
                                                                   ===============   ===============   ===============

a   Reclassification and effect of properly accounting for embedded derivatives
b   Properly record accretion on Notes
c   Effect of valuation of embedded derivatives
d   Reclassification of interest

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-70

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                     STATEMENTS OF CASH FLOWS                       AS PREVIOUSLY
                           JUNE 30, 2006                               REPORTED        AS RESTATED         CHANGE
                            (Unaudited)                            ---------------   ---------------   ---------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                  $   (1,511,000)   $     (876,000)   $      635,000  a
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
          Depreciation and amortization                                    24,000            24,000                 -
          Stock option valuation                                           23,000            23,000                 -
          Change in fair value of derivative liabilities                        -          (296,000)         (296,000) b
          Beneficial conversion interest                                  964,000           661,000          (303,000) c
          Issuance of stock  options and warrants for services             36,000                 -           (36,000) d
          Provision for losses on receivables                               1,000             1,000                 -
(Increase) decrease in:
          Accounts Receivables                                            (86,000)          (86,000)                -
          Inventories                                                      67,000            67,000                 -
          Prepaid and other assets                                        (38,000)          (38,000)                -
Increase (decrease) in:
          Accounts payable                                                (69,000)          (69,000)                -
          Accrued liabilities                                             144,000           144,000                 -
                                                                   ---------------   ---------------   ---------------
NET CASH USED IN OPERATING ACTIVITIES                                    (445,000)         (445,000)                -

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

CASH FLOWS FROM INVESTING ACTIVITIES:
          Acquisition of property and equipment                           (16,000)          (16,000)                -
                                                                   ---------------   ---------------   ---------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                       (16,000)          (16,000)                -
                                                                   ---------------   ---------------   ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
          Principal payments on notes payable and long-term debt          (14,000)          (14,000)                -
          Proceeds from issuance of convertible notes                   1,000,000         1,000,000                 -
                                                                   ---------------   ---------------   ---------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                       986,000           986,000                 -
                                                                   ---------------   ---------------   ---------------

Net change in cash                                                        525,000           525,000                 -

Cash, beginning of period                                                  66,000            66,000                 -
                                                                   ---------------   ---------------   ---------------

CASH, END OF PERIOD                                                $      591,000    $      591,000    $            -
                                                                   ===============   ===============   ===============

Supplemental disclosure of cash flow information:
          Cash paid for interest                                   $        2,000    $        2,000
                                                                   ---------------   ---------------
          Cash paid for income taxes                               $            -    $            -
                                                                   ---------------   ---------------

a   Effect of properly accounting for embedded derivatives
b   Effect of valuation of embedded derivatives
c   To properly record accretion on Notes
d   Reclassification of improperly recorded warrant expense

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-71

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                          BALANCE SHEET                             AS PREVIOUSLY
                       SEPTEMBER 30, 2006                              REPORTED        AS RESTATED         CHANGE
                          (Unaudited)                              ---------------   ---------------   ---------------

ASSETS

Current assets:
   Cash                                                            $      267,000    $      267,000    $            -
   Receivables, net                                                       292,000           292,000                 -
   Inventories, net                                                       873,000           873,000                 -
Prepaid and other assets                                                   57,000            57,000                 -
                                                                   ---------------   ---------------   ---------------
Total current assets                                                    1,489,000         1,489,000                 -

Property and equipment, net                                                24,000            24,000                 -
Goodwill                                                                  339,000           339,000                 -
                                                                   ---------------   ---------------   ---------------

Total assets                                                       $    1,852,000    $    1,852,000    $            -
                                                                   ===============   ===============   ===============

LIABILITIES AND STOCKHOLDERS' (DEFICIT)

Current liabilities:
   Accounts payable                                                $      336,000    $      336,000    $            -
   Accrued liabilities                                                    793,000           793,000                 -
                                                                   ---------------   ---------------   ---------------
Total current liabilities                                               1,129,000         1,129,000                 -
                                                                   ---------------   ---------------   ---------------

   Convertible notes payable, net of discount $1,431,000                2,660,000         1,229,000        (1,431,000) a
   Derivative liabilities                                                       -           383,000           383,000  b
                                                                   ---------------   ---------------   ---------------
Total long-term liabilities                                             2,660,000         1,612,000        (1,048,000)
                                                                   ===============   ===============   ===============
Total liabilities                                                       3,789,000         2,741,000        (1,048,000)
Commitments and contingencies                                                   -                 -                 -

Stockholders' (Deficit):
Preferred stock authorized:
   5,000,000 shares, $0.001  par value                                      1,000             1,000                 -
Common stock authorized:
   800,000,000 shares, $.001 par value, 199,956,828 shares
   issued and outstanding at September 30, 2006                           200,000           200,000                 -
Additional paid-in capital                                             61,881,000        58,381,000        (3,500,000) c
Accumulated deficit                                                   (64,019,000)      (59,471,000)        4,548,000  d
                                                                   ---------------   ---------------   ---------------

Total stockholders' (Deficit)                                          (1,937,000)         (889,000)        1,048,000
                                                                   ---------------   ---------------   ---------------

Total liabilities and stockholders' (Deficit)                      $    1,852,000    $    1,852,000    $            -
                                                                   ===============   ===============   ===============

a   To properly record debt discount in accordance with SFAS 133
b   Fair valuation of embedded derivatives associated with Notes
c   Reclassification of fully expensed beneficial conversion feature in 2005 and 2006
d   Effect of properly accounting for embedded derivatives

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-72

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                     STATEMENTS OF OPERATIONS                       AS PREVIOUSLY
              THREE MONTHS ENDED SEPTEMBER 30, 2006                    REPORTED        AS RESTATED         CHANGE
                          (Unaudited)                             ---------------   ---------------   ---------------

Sales                                                              $      418,000    $      418,000    $            -
Cost of sales                                                             203,000           203,000                 -
                                                                   ---------------   ---------------   ---------------

Gross profit                                                              215,000           215,000                 -
                                                                   ---------------   ---------------   ---------------

Operating expenses:
      General and administrative                                         (258,000)         (258,000)                -
      Marketing and selling                                              (123,000)         (123,000)                -
      Research and development                                           (130,000)         (130,000)                -
                                                                   ---------------   ---------------   ---------------

Total operating expenses                                                 (511,000)         (511,000)                -
                                                                   ---------------   ---------------   ---------------

Operating loss                                                           (296,000)         (296,000)                -
                                                                   ---------------   ---------------   ---------------
Other income (expense):
      Other income (interest)                                               5,000             5,000                 -
      Other expenses (Financing cost)                                     (54,000)                -            54,000  a
      Interest expense-Accetion of debt discount                                -          (148,000)         (148,000) b
      Gain and loss on derivative valuation                                     -            58,000            58,000  c
      Interest expense                                                     (3,000)          (57,000)          (54,000) d
      Gain on sale of investment                                           33,000            33,000                 -
                                                                   ---------------   ---------------   ---------------

Total other income (expense)                                              (19,000)         (109,000)          (90,000)
                                                                   ---------------   ---------------   ---------------

Income (loss) before provision for income taxes                          (315,000)         (405,000)          (90,000)
Provision for income taxes                                                      -                 -                 -
                                                                   ---------------   ---------------   ---------------

Net (loss)                                                         $     (315,000)   $     (405,000)   $      (90,000)
                                                                   ===============   ===============   ===============

Earnings (loss) per common share - basic                           $        (0.00)   $        (0.00)   $           (0)
                                                                   ---------------   ---------------   ---------------
Earnings (loss) per common share - diluted                         $        (0.00)   $        (0.00)   $           (0)
                                                                   ===============   ===============   ===============
Weighted average common shares - basic                                198,546,000       198,546,000                 -
                                                                   ---------------   ---------------   ---------------
Weighted average common shares - diluted                              198,546,000       198,546,000                 -
                                                                   ===============   ===============   ===============

a   Reclassification and effect of properly accounting for embedded derivatives
b   Properly record accretion on Notes
c   Effect of valuation of embedded derivatives
d   Reclassification of interest

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-73

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                     STATEMENTS OF OPERATIONS                       AS PREVIOUSLY
               NINE MONTHS ENDED SEPTEMBER 30, 2006                    REPORTED        AS RESTATED         CHANGE
                          (Unaudited)                              ---------------   ---------------   ---------------

Sales                                                              $    1,600,000    $    1,600,000    $            -
Cost of sales                                                             841,000           841,000                 -
                                                                   ---------------   ---------------   ---------------

Gross profit                                                              759,000           759,000                 -
                                                                   ---------------   ---------------   ---------------

Operating expenses:
      General and administrative                                         (772,000)         (772,000)                -
      Marketing and selling                                              (307,000)         (307,000)                -
      Research and development                                           (388,000)         (388,000)                -
                                                                   ---------------   ---------------   ---------------

Total operating expenses                                               (1,467,000)       (1,467,000)                -
                                                                   ---------------   ---------------   ---------------

Operating loss                                                           (708,000)         (708,000)                -
                                                                   ---------------   ---------------   ---------------
Other income (expense):
      Other income (interest)                                               5,000             5,000                 -
      Other expenses (Financing cost)                                  (1,152,000)                -         1,152,000  a
      Interest expense-Accetion of debt discount                                -          (809,000)         (809,000) b
      Gain and loss on derivative valuation                                     -           353,000           353,000  c
      Interest expense                                                     (7,000)         (159,000)         (152,000) d
      Gain on sale of investment                                           36,000            36,000                 -
                                                                   ---------------   ---------------   ---------------

Total other income (expense)                                           (1,118,000)         (574,000)          544,000
                                                                   ---------------   ---------------   ---------------

Income (loss) before provision for income taxes                        (1,826,000)       (1,282,000)          544,000
Provision for income taxes                                                      -                 -                 -
                                                                   ---------------   ---------------   ---------------

Net (loss)                                                         $   (1,826,000)   $   (1,282,000)   $      544,000
                                                                   ===============   ===============   ===============

Earnings (loss) per common share - basic                           $        (0.01)   $        (0.01)   $            0
                                                                   ---------------   ---------------   ---------------
Earnings (loss) per common share - diluted                         $        (0.01)   $        (0.01)   $            0
                                                                   ===============   ===============   ===============
Weighted average common shares - basic                                166,459,000       166,459,000                 -
                                                                   ---------------   ---------------   ---------------
Weighted average common shares - diluted                              166,459,000       166,459,000                 -
                                                                   ===============   ===============   ===============

a   Reclassification and effect of properly accounting for embedded derivatives
b   Properly record accretion on Notes
c   Effect of valuation of embedded derivatives
d   Reclassification of interest

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-74

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                     STATEMENTS OF CASH FLOWS                       AS PREVIOUSLY
                         SEPTEMBER 30, 2006                            REPORTED        AS RESTATED         CHANGE
                            (Unaudited)                            ---------------   ---------------   ---------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                  $   (1,826,000)   $   (1,282,000)   $      544,000  a
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
          Depreciation and amortization                                    28,000            28,000                 -
          Stock option valuation                                           23,000            23,000                 -
          Change in fair value of derivative liabilities                        -          (353,000)         (353,000) b
          Beneficial conversion interest                                  964,000           809,000          (155,000) c
          Issuance of stock  options and warrants for services             36,000                 -           (36,000) d
          Provision for losses on receivables                              (5,000)           (5,000)                -
          Provision for losses on inventory                               (24,000)          (24,000)                -
(Increase) decrease in:
          Accounts Receivables                                            114,000           114,000                 -
          Inventories                                                       4,000             4,000                 -
          Prepaid and other assets                                        (46,000)          (46,000)                -
Increase (decrease) in:
          Accounts payable                                               (123,000)         (123,000)                -
          Accrued liabilities                                              89,000            89,000                 -
                                                                   ---------------   ---------------   ---------------
NET CASH USED IN OPERATING ACTIVITIES                                    (766,000)         (766,000)                -

                                                                   ---------------   ---------------   ---------------
Cash flows from investing activities:
          Acquisition of property and equipment                           (19,000)          (19,000)                -
                                                                   ---------------   ---------------   ---------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                       (19,000)          (19,000)                -
                                                                   ---------------   ---------------   ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
          Principal payments on notes payable and long-term debt          (14,000)          (14,000)                -
          Proceeds from issuance of convertible notes                   1,000,000         1,000,000                 -
                                                                   ---------------   ---------------   ---------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                       986,000           986,000                 -
                                                                   ---------------   ---------------   ---------------

Net change in cash                                                        201,000           201,000                 -

Cash, beginning of period                                                  66,000            66,000                 -
                                                                   ---------------   ---------------   ---------------

CASH, END OF PERIOD                                                $      267,000    $      267,000    $            -
                                                                   ===============   ===============   ===============

Supplemental disclosure of cash flow information:
          Cash paid for interest                                   $        4,000    $        4,000
                                                                   ---------------   ---------------
          Cash paid for income taxes                               $            -    $            -
                                                                   ---------------   ---------------

a   Effect of properly accounting for embedded derivatives
b   Effect of valuation of embedded derivatives
c   To properly record accretion on Notes
d   Reclassification of improperly recorded warrant expense

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-75

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                          BALANCE SHEET                             AS PREVIOUSLY
                        DECEMBER 31, 2006                              REPORTED        AS RESTATED         CHANGE
                                                                   ---------------   ---------------   ---------------

ASSETS

Current assets:
   Cash                                                            $      206,000    $      206,000    $            -
   Receivables, net                                                       410,000           410,000                 -
   Inventories, net                                                       945,000           945,000                 -
Prepaid and other assets                                                   11,000            11,000                 -
                                                                   ---------------   ---------------   ---------------
Total current assets                                                    1,572,000         1,572,000                 -

Property and equipment, net                                                21,000            21,000                 -
Goodwill                                                                  339,000           339,000                 -
                                                                   ---------------   ---------------   ---------------

Total assets                                                       $    1,932,000    $    1,932,000    $            -
                                                                   ===============   ===============   ===============

LIABILITIES AND STOCKHOLDERS' (DEFICIT)

Current liabilities:
   Accounts payable                                                $      400,000    $      400,000    $            -
   Accrued liabilities                                                    802,000           802,000                 -
                                                                   ---------------   ---------------   ---------------
Total current liabilities                                               1,202,000         1,202,000                 -
                                                                   ---------------   ---------------   ---------------

   Convertible notes payable, net of discount $1,288,000                2,655,000         1,367,000        (1,288,000) a
   Derivative liabilities                                                       -           166,000           166,000  b
                                                                   ---------------   ---------------   ---------------
Total long-term liabilities                                             2,655,000         1,533,000        (1,122,000)
                                                                   ===============   ===============   ===============
Total liabilities                                                       3,857,000         2,735,000        (1,122,000)
Commitments and contingencies                                                   -                 -                 -

Stockholders' (Deficit):
Preferred stock, $.001 par value, 5,000,000 shares authorized,
   612,697 shares issued and outstanding (aggregate
   liquidation preference of $456,000)                                      1,000             1,000                 -
Common stock, $.001 par value, 250,000,000 shares authorized,
   201,956,394 shares issued and outstanding                              202,000           202,000                 -
Additional paid-in capital                                             61,884,000        58,384,000        (3,500,000) c
Accumulated deficit                                                   (64,012,000)      (59,390,000)        4,622,000  d
                                                                   ---------------   ---------------   ---------------

Total stockholders' (Deficit)                                          (1,925,000)         (803,000)        1,122,000
                                                                   ---------------   ---------------   ---------------

Total liabilities and stockholders' (Deficit)                      $    1,932,000    $    1,932,000    $            -
                                                                   ===============   ===============   ===============

a   Reclassification and effect of properly accounting for embedded derivatives
b   Properly record accretion on Notes
c   Effect of valuation of embedded derivatives
d   Reclassification of interest

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-76

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                     STATEMENTS OF OPERATIONS                       AS PREVIOUSLY
              TWELVE MONTHS ENDED DECEMBER 31, 2006                    REPORTED        AS RESTATED         CHANGE
                                                                   ---------------   ---------------   ---------------

Sales                                                              $    2,195,000    $    2,195,000    $            -
Cost of sales                                                           1,277,000         1,277,000                 -
                                                                   ---------------   ---------------   ---------------

Gross profit                                                              918,000           918,000                 -
                                                                   ---------------   ---------------   ---------------

Operating expenses:
      General and administrative                                         (792,000)         (792,000)                -
      Professional fees-related party                                    (187,000)         (187,000)
      Marketing and selling                                              (434,000)         (434,000)                -
      Research and development                                           (250,000)         (250,000)                -
      Gain on settlement of liabilities                                    34,000            34,000                 -
                                                                   ---------------   ---------------   ---------------

Total operating expenses                                               (1,629,000)       (1,629,000)                -
                                                                   ---------------   ---------------   ---------------

Operating loss                                                           (711,000)         (711,000)                -
                                                                   ---------------   ---------------   ---------------
Other income (expense):
      Other income                                                        109,000           109,000                 -
      Other expenses                                                   (1,207,000)                -         1,207,000  a
      Interest expense-Accetion of debt discount                                -          (952,000)         (952,000) b
      Gain and loss on derivative valuation                                     -           570,000           570,000  c
      Interest expense                                                     (7,000)         (214,000)         (207,000) d
                                                                   ---------------   ---------------   ---------------

Total other income (expense)                                           (1,105,000)         (487,000)          618,000
                                                                   ---------------   ---------------   ---------------

Income (loss) before provision for income taxes                        (1,816,000)       (1,198,000)          618,000
Provision for income taxes                                                      -                 -                 -
                                                                   ---------------   ---------------   ---------------

Net (loss)                                                         $   (1,816,000)   $   (1,198,000)   $      618,000
                                                                   ===============   ===============   ===============

Earnings (loss) per common share - basic                           $        (0.01)   $        (0.01)   $            0
                                                                   ---------------   ---------------   ---------------
Earnings (loss) per common share - diluted                         $        (0.01)   $        (0.01)   $            0
                                                                   ===============   ===============   ===============
Weighted average common shares - basic                                175,034,000        175,034,000                -
                                                                   ---------------   ---------------   ---------------
Weighted average common shares - diluted                              175,034,000        175,034,000                -
                                                                   ===============   ===============   ===============

a   Reclassification and effect of properly accounting for embedded derivatives
b   Properly record accretion on Notes
c   Effect of valuation of embedded derivatives
d   Reclassification of interest

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-77

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                     STATEMENTS OF CASH FLOWS                       AS PREVIOUSLY
                         DECEMBER 31, 2006                             REPORTED        AS RESTATED         CHANGE
                                                                   ---------------   ---------------   ---------------

Cash flows from operating activities:
Net income (loss)                                                  $   (1,816,000)   $   (1,198,000)   $      618,000  a
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
          Depreciation and amortization                                    31,000            31,000                 -
          Stock option valuation                                           23,000            23,000                 -
          Change in fair value of derivative liabilities                        -          (570,000)         (570,000) b
          Beneficial conversion interest                                  964,000           952,000           (12,000) c
          Issuance of stock  options and warrants for services             36,000                 -           (36,000) d
          Provision for losses on receivables                             (28,000)          (28,000)                -
          Provision for losses on inventory                               (37,000)          (37,000)                -
          (Gain) loss on settlement of liabilities                        (34,000)          (34,000)                -
(Increase) decrease in:
          Accounts Receivables                                             19,000            19,000                 -
          Inventories                                                     (55,000)          (55,000)                -
Increase (decrease) in:
          Accounts payable                                                (30,000)          (30,000)                -
          Accrued liabilities                                              99,000            99,000                 -
                                                                   ---------------   ---------------   ---------------
NET CASH USED IN OPERATING ACTIVITIES                                    (828,000)         (828,000)                -

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

CASH FLOWS FROM INVESTING ACTIVITIES:
          Acquisition of property and equipment                           (20,000)          (20,000)                -
                                                                   ---------------   ---------------   ---------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                       (20,000)          (20,000)                -
                                                                   ---------------   ---------------   ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
          Principal payments on notes payable and long-term debt          (12,000)          (12,000)                -
          Proceeds from issuance of convertible notes                   1,000,000         1,000,000                 -
                                                                   ---------------   ---------------   ---------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                       988,000           988,000                 -
                                                                   ---------------   ---------------   ---------------

Net change in cash                                                        140,000           140,000                 -

Cash, beginning of year                                                    66,000            66,000                 -
                                                                   ---------------   ---------------   ---------------

CASH, END OF YEAR                                                  $      206,000    $      206,000    $            -
                                                                   ===============   ===============   ===============

a   Effect of properly accounting for embedded derivatives
b   Effect of valuation of embedded derivatives
c   To properly record accretion on Notes
d   Reclassification of improperly recorded warrant expense

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-78

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                          BALANCE SHEET                             AS PREVIOUSLY
                          MARCH 31, 2007                               REPORTED        AS RESTATED         CHANGE
                           (Unaudited)                             ---------------   ---------------   ---------------

ASSETS

Current assets:
   Cash                                                            $       66,000    $       66,000    $            -
   Receivables, net                                                       471,000           471,000                 -
   Inventories, net                                                       841,000           841,000                 -
Prepaid and other assets                                                   38,000            38,000                 -
                                                                   ---------------   ---------------   ---------------
Total current assets                                                    1,416,000         1,416,000                 -

Property and equipment, net                                                19,000            19,000                 -
Goodwill                                                                  339,000           339,000                 -
                                                                   ---------------   ---------------   ---------------

Total assets                                                       $    1,774,000    $    1,774,000    $            -
                                                                   ===============   ===============   ===============

LIABILITIES AND STOCKHOLDERS' (DEFICIT)

Current liabilities:
   Accounts payable                                                $      411,000    $      411,000    $            -
   Accrued liabilities                                                    882,000           882,000                 -
                                                                   ---------------   ---------------   ---------------
Total current liabilities                                               1,293,000         1,293,000                 -
                                                                   ---------------   ---------------   ---------------

   Convertible notes payable, net of discount $1,148,000                2,653,000         1,505,000        (1,148,000) a
   Derivative liabilities                                                       -         1,181,000         1,181,000  b
                                                                   ---------------   ---------------   ---------------
Total long-term liabilities                                             2,653,000         2,686,000            33,000
                                                                   ===============   ===============   ===============
Total liabilities                                                       3,946,000         3,979,000            33,000
Commitments and contingencies                                                   -                 -                 -

Stockholders' (Deficit):
Preferred stock authorized:
   5,000,000 shares, $0.001  par value                                      1,000             1,000                 -
Common stock authorized:
   800,000,000 shares, $.001 par value, 203,986,625 shares
   issued and outstanding at March 31, 2007                               204,000           204,000                 -
Additional paid-in capital                                             61,883,000        58,383,000        (3,500,000) c
Accumulated deficit                                                   (64,260,000)      (60,793,000)        3,467,000  d
                                                                   ---------------   ---------------   ---------------

Total stockholders' (Deficit)                                          (2,172,000)       (2,205,000)          (33,000)
                                                                   ---------------   ---------------   ---------------

Total liabilities and stockholders' (Deficit)                      $    1,774,000    $    1,774,000    $            -
                                                                   ===============   ===============   ===============

a    To properly record debt discount in accordance with SFAS 133
b    Fair valuation of embedded derivatives associated with Notes
c    Reclassification of fully expensed beneficial conversion feature in 2005 and 2006
d    Effect of properly accounting for embedded derivatives

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-79

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                    STATEMENTS OF OPERATIONS                        AS PREVIOUSLY
                THREE MONTHS ENDED MARCH 31, 2007                      REPORTED        AS RESTATED         CHANGE
                          (Unaudited)                              ---------------   ---------------   ---------------

Sales                                                              $      397,000    $      397,000    $            -
Cost of sales                                                             225,000           225,000                 -
                                                                   ---------------   ---------------   ---------------

Gross profit                                                              172,000           172,000                 -
                                                                   ---------------   ---------------   ---------------

Operating expenses:
      General and administrative                                         (189,000)         (189,000)                -
      Marketing and selling                                              (115,000)         (115,000)                -
      Research and development                                            (64,000)          (64,000)                -
                                                                   ---------------   ---------------   ---------------

Total operating expenses                                                 (368,000)         (368,000)                -
                                                                   ---------------   ---------------   ---------------

Operating loss                                                           (196,000)         (196,000)                -
                                                                   ---------------   ---------------   ---------------
Other income (expense):
      Other income                                                          1,000             1,000                 -
      Other expenses                                                      (52,000)                -            52,000  a
      Interest expense-Accetion of debt discount                                -          (139,000)         (139,000) b
      Gain and loss on derivative valuation                                     -         1,014,000         1,014,000  c
      Interest expense                                                     (1,000)          (53,000)          (52,000) d
                                                                   ---------------   ---------------   ---------------

Total other income (expense)                                              (52,000)       (1,205,000)       (1,153,000)
                                                                   ---------------   ---------------   ---------------

Income (loss) before provision for income taxes                          (248,000)       (1,401,000)       (1,153,000)
Provision for income taxes                                                      -                 -                 -
                                                                   ---------------   ---------------   ---------------

Net (loss)                                                         $     (248,000)   $   (1,401,000)   $   (1,153,000)
                                                                   ===============   ===============   ===============

Earnings (loss) per common share - basic                           $        (0.00)   $         0.00    $            0
                                                                   ---------------   ---------------   ---------------
Earnings (loss) per common share - diluted                         $        (0.00)   $         0.00    $            0
                                                                   ===============   ===============   ===============
Weighted average common shares - basic                                203,306,000       203,306,000                 -
                                                                   ---------------   ---------------   ---------------
Weighted average common shares - diluted                              203,306,000       203,306,000                 -
                                                                   ===============   ===============   ===============

a   Reclassification and effect of properly accounting for embedded derivatives
b   Properly record accretion on Notes
c   Effect of valuation of embedded derivatives
d   Reclassification of interest

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-80

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                    STATEMENTS OF CASH FLOWS                        AS PREVIOUSLY
                        MARCH 31, 2007                                 REPORTED        AS RESTATED         CHANGE
                         (Unaudited)                               ---------------   ---------------   ---------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                  $     (248,000)   $   (1,401,000)   $   (1,153,000) a
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
          Depreciation and amortization                                     2,000             2,000                 -
          Change in fair value of derivative liabilities                        -         1,014,000         1,014,000 b
          Beneficial conversion interest                                        -           139,000           139,000 c
          Provision for losses on receivables                             (10,000)          (10,000)                -
(Increase) decrease in:
          Accounts Receivables                                            (51,000)          (51,000)                -
          Inventories                                                     104,000           104,000                 -
          Prepaid and other assets                                        (27,000)          (27,000)                -
Increase (decrease) in:
          Accounts payable                                                 11,000            11,000                 -
          Accrued liabilities                                              79,000            79,000                 -
                                                                   ---------------   ---------------   ---------------
NET CASH USED IN OPERATING ACTIVITIES                                    (140,000)         (140,000)                -

                                                                   ---------------   ---------------   ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:

                                                                   ---------------   ---------------   ---------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                             -                 -                 -
                                                                   ---------------   ---------------   ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
                                                                   ---------------   ---------------   ---------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                             -                 -                 -
                                                                   ---------------   ---------------   ---------------

Net change in cash                                                       (140,000)         (140,000)                -

Cash, beginning of period                                                 206,000           206,000                 -
                                                                   ---------------   ---------------   ---------------

CASH, END OF PERIOD                                                $       66,000    $       66,000    $            -
                                                                   ===============   ===============   ===============

Supplemental disclosure of cash flow information:
          Cash paid for interest                                   $        1,000    $        1,000
                                                                   ---------------   ---------------
          Cash paid for income taxes                               $            -    $            -
                                                                   ---------------   ---------------

a   Effect of properly accounting for embedded derivatives
b   Effect of valuation of embedded derivatives
c   To properly record accretion on Notes

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-81

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                        BALANCE SHEET                               AS PREVIOUSLY
                        JUNE 30, 2007                                  REPORTED        AS RESTATED         CHANGE
                         (Unaudited)                               ---------------   ---------------   ---------------

ASSETS

Current assets:
   Cash                                                            $      486,000    $      486,000    $            -
   Receivables, net                                                       388,000           388,000                 -
   Inventories, net                                                     1,002,000         1,002,000                 -
Prepaid and other assets                                                   90,000            90,000                 -
                                                                   ---------------   ---------------   ---------------
Total current assets                                                    1,966,000         1,966,000                 -

Property and equipment, net                                                18,000            18,000                 -
Goodwill                                                                  339,000           339,000                 -
                                                                   ---------------   ---------------   ---------------

Total assets                                                       $    2,323,000    $    2,323,000    $            -
                                                                   ===============   ===============   ===============

LIABILITIES AND STOCKHOLDERS' (DEFICIT)

Current liabilities:
   Accounts payable                                                $      332,000    $      332,000    $            -
   Accrued liabilities                                                  1,011,000         1,011,000                 -
                                                                   ---------------   ---------------   ---------------
Total current liabilities                                               1,343,000         1,343,000                 -
                                                                   ---------------   ---------------   ---------------

   Convertible notes payable, net of discount $1,355,000                3,589,000         2,234,000        (1,355,000) a
   Derivative liabilities                                                       -           832,000           832,000  b
                                                                   ---------------   ---------------   ---------------
Total long-term liabilities                                             3,589,000         3,066,000          (523,000)
                                                                   ===============   ===============   ===============
Total liabilities                                                       4,932,000         4,409,000          (523,000)
Commitments and contingencies                                                   -                 -                 -

Stockholders' (Deficit):
Preferred stock authorized:
   5,000,000 shares, $0.001  par value                                      1,000             1,000                 -
Common stock authorized:
   800,000,000 shares, $.001 par value, 216,989,225 shares
   issued and outstanding at June 30, 2007                                217,000           217,000                 -
Additional paid-in capital                                             62,935,000        58,435,000        (4,500,000) c
Accumulated deficit                                                   (65,762,000)      (60,739,000)        5,023,000  d
                                                                   ---------------   ---------------   ---------------

Total stockholders' (Deficit)                                          (2,609,000)       (2,086,000)          523,000
                                                                   ---------------   ---------------   ---------------

Total liabilities and stockholders' (Deficit)                      $    2,323,000    $    2,323,000    $            -
                                                                   ===============   ===============   ===============

a   To properly record debt discount in accordance with SFAS 133
b   Fair valuation of embedded derivatives associated with Notes
c   Reclassification of fully expensed beneficial conversion feature in 2005, 2006 and 2007
d   Effect of properly accounting for embedded derivatives

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-82

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                    STATEMENTS OF OPERATIONS                       AS PREVIOUSLY
                THREE MONTHS ENDED JUNE 30, 2007                     REPORTED        AS RESTATED         CHANGE
                         (Unaudited)                              ---------------   ---------------   ---------------

Sales                                                              $      260,000    $      260,000    $            -
Cost of sales                                                             149,000           149,000                 -
                                                                   ---------------   ---------------   ---------------

Gross profit                                                              111,000           111,000                 -
                                                                   ---------------   ---------------   ---------------

Operating expenses:
      General and administrative                                         (309,000)         (309,000)                -
      Marketing and selling                                              (159,000)         (159,000)                -
      Research and development                                           (126,000)         (126,000)                -
                                                                   ---------------   ---------------   ---------------

Total operating expenses                                                 (594,000)         (594,000)                -
                                                                   ---------------   ---------------   ---------------

Operating loss                                                           (483,000)         (483,000)                -
                                                                   ---------------   ---------------   ---------------
Other income (expense):
      Other income (interest)                                               3,000             3,000                 -
      Other expenses                                                   (1,062,000)                -         1,062,000  a
      Interest expense-Accetion of debt discount                                -          (197,000)         (197,000) b
      Gain and loss on derivative valuation                                     -           752,000           752,000  c
      Interest expense                                                     (1,000)          (63,000)          (62,000) d
      Gain on sale of investment                                           41,000            41,000                 -
                                                                   ---------------   ---------------   ---------------

Total other income (expense)                                           (1,019,000)          536,000         1,555,000
                                                                   ---------------   ---------------   ---------------

Income (loss) before provision for income taxes                        (1,502,000)           53,000         1,555,000
Provision for income taxes                                                      -                 -                 -
                                                                   ---------------   ---------------   ---------------

Net (loss)                                                         $   (1,502,000)   $       53,000    $    1,555,000
                                                                   ===============   ===============   ===============

Earnings (loss) per common share - basic                           $        (0.01)   $         0.00    $            0
                                                                   ---------------   ---------------   ---------------
Earnings (loss) per common share - diluted                         $        (0.01)   $         0.00    $            0
                                                                   ===============   ===============   ===============
Weighted average common shares - basic                                206,228,000       206,228,000                 -
                                                                   ---------------   ---------------   ---------------
Weighted average common shares - diluted                              206,228,000       206,228,000                 -
                                                                   ===============   ===============   ===============

a   Reclassification and effect of properly accounting for embedded derivatives
b   Properly record accretion on Notes
c   Effect of valuation of embedded derivatives
d   Reclassification of interest

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-83

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                    STATEMENTS OF OPERATIONS                        AS PREVIOUSLY
                  SIX MONTHS ENDED JUNE 30, 2007                      REPORTED        AS RESTATED         CHANGE
                         (Unaudited)                               ---------------   ---------------   ---------------

Sales                                                              $      656,000    $      656,000    $            -
Cost of sales                                                             375,000           375,000                 -
                                                                   ---------------   ---------------   ---------------

Gross profit                                                              281,000           281,000                 -
                                                                   ---------------   ---------------   ---------------

Operating expenses:
      General and administrative                                         (496,000)         (496,000)                -
      Marketing and selling                                              (273,000)         (273,000)                -
      Research and development                                           (190,000)         (190,000)                -
                                                                   ---------------   ---------------   ---------------

Total operating expenses                                                 (959,000)         (959,000)                -
                                                                   ---------------   ---------------   ---------------

Operating loss                                                           (678,000)         (678,000)                -
                                                                   ---------------   ---------------   ---------------
Other income (expense):
      Other income (interest)                                               5,000             5,000                 -
      Other expenses                                                   (1,115,000)                -         1,115,000  a
      Interest expense-Accetion of debt discount                                -          (337,000)         (337,000) b
      Gain and loss on derivative valuation                                     -          (262,000)         (262,000) c
      Interest expense                                                     (1,000)         (116,000)         (115,000) d
      Gain on sale of investment                                           41,000            41,000                 -
                                                                   ---------------   ---------------   ---------------

Total other income (expense)                                           (1,070,000)         (669,000)          401,000
                                                                   ---------------   ---------------   ---------------

Income (loss) before provision for income taxes                        (1,748,000)       (1,347,000)          401,000
Provision for income taxes                                                      -                 -                 -
                                                                   ---------------   ---------------   ---------------

Net (loss)                                                         $   (1,748,000)   $   (1,347,000)   $      401,000
                                                                   ===============   ===============   ===============

Earnings (loss) per common share - basic                           $        (0.01)   $        (0.01)   $            0
                                                                   ---------------   ---------------   ---------------
Earnings (loss) per common share - diluted                         $        (0.01)   $        (0.01)   $            0
                                                                   ===============   ===============   ===============
Weighted average common shares - basic                                204,775,000       204,775,000                 -
                                                                   ---------------   ---------------   ---------------
Weighted average common shares - diluted                              204,775,000       204,775,000                 -
                                                                   ===============   ===============   ===============

a   Reclassification and effect of properly accounting for embedded derivatives
b   Properly record accretion on Notes
c   Effect of valuation of embedded derivatives
d   Reclassification of interest

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-84

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                   STATEMENTS OF CASH FLOWS                         AS PREVIOUSLY
                        JUNE 30, 2007                                  REPORTED        AS RESTATED         CHANGE
                         (Unaudited)                               ---------------   ---------------   ---------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                  $   (1,748,000)   $   (1,346,000)   $      402,000  a
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
          Depreciation and amortization                                     3,000             3,000                 -
          Change in fair value of derivative liabilities                        -           262,000           262,000  b
          Beneficial conversion interest                                  939,000           336,000          (603,000) c
          Issuance of stock  options and warrants for services             61,000                 -           (61,000) d
          Provision for losses on inventory                               (22,000)          (22,000)                -
(Increase) decrease in:
          Accounts Receivables                                             44,000            44,000                 -
          Inventories                                                     (57,000)          (57,000)                -
          Prepaid and other assets                                        (79,000)          (79,000)                -
Increase (decrease) in:
          Accounts payable                                                (69,000)          (69,000)                -
          Accrued liabilities                                             208,000           208,000                 -
                                                                   ---------------   ---------------   ---------------
NET CASH USED IN OPERATING ACTIVITIES                                    (720,000)         (720,000)                -

                                                                   ---------------   ---------------   ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
                                                                   ---------------   ---------------   ---------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                             -                 -                 -
                                                                   ---------------   ---------------   ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
          Proceeds from issuance of convertible notes                   1,000,000         1,000,000                 -
                                                                   ---------------   ---------------   ---------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                     1,000,000         1,000,000                 -
                                                                   ---------------   ---------------   ---------------

Net change in cash                                                        280,000           280,000                 -

Cash, beginning of period                                                 206,000           206,000                 -
                                                                   ---------------   ---------------   ---------------

CASH, END OF PERIOD                                                $      486,000    $      486,000    $            -
                                                                   ===============   ===============   ===============
Supplemental disclosure of cash flow information:
          Cash paid for interest                                   $        1,000    $        1,000
                                                                   ---------------   ---------------
          Cash paid for income taxes                               $            -    $            -
                                                                   ---------------   ---------------

a   Effect of properly accounting for embedded derivatives
b   Effect of valuation of embedded derivatives
c   To properly record accretion on Notes
d   Reclassification of improperly recorded warrant expense

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-85

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                         BALANCE SHEET                              AS PREVIOUSLY
                      SEPTEMBER 30, 2007                               REPORTED        AS RESTATED         CHANGE
                          (Unaudited)                             ---------------   ---------------   ---------------

ASSETS

Current assets:
   Cash                                                            $      129,000    $      129,000    $            -
   Receivables, net                                                       515,000           515,000                 -
   Inventories, net                                                     1,095,000         1,095,000                 -
Prepaid and other assets                                                   73,000            73,000                 -
                                                                   ---------------   ---------------   ---------------
Total current assets                                                    1,812,000         1,812,000                 -

Property and equipment, net                                                17,000            17,000                 -
Goodwill                                                                  339,000           339,000                 -
                                                                   ---------------   ---------------   ---------------

Total assets                                                       $    2,168,000    $    2,168,000    $            -
                                                                   ===============   ===============   ===============

LIABILITIES AND STOCKHOLDERS' (DEFICIT)

Current liabilities:
   Accounts payable                                                $      347,000    $      347,000    $            -
   Accrued liabilities                                                  1,075,000         1,075,000                 -
                                                                   ---------------   ---------------   ---------------
Total current liabilities                                               1,422,000         1,422,000                 -
                                                                   ---------------   ---------------   ---------------

   Convertible notes payable, net of discount $1,099,000                3,455,000         2,355,000        (1,100,000) a
   Derivative liabilities                                                       -           228,000           228,000  b
                                                                   ---------------   ---------------   ---------------
Total long-term liabilities                                             3,455,000         2,583,000          (872,000)
                                                                   ===============   ===============   ===============
Total liabilities                                                       4,877,000         4,005,000          (872,000)
Commitments and contingencies                                                   -                 -                 -

Stockholders' (Deficit):
Preferred stock authorized:
   5,000,000 shares, $0.001  par value                                      1,000             1,000                 -
Common stock authorized:
   800,000,000 shares, $.001 par value, 281,085,819 shares
   issued and outstanding at September 30, 2007                           281,000           281,000                 -
Additional paid-in capital                                             63,005,000        58,505,000        (4,500,000) c
Accumulated deficit                                                   (65,996,000)      (60,624,000)        5,372,000  d
                                                                   ---------------   ---------------   ---------------

Total stockholders' (Deficit)                                          (2,709,000)       (1,837,000)          872,000
                                                                   ---------------   ---------------   ---------------

Total liabilities and stockholders' (Deficit)                      $    2,168,000    $    2,168,000    $            -
                                                                   ===============   ===============   ===============

a   To properly record debt discount in accordance with SFAS 133
b   Fair valuation of embedded derivatives associated with Notes
c   Reclassification of fully expensed beneficial conversion feature in 2005, 2006 and 2007
d   Effect of properly accounting for embedded derivatives

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-86

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                    STATEMENTS OF OPERATIONS                       AS PREVIOUSLY
              THREE MONTHS ENDED SEPTEMBER 30, 2007                   REPORTED        AS RESTATED         CHANGE
                          (Unaudited)                              ---------------   ---------------   ---------------

Sales                                                              $      534,000    $      534,000    $            -
Cost of sales                                                             270,000           270,000                 -
                                                                   ---------------   ---------------   ---------------

Gross profit                                                              264,000           264,000                 -
                                                                   ---------------   ---------------   ---------------

Operating expenses:
      General and administrative                                         (191,000)         (191,000)                -
      Marketing and selling                                              (168,000)         (168,000)                -
      Research and development                                            (71,000)          (71,000)                -
                                                                   ---------------   ---------------   ---------------

Total operating expenses                                                 (430,000)         (430,000)                -
                                                                   ---------------   ---------------   ---------------

Operating loss                                                           (166,000)         (166,000)                -
                                                                   ---------------   ---------------   ---------------
Other income (expense):
      Other income (interest)                                               3,000             3,000                 -
      Other expenses (financing cost)                                     (70,000)                -            70,000  a
      Interest expense-Accetion of debt discount                                -          (255,000)         (255,000) b
      Gain and loss on derivative valuation                                     -           605,000           605,000  c
      Interest expense                                                     (1,000)          (71,000)          (70,000) d
                                                                   ---------------   ---------------   ---------------

Total other income (expense)                                              (68,000)          282,000           350,000
                                                                   ---------------   ---------------   ---------------

Income (loss) before provision for income taxes                          (234,000)          116,000           350,000
Provision for income taxes                                                      -                 -                 -
                                                                   ---------------   ---------------   ---------------

Net (loss)                                                         $     (234,000)   $      116,000    $      350,000
                                                                   ===============   ===============   ===============

Earnings (loss) per common share - basic                           $        (0.00)   $         0.00    $            0
                                                                   ---------------   ---------------   ---------------
Earnings (loss) per common share - diluted                         $        (0.00)   $         0.00    $            0
                                                                   ===============   ===============   ===============
Weighted average common shares - basic                                247,755,000       247,755,000                 -
                                                                   ---------------   ---------------   ---------------
Weighted average common shares - diluted                              247,755,000       247,755,000                 -
                                                                   ===============   ===============   ===============

a    Reclassification and effect of properly accounting for embedded derivatives
b    Properly record accretion on Notes
c    Effect of valuation of embedded derivatives
d    Reclassification of interest

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-87

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                    STATEMENTS OF OPERATIONS                       AS PREVIOUSLY
              NINE MONTHS ENDED SEPTEMBER 30, 2007                    REPORTED        AS RESTATED         CHANGE
                         (Unaudited)                              ---------------   ---------------   ---------------

Sales                                                              $    1,190,000    $    1,190,000   $             -
Cost of sales                                                             645,000           645,000                 -
                                                                   ---------------   ---------------   ---------------

Gross profit                                                              545,000           545,000                 -
                                                                   ---------------   ---------------   ---------------

Operating expenses:
      General and administrative                                         (688,000)         (688,000)                -
      Marketing and selling                                              (442,000)         (442,000)                -
      Research and development                                           (261,000)         (261,000)                -
                                                                   ---------------   ---------------   ---------------

Total operating expenses                                               (1,391,000)       (1,391,000)                -
                                                                   ---------------   ---------------   ---------------

Operating loss                                                           (846,000)         (846,000)                -
                                                                   ---------------   ---------------   ---------------
Other income (expense):
      Other income (interest)                                               8,000             8,000                 -
      Other expenses (financing cost)                                  (1,185,000)                -         1,185,000  a
      Interest expense-Accetion of debt discount                                -          (592,000)         (592,000) b
      Gain and loss on derivative valuation                                     -           342,000           342,000  c
      Interest expense                                                     (2,000)         (187,000)         (185,000) d
      Gain on sale of investment                                           41,000            41,000                 -
                                                                   ---------------   ---------------   ---------------

Total other income (expense)                                           (1,138,000)         (388,000)          750,000
                                                                   ---------------   ---------------   ---------------

Income (loss) before provision for income taxes                        (1,984,000)       (1,234,000)          750,000
Provision for income taxes                                                      -                 -                 -
                                                                   ---------------   ---------------   ---------------

Net (loss)                                                         $   (1,984,000)   $   (1,234,000)   $      750,000
                                                                   ===============   ===============   ===============

Earnings (loss) per common share - basic                           $        (0.01)   $        (0.01)   $            0
                                                                   ---------------   ---------------   ---------------
Earnings (loss) per common share - diluted                         $        (0.01)   $        (0.01)   $            0
                                                                   ===============   ===============   ===============
Weighted average common shares - basic                                219,259,000        219,259,000                -
                                                                   ---------------   ---------------   ---------------
Weighted average common shares - diluted                              219,259,000        219,259,000                -
                                                                   ===============   ===============   ===============

a    Reclassification and effect of properly accounting for embedded derivatives
b    Properly record accretion on Notes
c    Effect of valuation of embedded derivatives
d    Reclassification of interest

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-88

<PAGE>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           NOTES TO FINANCIAL STATEMENTS
                                                                                                               CONTINUED
------------------------------------------------------------------------------------------------------------------------

                PARADIGM MEDICAL INDUSTRIES, INC.
                    STATEMENTS OF CASH FLOWS                        AS PREVIOUSLY
                      SEPTEMBER 30, 2007                               REPORTED        AS RESTATED         CHANGE
                          (Unaudited)                              ---------------   ---------------   ---------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                  $   (1,984,000)   $   (1,233,000)   $      751,000  a
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
          Depreciation and amortization                                     4,000             4,000                 -
          Change in fair value of derivative liabilities                        -          (343,000)         (343,000) b
          Beneficial conversion interest                                  939,000           592,000          (347,000) c
          Issuance of stock  options and warrants for services             61,000                 -           (61,000) d
          Provision for losses on inventory                               (22,000)          (22,000)                -
(Increase) decrease in:
          Accounts Receivables                                            (83,000)          (83,000)                -
          Inventories                                                    (150,000)         (150,000)                -
          Prepaid and other assets                                        (62,000)          (62,000)                -
Increase (decrease) in:
          Accounts payable                                                (54,000)          (54,000)                -
          Accrued liabilities                                             274,000           274,000                 -
                                                                   ---------------   ---------------   ---------------
NET CASH USED IN OPERATING ACTIVITIES                                  (1,077,000)       (1,077,000)                -

                                                                   ---------------   ---------------   ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
                                                                   ---------------   ---------------   ---------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                             -                 -                 -
                                                                   ---------------   ---------------   ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
          Proceeds from issuance of convertible notes                   1,000,000         1,000,000                 -
                                                                   ---------------   ---------------   ---------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                     1,000,000         1,000,000                 -
                                                                   ---------------   ---------------   ---------------
Net change in cash                                                        (77,000)          (77,000)                -

Cash, beginning of period                                                 206,000           206,000                 -
                                                                   ---------------   ---------------   ---------------

CASH, END OF PERIOD                                                $      129,000    $      129,000    $            -
                                                                   ===============   ===============   ===============

Supplemental disclosure of cash flow information:
          Cash paid for interest                                   $        2,000    $        2,000
                                                                   ---------------   ---------------
          Cash paid for income taxes                               $            -    $            -
                                                                   ---------------   ---------------

a    Effect of properly accounting for embedded derivatives
b    Effect of valuation of embedded derivatives
c    To properly record accretion on Notes
d    Reclassification of improperly recorded warrant expense

------------------------------------------------------------------------------------------------------------------------
                                                                                                                    F-89
</TABLE>

<PAGE>

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

     None.

Item 8A.  Controls and Procedures

         Under  the  supervision  and with the  participation  of the  Company's
management,  including its principal  executive officer and principal  financial
officer,  the Company evaluated the effectiveness of the design and operation of
its  disclosure  controls  and  procedures  (as  defined  in Rule  13a-15(e)  or
15d-15(e) under the Securities  Exchange Act of 1934 (the "Exchange Act"). Based
upon that evaluation,  the principal  executive officer and principal  financial
officer concluded that, as of the end of the period covered by this report,  the
Company's  disclosure  controls and  procedures  were  effective and  adequately
designed to ensure that  information  required to be disclosed by the Company in
the reports it files or submits  under the Exchange Act is recorded,  processed,
summarized and reported  within the time periods  specified in applicable  rules
and forms.

         During  the  fourth  fiscal  quarter,  there  has been no change in the
Company's  internal  control  over  financial  reporting  (as  defined  in  Rule
13a-15(f) or 15d-15(f) under the Exchange Act) that has materially affected,  or
is reasonably likely to materially  affect,  the Company's internal control over
financial reporting.

                                    PART III

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

         As of March 31, 2007, the Company's  executive  officers and directors,
their ages and their positions are set forth below:

     Name                          Age     Position
     ----                          ---     --------
     Raymond P.L. Cannefax         59      President and Chief Executive Officer
     Randall A. Mackey, Esq.       62      Chairman of the Board and Director
     David M. Silver, PhD.         66      Director
     Keith D. Ignotz               61      Director
     John C. Pingree               67      Director

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

         Raymond P.L.  Cannefax has served as the Company's  President and Chief
Executive  Officer since January 5, 2006. Mr. Cannefax  previously served as the
Company's  Vice  President of Sales and Marketing from January 2003 to May 2005.
From May 2005 to January  2006,  Mr.  Cannefax  served as Vice  President of the
Asia/Pacific Region for Sonomed, Inc., a manufacturer of ophthalmic products and
a wholly  owned  subsidiary  of Escalon  Medical  Corp.  From 2002 to 2003,  Mr.
Cannefax was Vice President of Business  Development and Sales for Vermax, Inc.,
a  manufacturer  of products  for hotel  properties.  From 1996 to 2002,  he was
President,  Chief  Operating  Officer  and  founder of Aspen  Network,  Inc.,  a


                                       39
<PAGE>

software development and ecommerce company.  From 1992 to 1996, Mr. Cannefax was
President   and  Chief   Executive   Officer   of  Apollo   Telecom,   Inc.,   a
telecommunications  company. From 1986 to 1992, he was a Regional Sales Director
and a Senior District Manager of Sprint Communications Corporation. Mr. Cannefax
received a B.S.  degree in Psychology and Zoology from the University of Utah in
1976.

         Randall A. Mackey,  Esq. has been the  Company's  Chairman of the Board
since August 20, 2002,  and a director  since  January  2000. He had served as a
director of the Company from 1995 to 1998.  Mr. Mackey has been President of the
Salt Lake City law firm of Mackey  Price  Thompson & Ostler  since  1992,  and a
shareholder and director of the firm and its  predecessor  firms since 1989. Mr.
Mackey  received a B.S. degree in Economics from the University of Utah in 1968,
an M.B.A.  degree from the Harvard  Business  School in 1970, a J.D. degree from
Columbia Law School in 1975 and a B.C.L.  degree from Oxford University in 1977.
Mr. Mackey has also served as Chairman of the Board from 2001 to 2003,  and as a
director  from 1998 to 2003 of Cimetrix,  Incorporated,  a software  development
company.  Mr. Mackey has additionally  served as Chairman of the Board from 2000
to 2003 and as a trustee from 1993 to 2003 of Salt Lake Community College and as
a member of the Utah State Board of Education since 2005.

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

         Keith D. Ignotz has been a director since  November  2000.  Since March
2005,  Mr.  Ignotz has been  President  and Chief  Executive  Officer of Diakine
Therapeutics,  Inc., a pharmaceutical  therapeutics  company. From 1992 to 2004,
Mr. Ignotz was with SpectRx, Inc., a medical technology company that he founded,
which develops, manufactures and markets alternatives to traditional blood based
medical  tests,  serving  from 2002 to 2004 as the Chief  Executive  Officer  of
Guided Therapeutics,  Inc., a wholly-owned subsidiary of SpectRx, Inc., and from
1992 to 2002 as President and Chief Operating Officer of SpectRx, Inc. From 1986
to 1992,  Mr.  Ignotz was Senior Vice  President of Allergan  Humphrey,  Inc., a
medical  electronics  company.  From 1985 to 1986,  he was President of Humphrey
Instruments  Limited-SKB,  a medical electronics company, and from 1980 to 1985,
Mr.  Ignotz  was  President  of  Humphrey   Instruments  GmbH,  also  a  medical
electronics company. Mr. Ignotz also served on the Board of Directors of Vismed,
Inc.,  d/b/a  Dicon from 1992 to 2000.  Mr.  Ignotz  received  a B.A.  degree in
Sociology and Political  Science from San Jose  University and an M.B.A.  degree
from Pepperdine  University.  Mr. Ignotz has served as a trustee of Pennsylvania
College of Optometry and Audiology since 1990, a director of AeroVectrix,  Inc.,
a drug  delivery  company,  since August  2005,  and as a member of the American
Diabetes  Association  and the American  Marketing  Association  of the American
Association of Diabetes Education.

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

Appointment of New President and Chief Executive Officer

         On  January  5,  2006,  Raymond  P.L.  Cannefax  was  appointed  as the
Company's President and Chief Executive Officer,  replacing John Y. Yoon who had
served in those  positions  from March 18, 2004 to December 31,  2005.  Mr. Yoon
resigned as the  Company's  President  and Chief  Executive  Officer,  effective
December 31, 2005, to pursue other opportunities.

Appointment   of  New  Vice   President  of  Finance,   New  Vice  President  of
International Sales, New Vice President of Operations, and New Vice President of
Domestic Sales


                                       40
<PAGE>

         On  March  20,  2006,  Luis A.  Mostacero  was  appointed  as the  Vice
President of Finance.  Mr.  Mostacero  previously  served as the Controller from
June 2000 to August 2005. On January 8, 2008,  Mr.  Mostacero was also appointed
as Chief  Financial  Officer.  On October 11, 2006,  Christina  M.  O'Connor was
appointed  as Vice  President  of  International  Sales and Julio C.  Maximo was
appointed  as Vice  President  of  Operations.  On January  4,  2007,  Alfred B.
Franklin was appointed as Vice President of Domestic Sales, replacing Michael S.
Austin who  resigned on November 28, 2006,  to pursue other  opportunities.  Mr.
Franklin  resigned on May 10, 2007,  to pursue other  opportunities.  On May 10,
2007,  Stephen L. Davis was  appointed as Vice  President of Domestic  Sales and
Marketing.   Mr.  Davis   resigned  on  February  14,  2008,   to  pursue  other
opportunities.

Board Meetings and Committees

         The Board of Directors held a total of four meetings  during the fiscal
year ended  December  31,  20076.  No  director  attended  fewer than 75% of all
meetings  of the Board of  Directors  during  the 2006  fiscal  year.  The Audit
Committee of the Board of Directors  consists of directors  Dr. David M. Silver,
Randall A. Mackey,  Keith D. Ignotz and John C. Pingree. The Audit Committee met
one time during the fiscal year.  The Audit  Committee is primarily  responsible
for reviewing the services  performed by its independent  public accountants and
internal audit  department  and  evaluating  its  accounting  principles and its
system of internal accounting controls.  The Compensation Committee of the Board
of Directors consists of directors Dr. David M. Silver, Randall A. Mackey, Keith
D. Ignotz and John C. Pingree.  The Compensation  Committee met two times during
the fiscal  year.  The  Compensation  Committee  is  primarily  responsible  for
reviewing  compensation  of executive  officers and  overseeing  the granting of
stock options.

         Pursuant to Item 406 of Regulation  S-K under the  Securities  Exchange
Act of 1934,  the Company  has not yet adopted a code of ethics that  applies to
its principle  executive officer,  principal  financial  officer,  controller or
persons  performing  similar  functions.  The Company is still in the process of
studying this issue and intends to adopt a code of ethics in the near future.

         The Company's  Board of Directors has  determined  that Keith D. Ignotz
and John C. Pingree,  who currently serve as directors of the Company as well as
a member of the Company's  audit  committee,  are  independent  audit  committee
financial experts.

Item 10. Executive Compensation

         The  following  table sets  forth,  for each of the last  three  fiscal
years, the compensation  received by Raymond P.L. Cannefax,  President and Chief
Executive  Officer,  and other executive officers whose salary and bonus for all
services in all capacities  exceed  $100,000 for the fiscal years ended December
31, 2007, 2006 and 2005.

<TABLE>
<CAPTION>

                                                  Summary Compensation Table

                                                                                           Change in
                                                                                            Pension
                                                                                           Value and
                                                                             Non-Equity  Non-qualified
                                                                             Incentive     Deferred
                                                                                Plan        Compen-     All Other
Name and                                                Stock     Option      Compen-       sation       Compen-
Principal Position     Year     Salary$    Bonus($)    Awards    Awards($)     sation      Earnings      sation      Total
------------------     ----     -------    --------    ------    ---------     ------      --------      ------      -----
<S>                    <C>       <C>            <C>       <C>        <C>         <C>           <C>          <C>     <C>
Raymond P.L.           2007      $143,330       -         -          -           -             -            -       $143,330
Cannefax  President    2006       127,940       -         -          -           -             -            -        127,940
and Chief Executive    2005        64,285       -         -          -           -             -            -         64,285
Officer(1)
----------------------
</TABLE>
         (1) Mr.  Cannefax has served as President and Chief  Executive  Officer
since January 5, 2006.




                                       41
<PAGE>
<TABLE>
<CAPTION>

                                       Supplemental All Other Compensation Table

                                                                             Registrant
                                                                             Contribu-               Dividends
                        Perks                                                 tions to                  or
                         and                                    Payments/     Defined                Earnings
                        Other        Tax         Discounted     Accruals     Contribu-               on Stock
                       Personal    Reimburse-    Securities     on Termin-       tion   Insurance    or Option
Name           Year    Benefits      ments        Purchases     ation Plans     Plans    Premiums     Awards     Other
----           ----    --------      -----        ---------     -----------     -----    --------     ------     -----
<S>            <C>           <C>         <C>            <C>            <C>          <C>       <C>          <C>       <C>
Raymond P.L.   2007          -           -              -              -            -         -            -         -
Cannefax       2006          -           -              -              -            -         -            -         -
               2005          -           -              -              -            -         -            -         -
</TABLE>


<TABLE>
<CAPTION>

                                              Grants of Plan-Based Awards


                       Estimated Future Payouts Under   Estimated Future Payouts
                         Non-Equity Incentive Plan     Under Equity Incentive Plan
                                 Awards                          Awards
                                                                                               All Other
                                                                                  All Other     Option
                                                                                    Stock       Awards:
                                                                                    Awards:    Number of     Exercise
                                                                                   Number of   Securities     or Base
                                                                                   Shares of    Under-       Price of
                                                                                   Stock or     lying        Option
              Grant    Threshold   Target   Maximum   Threshold   Target  Maximum   Units       Options       Awards
   Name       Date        ($)        ($)      ($)        (#)       (#)      ($)      (#)         (#)         ($/Sh)
   ----       ----        ---       ----      ---        ---       ---      ---      ---         ---         ------
<S>          <C>           <C>        <C>      <C>        <C>       <C>      <C>      <C>     <C>              <C>
Raymond P.L. 5/1/07        -          -        -          -         -        -        -       4,500,000        $.01
Cannefax     1/5/06        -          -        -          -         -        -        -       4,500,000        $.01


</TABLE>


                                                          42
<PAGE>
<TABLE>
<CAPTION>

                                     Outstanding Equity Awards At Fiscal Year End


                                                                                                                         Equity
                                                                                                              Equity    Incentive
                                                                                                            Incentive     Plan
                                                                                                              Plan       Awards:
                                                                                                              Awards     Market or
                                              Equity                                                         Number of    Payout
                                             Incentive                                           Market      Unearned    Value of
                              Number of      Pan Awards                              Number     Value of      Shares,    Unearned
                Number of    Securities      Number of                                 of       Shares or    Units or     Shares,
               Securities    Underlying      Securities                            Shares or    Units of       Other     Units or
               Underlying    Unexercised      Underlying                             Units of      Stock       Rights      Other
               Unexercised    Options:      Unexercised     Option                   Stock      That Have    That Have  Rights That
                 Options        (#)           Unearned     Exercise     Option     Held That       Not          Not      Have Not
                   (#)        Unexer-         Options        Price    Expiration    Have Not     Vested       Vested      Vested
      Name     Exercisable    cisable           (#)           ($)        Date      Vested(#)       ($)          (#)         ($)
      ----     -----------    -------           ---           ---        ----      ---------       ---          ---         ---
<S>                 <C>          <C>             <C>           <C>         <C>         <C>          <C>          <C>         <C>
Raymond P.L.        0            0               -             -           -           -            -            -           -
Cannefax

</TABLE>
                Option Exercises and Stock Vested for Fiscal 2007


                        Option Awards                           Stock Awards
                 Number of           Value             Number of       Value
              Shares Acquired     Realized         Shares Acquired    Realized
                on Exercise       on Exercise         on Vesting     on Vesting
      Name          (#)              ($)                (#)              ($)
                   -----            -----              -----             ----
Raymond P.L.         0                -                  0                -
Cannefax

                        Pension Benefits for Fiscal 2007


                               Number of
                                Years      Present Value of
                               Credited      Accumulated       Payments During
                               Service        Benefit        Last Fiscal Year
      Name      Plan Name        (#)            ($)                 ($)
      ----      ---------       -----          -----               ----
Raymond P.L.    None              -              -                   -
Cannefax

Director Compensation

         Outside  directors are  currently  not paid a director's  fee for their
services but are 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  therefore.  The directors were not granted
any options to purchase  shares of the  Company's  common  stock  during 2006 or
2007.


                                       43
<PAGE>
<TABLE>
<CAPTION>
                                 Director Compensation for Fiscal 2007

                                                                     Change in
                                                                   Pension Value
                        Fees                                             and
                      Earned or                      Non-Equity     Nonqualified
                       Paid In     Stock   Option  Incentive Plan     Deferred      All Other
                        Cash      Awards   Awards   Compensation    Compensation  Compensation   Total
Name                     ($)        ($)      ($)         ($)          Earnings         ($)        ($)
----                     ---        ---      ---         ---          --------         ---        ---
<S>                       <C>        <C>      <C>         <C>             <C>           <C>        <C>
Keith D. Ignotz           0          -        -           -               -             -          0
Randall A. Mackey         0          -        -           -               -             -          0
John C. Pingree           0          -        -           -               -             -          0
David M. Silver, PhD.     0          -        -           -               -             -          0

</TABLE>

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 plan. The plan is currently  available to the Company's  employees at the
employees' expense with no matching contribution from the Company.

1995 Stock Option Plan

         The  Company  adopted  a 1995  Stock  Option  Plan,  for the  officers,
employees,  directors and  consultants  of its company on November 7, 1995.  The
plan  authorized  the granting of stock  options to purchase an aggregate of not
more than 300,000 shares of its common stock. On February 16, 1996,  options for
substantially all 300,000 shares were granted. On June 9, 1997, its shareholders
approved an  amendment  to the plan to  increase  the number of shares of common
stock reserved for issuance thereunder from 300,000 shares to 600,000 shares. On
September  3,  1998,  its  shareholders  approved  an  amendment  to the plan to
increase the number of shares of common stock  reserved for issuance  thereunder
from 600,000 shares to 1,200,000  shares. On November 29, 2000, its shareholders
approved an  amendment  to the plan to  increase  the number of shares of common
stock  reserved  for  issuance  thereunder  from  1,200,000  shares to 1,700,000
shares.  On September 11, 2001,  its  shareholders  approved an amendment to the
plan to increase  the number of shares of common  stock  reserved  for  issuance
thereunder  from  1,700,000  shares to 2,700,000  shares.  On June 13, 2003, its
shareholders  approved an amendment to the plan to increase the number of shares
of common stock  reserved  for  issuance  thereunder  from  2,700,000  shares to
3,700,000  shares.  On July 11, 2005, its shareholders  approved an amendment to
the plan to increase the number of shares of common stock  reserved for issuance
thereunder from 3,700,000 shares to 5,000,000 shares.

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



                                       44
<PAGE>

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

Employment Agreement

         The Company  entered  into an  employment  agreement  with Raymond P.L.
Cannefax, which commenced on January 5, 2006 and expired on January 5, 2007. The
employment  agreement  requires Mr. Cannefax to devote  substantially all of his
working time as the Company's  President and Chief Executive Officer,  providing
that he may be  terminated  for  "cause"  (as  provided  in the  agreement)  and
prohibits  him from  competing  with the  Company  for two years  following  the
termination of his employment  agreement.  The employment agreement provides for
the payment of an initial base salary of $125,000. The employment agreement also
provides  for  salary  increases  and  bonuses  as  shall be  determined  at the
discretion of the Board of Directors, with the first review of the annual salary
to be made as of June 30, 2006. The employment  agreement  further  provides for
the  issuance of stock  options to purchase  4,500,000  shares of the  Company's
common  stock at $.01 per  share.  The  options  vest in  twelve  equal  monthly
installments of 375,000 shares,  beginning on February 5, 2006 until such shares
are vested.

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

         Effective  July 1, 2007,  the Company  entered into an amendment of the
employment agreement with Mr. Cannefax, which extends the term of the employment
agreement  until  January  5,  2009.  Under  the  terms  of the  amendment,  Mr.
Cannefax's annual base salary increased to $150,000.  The initial base salary in
the employment agreement dated January 5, 2006 was $125,000,  which the Board of
Directors  increased to $140,000 as of July 1, 2006. The amendment also provides
for the  granting of  additional  stock  options to Mr.  Cannefax to purchase an
additional  4,500,000  shares of the  Company's  common stock at $.01 per share.
These  options  vest in twelve  equal  monthly  installments  of 375,000  shares
beginning on June 1, 2007 until such shares are vested.

Item 11.  Security  Ownership  of Certain  Beneficial  Owners and Management and
      Related Stockholder Matters

         The  following  table sets forth  certain  information  with respect to
beneficial  ownership of the Company's common stock as of March 31, 2008 for (i)
each  executive  officer  (ii) each  director,  (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.

                                                                  Percentage of
Name and Address(1)                         Number of Shares        Ownership
-------------------                         ----------------      -------------

Raymond P.L. Cannefax (2)                     10,000,000               1.3%
Dr. David M. Silver (2)                          761,166                *
Randall A. Mackey (2)                            725,000                *
Keith D. Ignotz (2)                              525,709                *
John C. Pingree (2)                              431,500                *
                                              ----------
Executive officers and directors
   as a group (five persons)                  12,443,375               1.6%
        -----------------
        *Less than 1%.

(1)      Unless otherwise  indicated,  the address of each listed stockholder is
         c/o Paradigm Medical Industries,  Inc., 2355 South 1070 West, Salt Lake
         City, Utah, 84119.

(2)      The amounts shown  include  shares that may be acquired  currently,  or
         within 60 days after  March 31,  2007  through  the  exercise  of stock
         options are  follows:  Mr.  Cannefax,  9,000,000  shares;  Dr.  Silver,
         725,000 shares; Mr. Mackey, 725,000 shares; Mr. Ignotz, 525,851 shares;
         and Mr. Pingree, 275,000 shares.

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 and will be on terms no less
favorable  to the Company  than those that could be obtained  from  unaffiliated
parties.

         Randall A. Mackey,  a director since January 21, 2000, and from 1995 to
1998 and  Chairman  of the Board  since  August 30,  2002,  is  president  and a
shareholder  of the law firm of Mackey Price  Thompson & Ostler,  which rendered
legal  services in connection  with various  corporate  matters.  Legal fees and
expenses  paid to Mackey  Price  Thompson & Ostler for the  fiscal  years  ended
December 31, 2007 and 2006, totaled $156,000 and $148,000,  respectively.  As of
December 31,  2007,  the Company  owed this firm  $46,400,  which is included in
accounts payable.

                                     PART IV

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.

Exhibit
  No.                               Document Description
-------                             --------------------

2.1                Amended Agreement and Plan of Merger between Paradigm Medical
                   Industries,  Inc.,  a  California  corporation  and  Paradigm
                   Medical Industries, Inc., a Delaware corporation(1)
3.1                Certificate of Incorporation(1)
3.2                Amended Certificate of Incorporation
3.3                Bylaws(1)
4.1                Specimen Common Stock Certificate (2)
4.2                Specimen Series C Convertible Preferred Stock Certificate(3)
4.3                Certificate  of the  Designations,  Powers,  Preferences  and
                   Rights of the Series C Convertible Preferred Stock(3)
4.4                Specimen Series D Convertible Preferred Stock Certificate (4)
4.5                Certificate  of the  Designations,  Powers,  Preferences  and
                   Rights of the Series D Convertible Preferred Stock (5)
4.6                Certificate of Designations,  Powers,  Preferences and Rights
                   of the Series G Convertible Preferred Stock (6)
10.1               Exclusive Patent License Agreement with PhotoMed(1)
10.2               1995 Stock Option Plan (1)

                                       45
<PAGE>

10.3               April 2005 Securities  Purchase  Agreement with AJW Partners,
                   LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC, and New
                   Millennium Capital Partners II, LLP (the "Purchasers")(7)
10.4               Form of Convertible Note with each Purchaser(7)
10.5               Form of Stock Purchase Warrant with each Purchaser(7)
10.6               Security Agreement with Purchasers(7)
10.7               Intellectual Property Security Agreement with Purchasers(7)
10.8               Registration Rights Agreement with Purchasers(7)
10.9               Employment Agreement with Raymond P.L. Cannefax(8)
10.10              February  2006   Securities   Purchase   Agreement  with  AJW
                   Partners,  LLC, AJW Offshore,  Ltd., AJW Qualified  Partners,
                   LLC, and New Millennium Capital Partners II, LLP(9)
10.11              Form  of  Callable   Secured   Convertible   Note  with  each
                   Purchaser(9)
10.12              Form of Stock Purchase Warrant with each Purchaser(9)
10.13              Security Agreement with Purchasers(9)
10.14              Intellectual Property Security Agreement with Purchasers(9)
10.15              Registration Rights Agreement with Purchasers(9)
10.16              Settlement Agreement with Dr. Joseph W. Spadafora (10)
10.17              Worldwide OEM Agreement with MEDA Co., Ltd. (11)
10.18              Second Amendment to the  Registration  Rights Agreement dated
                   April 27, 2005 (12)
10.19              Second Amendment to the  Registration  Rights Agreement dated
                   February 28, 2006 (12)
10.20              June 2007  Securities  Purchase  Agreement with AJW Partners,
                   LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC, and New
                   Millennium Capital Partners II, LLP (13)
10.21              Form of Convertible Note with each Purchaser (13)
10.22              Form of Stock Purchase Warrant with each Purchaser (13)
10.23              Security Agreement with Purchasers (13)
10.24              Intellectual Property Agreement with Purchasers (13)
10.25              Registration Rights Agreement with Purchasers (13)
10.26              December  2007   Securities   Purchase   Agreement  with  AJW
                   Partners,  LLC, AJW Offshore,  Ltd., AJW Qualified  Partners,
                   LLC, and New Millennium Capital Partners II, LLP (14)
10.27              Form of Convertible Note with each Purchaser (14)
10.28              Form of Stock Purchase Warrant with each Purchaser (14)
10.29              Security Agreement with Purchasers (14)
10.30              Intellectual Property Agreement with Purchasers (14)
10.31              Registration Rights Agreement with Purchasers (14)
10.32              Agreement with Equity Source Partners, LLC
10.33              Distribution Agreement with LACE Elettronica srl
31.1               Certification  pursuant to 18 U.S.C. Section 1350, as enacted
                   by Section 302 of the Sarbanes-Oxley Act of 2002
31.2               Certification  pursuant to 18 U.S.C. Section 1350, as enacted
                   by Section 302 of the Sarbanes-Oxley Act of 2002
32.1               Certification  pursuant to 18 U.S.C. Section 1350, as adopted
                   pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2               Certification  pursuant to 18 U.S.C. Section 1350, as adopted
                   pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
-----------------
(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 Annual Report on Form 10-KSB,
                   as filed on April 16, 1998.
(4)                Incorporated by reference from Registration Statement on Form
                   SB-2, as filed on April 29, 1999.
(5)                Incorporated  by  reference  from Report on Form  10-QSB,  as
                   filed on August 16, 2000.
(6)                Incorporated  by  reference  from Report on Form  10-QSB,  as
                   filed on November 14, 2003.
(7)                Incorporated by reference from Current Report on Form 8-K, as
                   filed on May 18, 2005.
(8)                Incorporated by reference from Current Report on Form 8-K, as
                   filed on January 18, 2006.
(9)                Incorporated by reference from Current Report on Form 8-K, as
                   filed on March 1, 2006.
(10)               Incorporated by reference from Registration Statement on Form
                   SB-2, as filed on June 15, 2006.
(11)               Incorporated by reference from Current Report on Form 8-K, as
                   filed on June 19, 2006.
(12)               Incorporated by reference from Registration Statement on Form
                   SB-2, as filed on April 16, 2007.
(13)               Incorporated  by  reference  from Report on Form  10-QSB,  as
                   filed on August 17, 2007.

                                       46
<PAGE>

(14)               Incorporated by reference from Current Report on Form 8-K, as
                   filed on January 7, 2008.

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

     Current report on Form 8-K, as filed on January 7, 2008.

Item 14. Principal Accountant Fees and Services

         Fees for the 2007 annual audit of the financial  statements and related
quarterly  review  services were $31,893.  Fees in 2007 related to the review of
registration  statements and assistance in responding to SEC comments were $675.
Fees in 2007 for  edgarization  of  filings  were  $4,565.  Fees in 2007 for tax
return  preparation  were $2,350.  There were no other fees in 2007 for meetings
and other consultation.

         Fees for the 2006 annual audit of the financial  statements and related
quarterly  review  services were $28,600.  Fees in 2006 related to the review of
registration  statements  and  assistance  in  responding  to SEC comments  were
$1,300.  Fees in 2006 for edgarization of filings were $2,600.  Fees in 2006 for
tax return preparation were $3,500.  There were no fees in 2006 for meetings and
other consultation.




                                       47
<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, there unto duly authorized.

                                        PARADIGM MEDICAL INDUSTRIES, INC.




Dated: July 8, 2008                     By: /s/ Raymond P.L. Cannefax
                                        ----------------------------------------
                                           Raymond P.L. Cannefax,
                                           President and Chief Executive Officer

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

     Signature                         Title                              Date


 /s/ Raymond P.L. Cannefax     President and Chief Executive        July 8, 2008
---------------------------    Officer(Principal Executive
Raymond P.L. Cannefax          Officer)



/s/ Randall A. Mackey          Chairman of the Board and            July 8, 2008
---------------------------    Director
Randall A. Mackey



/s/ David M. Silver            Director                             July 8, 2008
---------------------------
David M. Silver, Ph.D.



/s/ Keith D. Ignotz            Director                            July 8, 2008
---------------------------
Keith D. Ignotz



/s/ John C. Pingree            Director                             July 8, 2008
---------------------------
John C. Pingree



/s/ Luis A. Mostacero          Vice President of Finance,           July 8, 2008
---------------------------    Treasurer and Chief Financial
Luis A. Mostacero              Officer, (Principal Financial
                               and Accounting Officer)









                                       48





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