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

                                  Form 10-KSB/A
(Mark One)
[X]      Annual Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934 for the year ended December 31, 2000

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

                           Commission File No. 0-28498


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

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

                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 under Section 12(b) of the Exchange Act:

                                 Name of each exchange on
         Title of each class                                  which registered
         ______________                                        _____________
             (None)                                                (None)

         Securities registered under Section 12(g) of the Exchange Act:

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X]  No [  ]

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

Registrant's revenues for the fiscal year ended December 31, 2000 were
$7,989,000.

The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 6, 2001 was approximately $23,539,000 based on the
closing price on that date on the Nasdaq SmallCap Market.

As of March 23, Registrant had outstanding 12,792,876,shares of Common Stock,
5,957 shares of Series A Preferred Stock, 15,236 shares of Series B Preferred
Stock, no shares of Series C Preferred Stock and 46,500 shares of Series D
Preferred Stock.
<PAGE>


                       DOCUMENTS INCORPORTED BY REFERENCE:

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


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


                                     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 markets three cataract
surgery systems with related, accessories and disposable products. The Company's
flagship cataract removal system, the Photon(TM), is a laser cataract surgery
system marketed as the next generation of cataract removal. The Photon(TM)
product is currently undergoing investigational trials in the United States. The
Photon(TM) is available for sale in many markets outside of the United States.
The Photon(TM) is manufactured and marketed with the Precisionist(TM), an
ultrasonic cataract removal system. Both the Photon(TM) and the Precisionist(TM)
are manufactured as an Ophthalmic Surgical Workstation(TM). The Company plans to
market the Ophthalmic Surgical Workstation(TM) as a plug-in module for the
Photon(TM) and other lasers for use in eyecare and other medical specialties.

         The Company's diagnostic products include a pachymeter, an A-Scan, an
A/B Scan, an UBM biomicroscope, a perimeter, a corneal topographer and the Blood
flow Analyzer(TM). The diagnostic ultrasonic products including the pachymeter,
the A-Scan, the A/B Scan and the UBM biomicroscope were acquired from Humphrey
Systems a division of Carl Zeiss in 1998. 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 of 2000. The Company purchased
O.B.F. Labs in June of 2000 whose principal product is the Blood Flow
Analyzer(TM). This product is designed for the measurement of intraocular
pressure and pulsatile ocular blood flow volume for detection and treatment of
glaucoma. The Company is currently developing additional applications for all of
its diagnostic products.

         A cataract is a condition, which largely affects the elderly
population, in which the natural lens of the eye hardens and becomes cloudy,
thereby reducing visual acuity. Treatment consists of removal of the cloudy lens
and replacement with a synthetic lens implant, which restores visual acuity.
Cataract surgery is the single largest volume and revenue producing outpatient
surgical procedure for ophthalmologists worldwide. The Health Care Finance
Administration reports that in the United States approximately 2 million
cataract removal procedures are performed annually, making this the largest
outpatient procedure reimbursed by Medicare. Most cataract procedures are
performed using a method called phacoemulsification or "phaco", which employs a
high frequency (40 kHz to 60 kHz) ultrasonic probe needle device to fragment the
cataract while still in the eye and remove it in pieces by suction through a
small incision.

         The Company manufactures and sells three phaco systems with
instruments, accessories and disposable products. The Odyssey(TM) is a low-cost
portable system intended primarily for the international market.

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         The Paradigm SIStem(TM) is a mid-range priced ultrasonic phaco and
competes in the market segment that wants an ultrasonic phaco only. Paradigm
acquired both technologies from Mentor in October 1999.

         The Precisionist(TM) Ocular Surgery Workstation(TM) is the Company's
newest generation system, which is the base for its expandable surgical
"workstation" platform. 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.

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

         In addition to cataract surgery, the Company believes that its
Photon(TM) laser system is capable of being configured with specialty probes for
use in other ophthalmic surgical and other medical procedures. In October of
2000, the Company received FDA approval for the Photon(TM) Workstation(TM) to be
used with a 532nm green laser which is effective for medical procedures other
than cataract removal, such as, photocoagulation of retinal and venous anomalies
within or outside the eye, pigmented lesions around the orbital socket,
posterior or anterior procedures associated with glaucoma or diabetes and
general photocoagulation for various dermatological venous anomalies including
telangiectasia (surface veins), or commonly referred to as "spider vein". 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) Workstation(TM) has not
been commercially developed and there can be no assurance that these
applications or the Photon(TM) Workstation(TM) will be commercially developed or
approved. Further there is no guarantee that the laser will be accepted by the
ophthalmic surgery market in this capacity.

         In June 1997, the Company received FDA clearance to market the Blood
Flow Analyzer(TM) for measurement of intraocular pressure and pulsatile ocular
blood flow for the detection of glaucoma and other retina related diseases.
Ocular blood flow is critical, the reduction of which may cause nerve fiber
bundle death through oxygen deprivation thus resulting in visual field loss
associated with glaucoma. The Company's Blood Flow Analyzer(TM) is a portable
automated in-office system that presents an affordable method for ocular blood
flow testing for the ophthalmic and optometric practitioner. In June of 2000 the

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company purchased O.B.F. Labs, the manufacture of the Blood Flow Analyzer(TM).
The terms and conditions of the sales were $100,000 in cash and 100,000 shares
of common stock.

         On June 26, 1998, the Company entered into a Co-Distribution Agreement
with Pharmacia Corporation ("Pharmacia") & Upjohn Company and MAXXIM
Corporation, which provides for the marketing and sale of a range of ophthalmic
products. Under the terms of the Co-Distribution Agreement, the Company,
Pharmacia and MAXXIM will offer a comprehensive package of products to cataract
surgeons, including cataract surgical equipment, intraocular lens implants,
intraocular pharmaceuticals, surgical instruments and sterile procedural packs.
The Company will provide the Precisionist(TM) for distribution and sale under
the Co-Distribution Agreement. The Pharmacia products to be distributed as part
of the Co-Distribution Agreement include the Healon(R) and Healon-GV(R), and
Healon V, the new visco-elastic solution, scheduled for introduction mid-year
2000. Pharmacia also manufactures the CeeOn line of foldable, small intraocular
lens implants, designed to replace the natural lens removed during cataract
surgery.

         On July 23, 1998, the Company entered into an Agreement for Purchase
and Sale of Assets with the Humphrey Systems Division of Carl Zeiss, Inc. to
acquire the ownership and manufacturing rights to certain assets of Humphrey
Systems that are used in the manufacturing and marketing of an ultrasonic
microprocessor-based line of ophthalmic diagnostic instruments, including the
Ultrasonic Biometer Model 820, the A/B Scan System Model 837, the Ultrasound.

         Pachymeter Model 855, and the Ultrasound Biomicroscope Model 840, and
all accessories, packaging and end-user collateral materials for each of the
product lines for the sum of $500,000, payable in the form of 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
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 Paradigm's common stock, Paradigm 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.

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

         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 rounds out the Company's cataract surgery
product line by adding high-quality, moderately priced cataract surgery
products. The transaction was paid for with $1.5 million worth of Paradigm
common stock.

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         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 4000, 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 corneal 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.

Background

         Corporate History: The Company's business originated with Paradigm
Medical, Inc., a California corporation formed in October 1989 "PMI". PMI
developed the Company's present ophthalmic business and was operated by its
founders Thomas F. Motter and Robert W. Millar. In May 1993, PMI merged with and
into the Company. At the time of the merger, the Company was a dormant public
shell existing under the name French Bar Industries, Inc. ("French Bar"). French
Bar had operated a mining and tourist business in Montana. Prior to its merger
with PMI in 1993, French Bar had disposed of its mineral and mining assets in a
settlement of outstanding debt and had returned to the status of a dormant
entity. Pursuant to the merger, the Company caused a 1-for-7.96 reverse stock
split of its shares of Common Stock. The Company then acquired all of the issued
and outstanding shares of Common Stock of PMI using shares of its own Common
Stock as consideration. As part of the merger, the Company changed its name from
French Bar Industries, Inc. to Paradigm Medical Industries, Inc. and the
management of PMI assumed control of the Company. In April 1994, the Company
caused a 1-for-5 reverse stock split of its shares of Common Stock. In February
1996, the Company 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 can all contribute to eye disorders.
The most common eye disorders are either pathological or refractive. Many
pathological disorders of the eye can be corrected by surgery. These include
cataracts (clouded lenses), glaucoma (elevated pressure in the eye), corneal
disorders such as scars, defects and irregular surfaces and vitro-retinal
disorders such as the attachment of membrane growths to the retina causing blood
leakage within the eye. All of these disorders can impair vision. Many
refractive disorders can be corrected through the use of eyeglasses and contact
lenses. Myopia (nearsightedness), hyperopia (farsightedness) and presbyopia
(inability to focus) are three of the most common refractive disorders.

         Ultrasound Technology: Ultrasound devices have been used in
ophthalmology since the late 1960's for diagnostic and surgical applications
when treating or correcting eye disorders. In diagnostics, ultrasound
instruments are used to measure distances and shapes of various parts of the eye
for prescription of eyeglasses and contact lenses and for calculation of lens
implant prescriptions for cataract surgery treatment. These devices emit sound

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waves through a hand-held probe that is placed onto or near the eye with the
sound waves emitted being reflected by the targeted tissue. The reflection
"echo" is computed into a distance value that is presented as a visual image, or
cross-section of the eye, with precise measurements displayed and printed for
diagnostic use by the surgeon.

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

         Laser Technology: The term "laser" is an acronym for Light
Amplification by Stimulated Emission of Radiation. Lasers have been commonly
used for a variety of medical and ophthalmic 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 tissue. In a surgical laser,
light is emitted in either a continuous stream or in a series of short duration
"pulses, "thus interacting with the tissue through heat and shock waves,
respectively. Several factors, including the wavelength of the laser and the
frequency and duration of the pulse or exposure, determine the amount of energy
that interacts with the targeted tissue and, thus, the amount of surgical effect
on the tissue.

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

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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. In 1990, the Company received clearance
from the FDA pursuant to Section 510(k) of the Food, Drug and Cosmetics Act (the
"FDC Act") on its Precisionist 3000(TM) phaco system for cataract surgery, which
system was upgraded to the Precisionist 3000 Plus(TM) in 1994. The Company also
completed its preclinical in vitro and in vivo (animal) testing of its
Photon(TM) laser cataract surgical system and submitted a Section 510(k)
Premarket Notification to the FDA for the Photon(TM) laser cataract system in
September 1993, with a follow-up Investigational Device Exemption ("IDE")
application submitted in October 1994 to provide additional clinical data
through human cases to support its earlier filing. The IDE was approved in May
1995. Phase I clinical trials were begun in April 1996 with surgeries completed
in December 1996. Patient follow-up examinations as mandated by the FDA study
were completed in July 1997, and the Company submitted its final report to the
FDA thereafter. During the Phase I clinical trials the Company discovered that
the Nd:YAG (Neodymium: Yttrium-Aluminum-Garnet) laser system is most effective
on soft cataracts. Hard cataracts can be removed using the already existing
ultrasound capability of the Workstation(TM). The FDA approved Phase II trials
on soft cataracts in May 1998. Seven laser systems are now installed in the
United States and surgeries are being performed with trial completion expected
in the first half of 2001.

         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 ("FDA") relating to the human clinical trials of its
Photon(TM) Laser Cataract System. The warning letter concerns the conditions
found by the FDA during several audits at Company's 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 requested clarification of two issues. The Company believes that these
issues have been resolved. Subsequent to the warning letter the Company has
received approval to continue its clinical trials and is the process of
collecting more data.

         The Odyssey(TM): The Odyssey(TM) replaced the Precisionist 3000 (three
thousand) and Precisionist 3000 (three thousand) Plus. The Odyssey(TM) is a
reliable, portable, low-cost phaco system, with a very low operating cost. The
primary market for the Odyssey(TM) is in foreign countries where phaco
technology is emerging and price-points arerelatively low. The Odyssey(TM) is
also a reliable back-up system. The systemfeatures a simple analog presentation
of the ultrasound power, and aspiration. The Odyssey(TM) provides the basic
standard features for phaco surgery including continuous ultrasound tuning,
ultrasound energy regulation and anterior vitrectomy. Sales from the Odyssey(TM)
were approximately 1% of total revenues in 2000.

         The SIStem(TM): The SIStem(TM) is the Company's state-of-the-art
phacoemulsification system, bridging the gap between the Odyssey(TM) and the
Precisionist(TM). The SIStem(TM) is designed to be a full-featured,
cost-effective, reliable phaco machine. The competitive feature package includes
automated priming and tuning, error detection, audible feedback, patented
fluidics system, pneumatic vitrectomy and bipolar electrosurgical coagulation.
With both reusable and single-use consumables, the SIStem(TM) is positioned for
the world's primary ultrasonic phaco markets, including the United States,
Europe and Asia. Fiscal year 2000 sales of the SIStem(TM) represented
approximately 9% of total revenue.

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         Precisionist ThirtyThousand(TM): The Precisionist ThirtyThousand(TM)
(the "Precisionist(TM)") is the Company's core phaco surgical technology and the
base system for its P(TM) Workstation(TM). 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. The system
features a graphic color display and unique proprietary on-board computer and
graphic user interface linked to soft-key membrane panel for flexible
programmable operation. The system provides real-time "on-the-fly" adjustment
capabilities for each surgical parameter during the surgical procedure for
high-volume applications. In addition, the Precisionist(TM) provides one hundred
pre-programmable surgery set-ups, with a second level of sub-programmed custom
modes within each major surgical screen (i.e., ultrasound phaco and
irrigation/aspiration modes). The Precisionist(TM) features the Company's newly
developed proprietary fluidics panel which is completely non-invasive for
improved sterility and to provide a surgical environment in the eye that
virtually eliminates fluidic surge and 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) contributed slightly less than 2% of total 2000
revenues.

         Precisionist (TM) Ocular Workstation(TM): The Precisionist(TM) Ocular
Surgery Workstation(TM) (the Workstation(TM) which comprises the base system for
the Precisionist(TM) is the first system to the knowledge of the Company which
uses the expansive capabilities of today's advanced computer technology to offer
seamless open architecture expandability of the system hardware and software
modules. The Workstation(TM) utilizes an embedded computer developed for the
Company 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). 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, when
approved by the FDA, and hardware for additional surgical applications are
easily implemented by means of a pre-existing expansion rack which resides in
the base of the Workstation. These expanded capabilities could include, but
would not be limited to laser systems, video surgical fiber optic imaging,
cutting and electrosurgery equipment. However, there is no guarantee that the
Workstation(TM) will be accepted in the market place. To date, this product has
not been commercially developed and is not available for sale.

         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 Photofragmentation Probe(TM) (the
"LCP"(TM). The Photon(TM) laser utilizes the on-board microprocessor computer of
the Workstation(TM) to generate short pulse laser energy developed through the
patented LCP(TM) to targeted cataract tissue inside the eye, while
simultaneously irrigating the eye and aspirating the diseased cataract tissue
from the eye. The probe is smaller in diameter than conventional ultrasound
phaco needles and presents no damaging vibration or heat build-up in the eye.
The Company's Phase I clinical trials demonstrated that this probe can easily

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reduce the size of the cataract incision from 3.0 mm to under 2.0 mm thereby
reducing surgical trauma and complementing current foldable intraocular implant
technology. The laser probe may also eliminate any possibility for burns around
the incision or at the cornea and may therefore be used with cataract surgery
techniques which utilize a more delicate clear cornea incision which can
eliminate sutures and be conducted with topical anesthesia. However, this system
may not effectively remove harder grade cataracts. Harder grade cataracts can be
removed using the already existing ultrasound capability of the Workstation(TM).

         The Company intends to refine the laser delivery system and laser
cataract surgical technique used on soft cataracts through expanded research and
clinical studies. As far as the Company can determine, no integrated single
laser photofragmenting probe is presently available on the market that uses
laser energy directly, contained in an enclosed probe, to plasmatize cataract
tissue at a precise location inside the eye while simultaneously irrigating and
aspirating the site.

         The Company's laser system is based upon the concept that pulsed laser
energy produced with the micro-processor controlled Nd:YAG laser system provides
ophthalmic surgeons with a more precise and less traumatic alternative in
cataract surgery. Although conventional ultrasonic surgical systems have proven
effective and reliable in clinical use for many years, their use of high
frequency shock waves and vibration to fragment the cataract can make the
procedure difficult and 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-cataractous tissues
within the eye, the Company's Photon(TM) laser cataract system should only
affect tissues it comes into direct contact with.

         Surgical Instruments, Accessories and Disposables: In addition to the
cataract surgery equipment, the Company is aggressively pursuing development and
product introductions for a range of cataract surgery instruments and
accessories that will be sold with its surgical systems and will complement
other competitive systems. In January 1998, the Company received FDA 510(k)
clearance for a line of proprietary titanium ultrasonic phaco needles it
produces at its Salt Lake City facility. The needles were released for sale in
May 1998 in a sterile Phaco PAK (TM). In May 1998, the Company received FDA
510(k) clearance for a line of irrigation/aspiration probes and tips. Product
release occurred in October 1998. These products and additional instruments were
previously sourced from third-party vendors. The Company believes that by
developing its own instruments and accessories it can improve product
performance, introduce innovative differentiation and improve sales margins. The
Company's surgical systems utilize or will utilize accessory instruments and
disposables, some of which are proprietary to the Company. These include
replacement ultrasound tips, sleeves, tubing sets and fluidics packs, instrument
drapes and laser cataract probes. The Company intends to expand its disposable
accessories as it further penetrates the cataract surgery market and expands the
treatment applications for its Workstation. These products contributed
approximately 14% to total revenues for 2000.

         Diagnostic Eye Care Products: Glaucoma is a second leading cause of
adult blindness in the world. Glaucoma is described as a partial or total loss
of visual field resulting from certain progressive disease or degeneration of
the retina, macula or nerve fiber bundle. The cause and mechanism of the
glaucoma pathology is not completely understood. Present detection methods focus
on the measurement of intraocular pressure in the eye, visual field and
observation of the optic nerve head to determine the possibility of pressure
being exerted upon the retina, and optic nerve fiber bundle, which can diminish
visual field. Recently, retinal blood circulation has been indicated as a key
component in the presence of glaucoma. Several 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.

                                       8
<PAGE>

         In June 1997, the Company received FDA clearance to market the Blood
Flow Analyzer(TM) for early detection and treatment management of glaucoma and
other retina related diseases. The device measures not only intraocular pressure
but also pulsatile ocular blood flow, the reduction of which may cause nerve
fiber bundle death through oxygen deprivation thus resulting in visual field
loss associated with glaucoma. The Company's Blood Flow Analyzer(TM) is a
portable automated in-office system that presents an affordable method for
ocular blood flow testing for the ophthalmic and optometric practitioner that is
marketed for around $10,000.

         Blood Flow Analyzer(TM): This was the Company's first diagnostic eye
care device. The device is manufactured for the Company and is being marketed by
the Company pursuant to a license agreement. The device is a portable desktop
system that utilizes a proprietary patented pneumatic Air Membrane Applanation
Probe(TM) (the "AMAP TM") which is attached to any model of standard examination
slitlamp which is then placed on the cornea of the patient's eye to measure the
intraocular pressure within the eye. The device is unique in that it reads a
series of intraocular pressure pulses over a short period of time (approximately
five to ten seconds) and generates a wave form profile which can be correlated
to blood flow volume within the eye. The blood flow volume is calculated by a
proprietary software algorithm developed by David M. Silver, Ph.D., at Johns
Hopkins. The device presents a numerical intraocular pressure reading and blood
flow analysis rating in a concise printout which is affixed to the patient
history file. In addition, the data generated by the device can be downloaded to
a personal computer system for advanced database development and management. The
Company markets the Blood Flow Analyzer(TM) as a stand-alone Model 100 SE unit,
and packaged with a custom built computer system as the Model 100 LE. The Blood
Flow Analyzer(TM) utilizes a single-use disposable cover for its AMAP(TM)
corneal probe which is shipped in sterile packages. The AMAP (TM) probe tip
cover provides accurate readings and acts as a prophylactic barrier for the
patient. The device has been issued a patent in the European Economic Community
and the United States and has a patent pending in Japan. The FDA cleared the
Blood Flow Analyzer(TM) for marketing in June 1997 and the Company commenced
selling the system in September 1997. In addition to the Humphrey products, this
diagnostic product will permit 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. International
sales of the Blood Flow Analyzer(TM) will be further expanded in 2001. Sales of
the Blood Flow Analyzer(TM) were not significant in 2000.

         Dicon(TM) perimeters consists of the LD 400, the TKS 4000, the SST(TM),
FieldLink(TM), FieldView(TM) and Advanced FieldView Perimeters are used to
determine retinal sensitivity testing the visual pathway. Perimeters have become
standard of care in the detection and monitoring of Glaucoma worldwide.
Perimetry is reimbursable worldwide. The Dicon(TM) perimeters feature patented
kinetic fixation and voice synthesis now in 27 different languages. Software
programs are sold to assist in the analysis of the test results. Sales of the
perimeters generated approximately 26% of the 2000 total revenues.

         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. Fiscal year 2000
revenues from the topographer were slightly less than 17% of the total revenues
for 2000.

                                       9
<PAGE>

         Pachymetric Analyzer: Paradigm produces two Ultrasonic Pachymeters used
for measurement of corneal thickness. The Model P55 is positioned as a standard
office pachymeter. This device is targeted to the refractive surgery market and
contributed approximately 2% to the total revenues for 2000.

         Ultrasonic A Scan: The Ultrasonic A Scan was and remains the industry
standard for axial length eye measurement, which is a prerequisite procedure
reimbursed by Medicare and is performed before every cataract surgery. Over
5,000 A-Scan systems have been installed in the worldwide market, representing a
substantial market opportunity for software upgrades and extended warranty
contract sales. A-scan sales were approximately 4% of the total 2000 revenues.

         Ultrasonic A/B Scan: The A/B Scan is used by retinal sub-specialists to
identify foreign bodies in the posterior chamber of the eye and to evaluate the
structural integrity of the retina. The A/B Scan is attractive to the general
ophthalmic community at large because of its lower price point. Sales from this
product were approximately 5% of the total 2000 revenues.

         Ultrasonic Biomicroscope ("UBM"): The UBM was developed by Humphrey
Systems in conjunction with the New York Eye and Ear Infirmary in Manhattan and
the University of Toronto. The UBM and its patent was included in the purchase
from Humphrey Systems and gives the Company the proprietary rights to this
device. The UBM creates a high-resolution computer image of the unseen parts of
the eye that is a "map" for the glaucoma surgeon. The UBM is an "enabling
technology" for the ophthalmologist, one that the Company has repositioned for
broader market sales penetration. Formerly sold only to glaucoma sub-specialty
practitioners, the Company reintroduced the UBM at a price-point targeted for
the average practitioner seeking to add glaucoma filtering surgical procedures
and income to his/her cataract surgical practice.

         The UBM related surgical filtering procedures are fully reimbursable by
Medicare and insurance providers. This untapped new market positions the Company
with its proprietary UBM 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 which combines the UBM, the A-Scan and the B-Scan all in one
instrument. The Company believes that by combining functions that the P45 will
appeal to a broader market. UBM sales were approximately 14% of total revenues
for the year, and the P45 contributed less than 3% to the total 2000 revenues.

         In July of 2000, the Company received ISO 9001 and EN 46001
certification using TUV as the notified body. Under ISO 9001 certification, all
of the Companies products are now CE marked. The CE mark allows the Company to
ship product for revenue into the European Community.

Marketing and Sales

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

                                       10
<PAGE>


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

         Current Market Acceptance and Potential: The Company's distribution
base includes over 200 of the Precisionist 3000, Precisionist 3000 Plus(TM),
Odyssey(TM), and SIStem(TM) phaco systems. Fourteen of the new Precisionist(TM)
Ocular Surgery Workstation(TM) and eleven Photon(TM) Precisionist(TM) Ocular
Surgery Workstations(TM)s have also been placed. The principal purchasers have
been ophthalmologists and clinics in many countries throughout the world. The
Company believes that the market for its products is being driven by: (i) the
aging of the population, which is evidenced by the domestic and international
cataract surgery volume growth trend over the past ten years, (ii) the entry by
emerging countries (including China, Russia, and other countries in Asia,
Eastern Europe and Africa) into advanced technology medical care for their
populations, (iii) increased awareness worldwide of the benefits of the
minimally invasive phaco cataract procedure and (iv) the introduction of
technology improvements such as the Company's laser system.

         Marketing Organization: The Company markets its products
internationally through a network of dealers and domestically through direct
sales representatives. As of December 31, 2000, the Company had ten direct
domestic sales representatives in the United States and twenty-one foreign
dealers. This is in addition to the fifty-three Paradigm, Pharmacia & Upjohn
Alliance representatives and eighty MAXXIM representatives domestically. These
sales representatives are assigned exclusive territories and have entered into
contracts with the Company that contain performance quotas. The Company also
plans to continue to market its products by identifying customers through
internal market research, trade shows and direct marketing programs. The Company
also utilizes a Clinical Advisory Board comprised of leading ophthalmic surgeons
in the United States and Europe who speak at conventions, train ophthalmologists
and visit foreign doctors and dealers to promote the Company's products.

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

         The Company disseminated the innovative capabilities of its products
through advertisement and printed materials at the Company's exhibition at the
annual meeting of the American Academy of Ophthalmology in Dallas, Texas in
October 2000. The theme of the Company's advertisement for its Ocular Surgery
workstation(TM) was "The Future of Phaco is Laser Cataract Surgery." The Company
will expand upon the concept of the "Workstation(TM)" with additional advanced
laser and surgical capabilities. The Company has also continued its campaign for
the Blood Flow Analyzer(TM) in addition to having a full diagnostic product
line.

                                       11
<PAGE>

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

         Manufacturing and Raw Materials: Currently, the Company a 29,000 square
foot facility in Salt Lake City, a 26,000 square foot facility in San Diego and
a small facility in England. These facilities accommodate the Company's expanded
manufacturing, marketing and engineering capabilities. The Company manufactures
under system of quality control and testing, which complies with the Quality
System Requirements (QSR) guidelines established by the FDA, as well as similar
guidelines established by foreign governments, including 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
the Company's financial purchasing capabilities and pricing needs. The Company
manufactures the LCP (TM) laser cataract probe and some of its surgical
instruments, accessories and fluidics surgical tubing sets at its facility in
Salt Lake City.

         Product Service and Support: Service for the Company's products is
overseen from its Salt Lake City and San Diego, and is augmented by its
international dealer network who provide technical service and repair.
Installation, on-site training and a limited product warranty are included as
the standard terms of sale. The Company provides distributors with replacement
parts at no charge during the warranty period. To date, the Company has incurred
minimal expenses under this warranty program. International distributors are
responsible for installation, repair and other customer service to installed
systems in their territory. All systems parts are modular sub-components that
are easily removed and replaced. The Company maintains adequate parts inventory
and provides overnight replacement parts shipment to its dealers. After the
warranty period expires, the Company offers one year and three year service
contracts to its domestic customers and will continue to sell parts to
international dealers who in turn create their own service plans with their
customers.

         Co-Distribution Agreement with Pharmacia Company and MAXXIM: The
Company has entered into a Co-Distribution Agreement as of June 26, 1998 with
Pharmacia Company and MAXXIM, which provides for the marketing and sale of a
range of ophthalmic products. The contract has a one-year term that is renewable
for additional one-year periods. The agreement can be canceled upon 90 days
written notice to the other parties. Under the terms of the Co-Distribution
Agreement, the Company, Pharmacia and MAXXIM will offer a comprehensive package
of products to cataract surgeons, including cataract surgical equipment,
intraocular lens implants, intraocular pharmaceuticals, surgical instruments and
sterile procedural packs. The Company will provide the Precisionist(TM) for
distribution and sale under the Co-Distribution Agreement. The Pharmacia
products to be distributed as part of the Co-Distribution Agreement include
Healon(R) and HealonGV(R) viscoelastic solution and the CeeOn line of foldable,
small intraocular lens implants, designed to replace the natural lens removed
during cataract surgery. It is too soon to determine the full effect of these
agreements on the Company. However, some possible benefits may be lower
marketing costs for the Company's products and a greater appeal of the Company's
products to hospitals and other buyers who prefer a comprehensive and more
cost-effective package.

                                       12
<PAGE>

Research and Development

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

         The Company believes its research and development capabilities provide
it with the ability to respond to regulatory developments, including new
products, new product features devised from its users and new applications for
its products on a timely and proprietary basis. The Company intends to continue
investing in research and development and to strengthen its ability to enhance
existing products and develop new products. The Company spent $771,000 in fiscal
year ended December 31, 1998, and $1,220,000 in fiscal year ended December 31,
1999 and $1,425,000 in fiscal year ended December 31, 2000.

Competition

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

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

         The Cataract Surgical System Industry: Presently, products currently in
use are offered by the major manufacturers utilizing ultrasonic technology.
Those systems rely on accessories including single-use cassette packs and other
ancillary surgical disposables such as saline solution, sutures and intraocular
lenses for their profits. The cassette packs are required for fluid and tissue
collection during the surgical procedure. The cassette packs are generally
unique and proprietary to their respective systems and represent a barrier to
entry for third-party, lower-cost after-market suppliers. While there is growing
market resistance in the United States and internationally to single-use
cassettes, the Company anticipates that manufacturers of ultrasound equipment
will continue to develop and enhance their present ultrasound products in order
to protect their investments in system and cassette technology and to protect
their profits from sales of these cassettes and accessories. The Company's
Precisionist Thirty Thousand(TM) ultrasonic phaco system has the ability to use
either reusable or single-use disposable components. The Photon(TM) laser

                                       13
<PAGE>

cataract system will utilize probes and cassette packs designed for single-use
and semi-disposable instruments priced at a level consistent with the demands of
health care cost containment. This will allow the health care providers a
substantial measure of cost containment, while providing the Company with the
quality control and income capability of cassette sales.

         The typical list price of a competitive advanced ultrasonic system
ranges from approximately $25,000 to $60,000. Lower cost models generally have a
list price ranging from approximately $15,000 to $25,000. The list price for the
Precisionist Thirty Thousand(TM) ocular surgery system is $49,950. The Company's
Photon(TM) Laser Phaco(TM) will be sold at a price of approximately $100,000.
The international market, with significantly lower medical budgets, has not been
able to justify the expense of using disposable components. Budgetary
constraints have limited current manufacturers from gaining a significant share
of the international ultrasound equipment market, and 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 & Lombe, Alcon Laboratories, and
Allergan Medical Optics as its primary competitors in the ultrasound phaco
cataract equipment market.

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

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

         The Retinal Diagnostic Market. The Glaucoma Research Foundation
suggests that with the aging of the so-called baby boom generation, there will
be an increase of macular degeneration and glaucoma in the United States, the
leading causes of adult blindness worldwide. The damage caused by these diseases
is irreversible. The preconditions for the onset of macular degeneration or
glaucoma are low ocular blood flow and/or high intraocular pressure. Diagnostic
screening is important for individuals susceptible to these diseases. People in
high-risk categories include: African Americans over 40 years of age, all
persons over 60 years of age, persons with a family history of glaucoma or
diabetes, and the very near-sighted. The glaucoma Research Foundation recommends
that these high-risk individuals be tested once every two years for glaucoma.
According to the U.S. Census Bureau, in 1995 there were over 30 million adults
65 years of age and older and 8 million African Americans 45 years of age and
older. The Glaucoma Research Foundation reports that glaucoma currently accounts
for more than 7 million visits to physicians annually.

                                       14
<PAGE>

         The Company is subject to intense competition in the ophthalmic
diagnostic market from well-financed, established companies with recognizable
trade names and product lines and new and developing technologies. The industry
is dominated by several large entities which the Company believes account for
the majority of diagnostic equipment sales. The Company expects to derive
revenues from the sale of its newly acquired ultrasound diagnostic equipment and
blood flow analyzer. The blood flow analyzer is designed to detect glaucoma in
an earlier stage than is presently possible. In addition, the device performs
tonometry and blood flow analysis. The blood flow analyzer has a list price of
$10,450. Other ophthalmic diagnostic devices that do not detect glaucoma in the
early stages of the disease as does the Company's analyzer retail at comparable
prices. The Company thus believes that it can compete in the diagnostic market
place based upon the lower price and improved diagnostic functions of the
analyzer.

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

Intellectual Property Protection

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

         The Photon(TM) laser cataract probe is protected under a United States
patent issued in 1987 to Daniel M. Eichenbaum, M.D. and subsequently assigned by
Photomed International, Inc. ("Photomed") and a Japanese patent issued in 1997
to the Company for the utility and methods of laser ablation, aspiration and
irrigation of tissue through a hand-held probe of a unique design. The Company
secured the exclusive worldwide right to this patent shortly after its issue,
and to the international patents pending, from Photomed by means of a license
agreement (the "License Agreement"). The License Agreement was amended on
December 5, 1997 to allow Photomed the right to conduct research, development
and marketing utilizing the patent in certain medical sub-specialties other than
ophthalmology for which the Company would receive royalty payments equal to 1%
of the proceeds from the net sales of products utilizing the patent. See
"Management" and "Certain Relationships and Related Transactions."

         The Blood Flow Analyzer(TM) has been granted a patent in the European
Economic Community and the United States and has a patent pending in Japan.

         The Dicon(TM) perimeter and the Dicon(TM) corneal topographer each have
US patent with a wide scope of claims.

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

                                       15
<PAGE>

would U.S. federal registered trademarks. Common law trademark rights only
extend to the geographical area in which the trademark is actually used while
U.S. federal registration prohibits the use of the trademark by any party
anywhere in the United States.

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

Regulation

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

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

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

         The FDA may determine that the device is "substantially equivalent" to
another legally marketed Class I, Class II or pre-1976 Class III device for
which the FDA has not called for a PMA, and allow the proposed device to be

                                       16
<PAGE>

marketed in the United States. The FDA may determine, however, that the proposed
device is not substantially equivalent, or may require further information, such
as additional test data, before the FDA is able to make a determination
regarding substantial equivalence. A "not substantially equivalent"
determination or a request for additional information could delay the Company's
market introduction of its products and could have a material adverse effect on
the Company's business, operating results and financial condition.

         The alternate method to seek approval is to obtain Premarket approval
from the FDA. If a manufacturer or distributor of a medical device cannot
establish that a proposed device is substantially equivalent to another legally
marketed device, whether or not the FDA has made a determination in response to
a Section 510(k) notification, the manufacturer or distributor will have to seek
Premarket approval for the proposed device. A PMA application would have to be
submitted and be supported by extensive data, including preclinical and clinical
trial data to prove the safety and efficacy of the device. If human clinical
trials of a proposed device are required and the device presents a "significant
risk," the manufacturer or the distributor of the device will have to file an
IDE application with the FDA prior to commencing human clinical trials. The IDE
application must be supported by data, typically including the results of animal
and mechanical testing. If the IDE application is approved, human clinical
trials may begin at a specific number of investigational sites, and the approval
letter could include the number of patients approved by the FDA. An IDE clinical
trial can be divided into several parts or Phases. Sometimes, a company will
conduct a feasibility study to confirm that a device functions according to its
design and operating parameters. This is usual clinical trial site. If the Phase
I results are promising, the applicant may, with the FDA's permission, expand
the number of clinical trial sites and the number of patients to be treated to
assure reasonable stability of clinical results. Phase II studies are performed
to confirm predictability of results and the absence of adverse reactions. The
applicant may, upon receipt of the FDA's authorization, subsequently expand the
study to a third phase with a larger number of clinical trial sites and a
greater number of patients. This involves longer patient follow-up times and the
collection of more patient data. Product claims, labeling and core data for the
PMA are derived primarily from this portion of the clinical trial. The applicant
may also, upon receipt of the FDA's permission, consolidate one or more of such
portions of the study. Sponsors of clinical trials are permitted to sell those
devices distributed in the course of the study, provided such compensation does
not exceed recovery of the costs of manufacture, research, development and
handling. Although both approval methods may require clinical testing of the
device in question under an approved IDE, the Premarket approval procedure is
more complex and time consuming.

         Upon receipt of the PMA application, the FDA makes a threshold
determination whether the application is sufficiently complete to permit a
substantive review. If the FDA determines that the PMA is sufficiently complete
to permit a substantive review, the FDA will "file" the application. Once the
submission is filed, the FDA has by regulation 90 days to review it; however,
the review time is often extended significantly by the FDA asking for more
information or clarification of information already provided in the submission.
During the review period, an advisory committee may also evaluate the
application and provide recommendations to the FDA as to whether the device
should be approved. In addition, the FDA will inspect the manufacturing facility
to ensure compliance with the FDA's QSR requirements prior to approval of a PMA.
While the FDA has responded to PMA applications within the allotted time period,
PMA reviews generally take approximately 12 to 18 months or more from the date
of filing to approval. The PMA process is lengthy and expensive, and there can
be no assurance that such approval will be obtained for any of the Company's
products determined to be subject to such requirements. A number of devices for
which PMA approval has been sought by other companies have never been approved
for marketing.

         Any products manufactured or distributed by the Company pursuant to a
premarket clearance notification or PMA are or will be subject to pervasive and
continuing regulation by the FDA. The FDC Act also requires that the Company's
products be manufactured in registered establishments and in accordance with QSR
regulations. Labeling, advertising and promotional activities are subject to
scrutiny by the FDA and, in certain instances, by the Federal Trade Commission.

                                       17
<PAGE>

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 substance. There can be no assurance that the Company will not be
required to incur significant costs to comply with such laws and regulations and
that such compliance will not have a material adverse effect upon the Company's
ability to conduct business.

         The Company and the manufacturers of the Company's products may be
inspected on a routine basis by both the FDA and individual states for
compliance with current QSR regulations and other requirements.

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

         Furthermore, the introduction of the Company's products in foreign
countries may require the Company to obtain foreign regulatory clearances. The
Company believes that only a limited number of foreign countries have extensive
regulatory requirements, including France, Germany, Korea and Japan. The time
involved for regulatory approval in foreign countries varies and can take a
number of years. A number of European and other economically advanced countries,
including Italy, Norway, Spain and Sweden, have not developed regulatory
agencies for intensive supervision of such devices. Instead, they generally have
been willing to accept the approval of the FDA. Therefore, a PMA, Section 510(k)
or approved IDE from the FDA is tantamount to approval in those countries. These
countries and most developing countries have simply deferred direct discretion
to licensed practicing surgeons to determine the nature of devices that they
will use in medical procedures. The Company's two ultrasound systems, the
Photon(TM) laser cataract system the Company is developing and the ocular blood
flow analyzer are all devices, which require FDA approval. Therefore, a

                                       18
<PAGE>

significant aspect of the acceptance of the devices in the market is the
effectiveness of the Company in obtaining the necessary approvals. Having an
approved IDE allows the Company to export a product to qualified investigational
sites.

Regulatory Status of Products

         All of the Companies 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 Companies
products have been accepted for import into CE countries and various non-CE
countries.

         The Company acquired permission from the FDA to manufacture the
Photon(TM) Laser Cataract System the device and approval to export outside the
United States under an open IDE 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
cataract 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 IDE application to provide for a "modest clinical
study" in order to collect the data required by the FDA for clearance of the
Photon(TM) laser cataract system. The FDA granted this IDE in May 1995 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 the Company's 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 ("FDA") relating to the human clinical trials of its
Photon(TM) Laser Cataract System. The warning letter concerns the conditions
found by the FDA during several audits at Company's 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 requested clarification of two issues.
The Company believes that these issues have been resolved. Subsequent to the
warning letter the Company has received approval to continue its clinical trials
and is in the process of collecting more data. The Company expects to complete
its trials later in 2001.


Employees

         As of December 31, 2000, the Company had 80 full-time employees. This
number does not include the Company's manufacturer's representatives who are
independent contractors rather than employees of the Company. The Company also
utilizes several consultants and advisors. There can be no assurance that the
Company will be successful in recruiting or retaining key personnel. None of the
Company's employees is a member of a labor union and the Company has never
experienced any business interruption as a result of any labor disputes.

                                       19
<PAGE>


Item 2. Description of Property

         The Company's executive offices are currently located at 2355 South
1070 West, Salt Lake City, Utah. This facility consists of approximately 29,088
square feet of leased office space under a three-year lease that will expire on
March 1, 2003 with an additional three-year renewal option. These facilities are
leased from Eden Roc, a California partnership, at a base monthly rate of
$15,999 plus a $2,356 monthly common area maintenance fee. The base monthly rent
increases to $16,479 and $16,973 for the second and third years of the lease,
respectively. Pursuant to the lease, the Company pays all real estate and
personal property taxes and the insurance costs on the premises.

         The Company maintains a facility located at 10373 Roselle Street, San
Diego, California. This facility consists of approximately 25,952 square feet of
leased office space under a five-year lease that will expire on August 1, 2002.
These facilities are leased from Torrey Sorrento Associates, Ltd., a California
limited partnership, at a gross monthly rate of $16,531. The monthly rate
increases to $17,025 and $17,544 in the fourth and fifth years of the lease,
respectively.

         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 in March 2000 by George
Wiseman, a former employee, in the Third District Court of Salt Lake County,
State of Utah. The complaint alleges that the Company owes Mr. Wiseman 6,370
shares of its common stock plus costs, attorney's fees and a wage penalty (equal
to 1,960 additional shares of Paradigm common stock) pursuant to Utah law. The
action is based upon an extension of a written employment agreement. The Company
believes the complaint is without merit and intends to vigorously defend against
the action.

         An action was brought against the Company in September 2000 by PhotoMed
International, Inc. and Daniel M. Eichenbaum 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 with
respect to the sales of certain equipment plus attorney's fees. Discovery has
taken place and the Company has paid royalties of $15,000 to bring all payments
up to date through June 30, 2001. However, the legal action has not been
dismissed as a result of the payments. The Company is in the process of working
with Photomed International, Inc. 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 correct calculations on the royalties, the legal action
will dismissed.

         The Company has received demand letters dated September 14, 2000 and
October 17, 2000 from Mentor Corporation ("Mentor") claiming that the Company
failed to register 485,751 shares of common stock issued to Mentor under the
Asset Purchase Agreement dated October 15, 1999, among the Company, Mentor,
Mentor Ophthalmics, Inc. and Mentor Medical, Inc. The Asset Purchase Agreement
related to the Company's purchase of Mentor's phacoemulsification product line
in consideration for the issuance by the Company to Mentor of 485,751 shares of
its common stock, valued at the sum of $1,500,000 at the time of closing.

         The Asset Purchase Agreement required the Company to register the
485,751 shares of common stock issued to Mentor whenever the Company determined
to register any of its shares of common stock. Mentor alleges that because the
Company did not register the 485,751 shares in a Registration Statement, which

                                       20
<PAGE>

became effective on January 6, 2000 (the "January 6, 2000 Registration
Statement"), that it was unable to sell the shares at the time and, as a result,
lost approximately $5,000,000 due to Company's alleged breach of the Asset
Purchase Agreement.

         The Company maintains that an authorized officer of Mentor agreed to
waive the registration rights of Mentor in having the 485,751 shares registered
in the January 6, 2000 Registration Statement. As a consequence, the Company
believes that it has not breached the Asset Purchase Agreement and that Mentor
is not owed any moneys for not having registered the shares of the Company's
common stock held by Mentor in the January 6, 2000 Registration Statement. The
Company is in the process of further review of the matter and denies liability
and for the damages asserted by Mentor.

         An Action was brought against the Company on March 7, 2000 in the Third
District Court of Salt Lake County, State of Utah, by Merrill Corporation that
alleges that the Company owes the plaintiff approximately $20,000 together with
interest thereon at the rate of 10% per annum from August 30, 1999 plus cost and
attorney fees. The complaint alleges a breech of contract relative to printing
services. The Company has filed an answer to the complaint and discovery is
proceeding. The Company believes that the complaint against the Company is
without merit and intends to vigorously defend against the action.

         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 the
Company's financial condition or results of operations.


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

         At the annual shareholders meeting held on November 29, 2000, the
following matters were acted upon: (i) four directors consisting of Thomas F.
Motter, Randall A. Mackey, Dr. David M. Silver and Keith D. Ignotz were elected
to serve until the next annual shareholders meeting and until their respective
successors are elected and qualified (with votes cast of 7,552,l82 shares for,
66,357 shares against and l,067,100 abstaining on each of the nominees); (ii)
the Company's l995 Stock Option Plan was amended to authorize an additional
500,000 shares of Common Stock to be available for issuance under the Plan (with
votes cast of 8,062,164 shares for, 573,222 against and 50,253 shares abstaining
on the motion); (iii) stock options were granted to Robert L. Frome, Patrick N.
Kolenik and Steven J. Bayern, former directors of the Company, to each receive
options to purchase 75,000 shares of Common Stock at $4.00 per share, and to Dr.
David M. Silver and Randall A. Mackey, current directors of the Company, to each
receive options to purchase 75,000 shares of Common Stock at $6.00 per share
(with votes cast of 7,876,819 shares for, 673,801 shares against and 40,621
shares abstaining on the motion); and (iv) the appointment of Tanner & Co. as
the Company's independent accountants for the fiscal year ending December 31,
2000 was ratified (with votes cast of 8,522,006 for, 123,012 votes against and
40,621 abstaining on the motion).



                                       21
<PAGE>

                                     PART II


Item 5. Market for Common Equity and related Stockholder Matters

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

         The Company's Common Stock and Class A Warrants trade on The Nasdaq
SmallCap Market under the respective symbols of "PMED" and "PMEDW." Prior to
July 22, 1996, there was no public market for the Common Stock. As of March 23,
2001 the closing sale prices of the Common Stock and Class A Warrants were
$1.688 per share and $0.15 per warrant, respectively. The following are the high
and low sales prices for the Common Stock and Class A Warrants by quarter as
reported by Nasdaq since January 1, 1999.


                               Common Stock               Class A Warrants
Period (Calendar Year)         Price Range                  Price Range
                           -----------------------------------------------------
                            High         Low           High            Low
--------------------------------------------------------------------------------

1999
----

First Quarter               4.000         2.094         1.063           0.047
Second Quarter              3.938         2.688         0.875           0.594
Third Quarter               4.594         2.688         1.000           0.438
Fourth Quarter              7.938         2.875         2.313           0.438

2000
----

First Quarter              14.500         6.880         6.500           2.630
Second Quarter             10.500         4.190         3.630           1.190
Third Quarter               6.190         3.380         2.000           0.500
Fourth Quarter              4.940         1.310         1.250           0.500


         The Company's Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock are not publicly traded.
As of March 23,2000, there were 1,713 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 and five record holders of
Series D Preferred Stock.

         The Company has never paid any cash dividends on its Common Stock and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. The Company must pay cash dividends to holders of its Series
A Preferred, Series B Preferred, Series C Preferred and Series D Preferred Stock
before it can pay any cash dividend to holders of its Common Stock. Dividends
paid in cash pursuant to outstanding shares of the Company's Series A, Series B,
Series C and Series D Preferred Stock are only payable from surplus earnings of
the Company and are non-cumulative and therefore, no deficiencies in dividend
payments from one year will be carried forward to the next. The Company

                                       22
<PAGE>

currently intends to retain future earnings, if any, to fund the development and
growth of the Company's proposed business and operations. Any payment of cash
dividends in the future on the Common Stock will be dependent upon the Company's
financial condition, results of operations, current and anticipated cash
requirements, plans for expansion, restrictions, if any, under any debt
obligations, as well as other factors that the Company's Board of Directors
deems relevant. The Company issued 6,764 shares of its Series A Preferred and
6,017 shares of its Series B Preferred on January 8, 1996 as a stock dividend to
Series A and Series B shareholders of record as of December 31, 1994.


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

         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 the current view of the Company respecting future events 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.

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 has changed its
fiscal year to the period from January 1 to and including December 31.

         The Company's ultrasound diagnostic products include a pachymeter, an
A-Scan, an A/B Scan and a biomicroscope, the technology for which was acquired
from Humphrey Systems in 1998. In addition, the Company markets its Blood Flow
Analyzer(TM). Paradigm's activities for the twelve months ended December 31,
1999 include domestic sales of the Precisionist ThirtyThousand(TM) and Humphrey
Systems ultrasound diagnostic equipment, acquisition of new product lines, and
research and development on the Photon(TM) laser cataract removal system which
received FDA approval for expansion to Phase II Clinical Trials on May 19, 1998.

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

         In October 1999 the Company entered into an agreement with Mentor to
purchase the rights to develop, manufacture, market and sell their Phaco product
line. The phaco line includes the Mentor SIStem(TM), the Odyssey(TM), and the
Surg-E-Trol(TM). Shipments of the Mentor SIStem(TM) commenced immediately upon
purchase, and have continued in first quarter of 2000.

                                       23
<PAGE>

         In November, 1999, the Company entered into a Mutual Release and
Settlement agreement with the manufacturer of the Precisionist
ThirtyThousand(TM) Ocular Surgery Workstation(TM) in which the Company
terminated its Manufacturing Agreement and completed the purchase from them of
outstanding finished goods and raw material inventory. The company took over the
development and manufacture of the ThirtyThousand(TM) Ocular Surgery
Workstation(TM).

         On June 5, 2000 the Company purchased under a pooling of interest
Vismed Inc. d/b/a Dicon(TM, a California Corporation and manufacturer and
distributor of diagnostic instrumentation for the detection of chronic eye
diseases. The purchase included the Dicon(TM) perimeter product line consisting
of the LD 400, the TKS 4000, the SST(TM), FieldLink(TM), FieldView(TM) and
Advanced FieldView and the corneal topographer product line the CT200(TM), the
CT50 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 corneal and 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.

Results of Operations

Fiscal Year Ended December 31, 2000, Compared to Fiscal Year Ended
------------------------------------------------------------------
December 31, 1999:
------------------

         It should be noted that the Company concluded a pooling of interests
transaction with Vismed inc. d/b/a Dicon on June 5, 2000. As a result of the
pooling, and in accordance with GAAP, the financial results of each organization
are reported as though they were one for all periods presented.

         Consolidated sales increased by $515,000, or 7%, to $7,989,000 for the
twelve months ended December 31, 2000, from $7,474,000 for the comparable period
in 1999. Sales of the phaco surgical line, the ultrasonic product line, and
related accessories increased $2,258,000, which were offset by a decrease in
sales of the Perimeter, the Corneal Topographer, and the Blood Flow Analyzer.

         Sales of the phaco surgical line accounted for approximately
$1,144,000, or 51%, of the $2,258,000 increase in sales from 1999 to 2000. Of
this increase, $1,057,000 was due to sales of the Mentor SIStem and related
consumables and accessories. The increase in sales of the Mentor SIStem from
1999 to 2000 was attributed to the fact that the Mentor product line was
purchased at the end of October 1999, affording only two months of sales
activity in the year 1999, compared to a full year of sales activity in 2000.

         Sales of the ultrasonic product line and related accessories accounted
for approximately 1,114,000, or 49% of the $2,258,000 increase. Shipment of the
ultrasonic product line did not commence until June 1999, once these products
were released for production, affording seven months sales activity in the year
1999, compared to a full year of sales activity in 2000.

         Sales of the Perimeter and Corneal Topographer decreased by $1,717,000
from 1999 to 2000, with approximately 78% of the decrease attributed to sales in
the domestic market. The Perimeter and Corneal Topographer, both mature
products, have seen a decline in sales over the past two years, both at a rate
of approximately 20% per year. The anticipation with the Dicon/Paradigm merger
in mid 2000 was that the combination of sales forces and the Pharmacea-Upjohn
alliance would piggyback these products with the phaco surgical line to begin
their penetration into the ophthalmic market, in addition to the optometric
market, resulting in a growth in their sales. Such growth had not taken place as
of year-end 2000.

                                       24
<PAGE>


         Cost of sales increased by $2,002,000, or 43%, to $6,626,000 for the
twelve months ended December 31, 2000, from $4,624,000 for the like period in
1999. The gross profit on sales of 17% for the fiscal year ended December 31,
2000 was 55% lower than the gross profit on sales of 38% for the year ended
December 31, 1999. This sharp profit margin decline can be attributed
principally to an inventory write-down of $1,596,000 for the fiscal year 2000 to
net realizable value and an increase of $167,000 in the reserve for obsolete
inventory. Many inventory items obtained principally through the acquisition of
new product lines were reduced in cost to reflect obsolescence, technological
advances and product enhancements.

         Of the total inventory write-down amount, $419,000 in parts and
finished goods was utilized for further research and development, $299,000 was
deemed obsolete, and $878,000 was a cost adjustment. Of the $878,000 cost
adjustment, 74% was for the ultrasonic line, 21% for the Mentor line, and 5% for
the Zevex line.

         The Humphrey ultrasonic product line was purchased in July 1998, the
Mentor line in October 1999, and the Zevex inventory in November 1999. Because
of engineering redesign, many of the raw material components associated with all
three product lines were changed to reflect current technology, and/or were
found at lower costs after re-quoting suppliers. In the process of redesigning
for production, some components were deemed obsolete. The $299,000 deemed
obsolete consisted of items from all product lines.

         Marketing and selling expenses increased by $994,000, or 34%, to
$3,950,000 for the twelve months ended December 31, 2000, from $2,956,000 for
the comparable period in 1999. This increase was partly the result of the
addition of three international area managers in an effort to improve the
international distribution system, and employing a United States direct sales
force rather than working through distributors. Payroll expenses increased by
$384,000, commissions increased by $95,000 and travel expenses increased by
$66,000. The increase also included building of additional awareness in the
international market, increased tradeshow participation, and updating marketing
materials to reflect company integration, as a result of the merger.

         General and administrative expenses increased by $2,049,000, or 61%, to
$5,432,000 for the twelve months ended December 31, 2000, from $3,383,000 for
the comparable period in 1999. This increase was mainly due to certain non-cash
transactions in the total amount of $1,933,000, resulting from warrants granted
to non-employees as payment for services, stock bonuses granted to officers of
the company, and stock granted to non-employees as payment for services. Also
included in the increase is $167,000 paid to Cyndel & Co. for consulting
services rendered during the year 2000.

         Research and development expenses increased by $205,000, or 17%, to
$1,425,000 for the twelve months ended December 31, 2000, from $1,220,000 for
the same period in 1999. This increase was due in part as the result of added
personnel in engineering and regulatory affairs, increasing personnel costs by
$91,000. Expenses related to new product development increased by $32,000, and
FDA clinical expenses increased by $14,000.

         Other income (expense) increased by $161,000, or 732%, to $139,000 for
the twelve months ended December 31, 2000, from ($22,000) for the same period in
1999. This was due to interest earned on investment in money market instruments
in the year 2000 and a decrease in interest paid on debt in the same year.

         The Company had a net loss of $9,305,000, or $.81 per share, based on
11,547,000 weighted average shares outstanding for the year ended December 31,

                                       25
<PAGE>

2000. This is compared to a net loss of $4,731,000, or $.62 per share, based on
7,655,000 weighted average shares outstanding for the year ended December 31,
1999, an increase of $4,574,000. The increase in the net loss was partially
attributable to the Black-Scholes valuation for warrants granted non-employees
in payment for services ($529,000), the valuation of stock granted non-employees
and officers of the company ($1,404,000), and a write-down of inventory
($1,596,000) principally for devaluation of certain active inventory items due
to technical advances, product enhancements, and obsolescence. The increase was
also attributable to an increase in consulting and regulatory fees paid in
connection with ISO 9001 and CE Mark certification and FDA compliance of
$195,000, investment banking fees of $138,000 and in the addition of personnel
company-wide for $389,000.

Fiscal year ended December 31, 1999, Compared to Fiscal year Ended
------------------------------------------------------------------
December 31, 1998:
------------------

         Sales increased by $443,000, or 35%, to $1,701,000 for the twelve
months ended December 31, 1999, from $1,258,000 for the comparable period in
1998. Production and shipment of the Humphrey ophthalmic diagnostic instruments
commenced in the first and second quarters of 1999. The Company shipped a total
of 105 A-Scans, 22 A/B Scans, 21 Ultrasonic Biomicroscopes, and 31 Pachymeters.
Also, upon the purchase of the Mentor phaco product line in the fourth quarter
of 1999, the Company shipped two Mentor SIStem(TM) surgery workstations, as well
as associated accessories. The new fluidic panel for the Precisionist(TM) was
completed late in the year, rather than in March 1999, as was anticipated at the
end of 1998. As a result, the Company shipped only one Precisionist(TM) in 1999.
Due to the restructuring of Phase II clinical study sites in the third quarter
of 1999, which was done to expedite completion of the clinical studies, sales
returns were posted of approximately $500,000.

         Cost of sales increased by $218,000, or 27%, to $1,031,000 for the
twelve months ended December 31, 1999, from $813,000 for the comparable period
in 1998. The 39% gross margin on sales for the twelve months ended December 31,
1999, was 4% higher than the 35% gross margin on sales for the comparable period
in 1998. If the amortization of capitalized engineering and design charges, a
non-cash expense, its excluded, gross margins for 1999 and 1998 were 44% and
41%, respectively.

         Marketing and selling expenses decreased by $106,000, or 10%, to
$915,000 for the twelve months ended December 31, 1999, from $1,021,000 for the
comparable period in 1998. Sales and marketing activities pertaining to the
Humphrey ophthalmic diagnostic instruments were launched during the 1999 year,
although there were no changes in the size of the sales force.

         General and administrative expenses increased by $870,000, or 47%, to
$2,711,000 in 1999, from $1,841,000 for the twelve months ended December 31,
1998. The majority of the increase was attributable to the Black-Scholes
valuation of common stock warrants and common stock granted as compensation for
consulting services during the year and an increase in bad debt expense relating
to receivables. In addition, approximately $85,000 in design expense was
recognized as a result of the Mutual Release and Settlement Agreement with the
manufacturer of the Precisionist(TM), which was entered into in preparation for
taking the development and manufacture of the Precisionist(TM) in-house.

         Research and development expenses increased by $379,000, or 127%, to
$677,000 for the year ended December 31, 1999, from $298,000 for comparable
period in 1998. The increase between 1998 and 1999 was ascribed to an increase
in personnel pursuant to bringing the Humphrey line into full production and
taking over the manufacture of the Precisionist(TM).

         Other income (expense) increased by $55,000, to $11,000 for the year
ended December 31, 1999, from ($44,000) for the same period in 1998. This was
the result of a reduction in interest expense recognized in 1999 and a billing
adjustment posted in 1998.

                                       26
<PAGE>

         The Company had a net loss of $3,622,000, or $.54 per share, for the
year ended December 31, 1999, compared to a net loss of $2,759,000, or $.69 per
share, for the year ended December 31, 1998, an increase of $863,000. The
increase in net loss was attributable to a reduction in sales of the
Precisionist(TM) as a result of delays in the release of the new fluidic panel,
sales returns pursuant to restructuring the Phase II clinical study sites, the
valuation of the warrants granted to outside consultants, expenses recognized in
connection with the Mutual Release and Settlement Agreement with the
manufacturer of the Precisionist(TM), and an increase in bad debt allowance for
receivables.


Liquidity and Capital Resources

         The Company used cash in operating activities of $5,424,000 for twelve
months ended December 31, 2000, compared to $3,613,000 for the twelve months
ended December 31, 1999. The increase in cash used for operating activities in
2000 was attributed to an increase in personnel and marketing and selling
expenses, expenses related to FDA clinical site monitoring, and consulting and
regulatory fees paid in connection with ISO 9001 and CE Mark certification and
investment banking and expenses in connection with the integration of merged
companies. The company used cash in investing activities of $725,000 for the
twelve months ended December 31, 2000, compared to $16,000 for the year 1999.
The difference was due to investment in property and equipment for production of
the Precisionist(TM) system, the move to a larger facility, and cash paid for
the acquisition of OBF Labs and the merger with Vismed d/b/a Dicon. Net cash
provided by financing activities for the twelve months ended December 31, 2000,
was $7,225,000, compared to $4,586,000 for the year ended December 31, 1999.
Sale transactions of common stock provided $2,572,000, and the exercise of
options and warrants to purchase common stock provided $4,842,000 in the year
2000, offset by a reduction of $189,000 in debt.

         As the Company has gained regulatory approval of its products, it has
been aggressive in gaining market presence. The majority of revenues to date
have been derived from the sales of product in foreign countries. Because of the
foreign nature of these revenues and the more liberal acceptance of customers in
order to gain market share and product awareness, the Company has experienced
difficulty in the collection of receivables. As of December 31, 2000, the
Company's allowance for doubtful accounts was 19% of total outstanding
receivables. 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, frequent direct
communication with the customer subsequent to delivery of the system, and
requiring prepayment in part or in full prior to shipment. As the Company's
products gain awareness and acceptance in the marketplace, the Company will
focus increasing attention on the customers credit worthiness and ability to
pay.

         In addition, the Company has recorded an allowance for obsolete
inventory of $489,000 which is approximately 10% of total inventory at December
31, 2000. 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 is uncertain. While such items may be used in the future, the
Company determined, based on current expectations and the rapid progression of
technology, to record an allowance for such inventory on hand.

         As of December 31, 2000, the Company had raised approximately $260,000
through a $20,000,000 equity line of credit under an investment banking
arrangement, which the Company will continue to use, if required. As of December
31, 2000, $19,740,000 was available under the equity line of credit. Management
anticipates that the combination of existing working capital and the private

                                       27
<PAGE>

equity line of credit will be sufficient to assure continuation of the Company's
operations through December 31, 2001. The Company will also seek funding to meet
its working capital requirements through other collaborative arrangements and
strategic alliances, additional public offerings and/or private placements of
its securities or bank borrowings, if necessary. There can be no assurance,
however, that additional funds, if required, will be available from any of the
foregoing or other sources on favorable terms.

         At December 31, 2000, the Company had net operating loss carry-forwards
(NOLs) of approximately $25,000,000 and research and development tax credit
carry-forwards of approximately $240,000. These carry-forwards are available to
offset future taxable income, if any, and begin to expire in the year 2001. The
Company's ability to use its NOLs to offset future income is dependent upon the
tax laws in effect at the time the NOL's can be utilized. The Tax Reform Act of
1996 significantly limits the annual amount that can be utilized for certain of
these carry-forwards as a result of changes of ownership.


Effect of Inflation and Foreign Currency Exchange

         The Company has not realized a reduction in the selling price of the
Precisionist phaco system as a result of domestic inflation. Nor has the Company
experienced unfavorable profit reductions due to currency exchange fluctuations
or inflation with its foreign customers. All sales transactions to date have
been denominated is US Dollars.


Impact of New Accounting Pronouncements

         In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
133". This statement establishes accounting and reporting standards for
derivative instruments and requires recognition of all derivatives as assets or
liabilities in the statement of financial position and measurement of those
instruments at fair value. The statement is effective for fiscal years beginning
after June 15, 2000. The Company believes that the adoption of SFAS 133 will not
have any material effect on the financial statements of the Company.

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


                                       28


<PAGE>


Item 7. Financial Statements


PARADIGM MEDICAL INDUSTRIES, INC.
Financial Statements
December 31, 2000 and 1999



<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Index to Financial Statements

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




                                                                        Page
                                                                        ----

Report of Tanner + Co.                                                   F-2


Report of Lavine, Lofgren, Morris & Engelberg                            F-3


Balance Sheet                                                            F-4


Statement of Operations                                                  F-5


Statement of Stockholders' Equity                                        F-6


Statement of Cash Flows                                                  F-8


Notes to Financial Statements                                            F-9



--------------------------------------------------------------------------------
See accompanying notes to financial statements.
                                                                             F-1

<PAGE>

                                                    INDEPENDENT AUDITORS' REPORT





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


We have audited the balance  sheet of Paradigm  Medical  Industries,  Inc.  (the
Company) as of December  31, 2000,  and the related  statements  of  operations,
stockholders'  equity,  and cash flows for the years ended December 31, 2000 and
1999.  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 did not audit the 1999 financial  statements
of Vismed, Inc. (dba Dicon), which was acquired by the Company in June 2000 in a
pooling of  interests  transaction.  Such  financial  statements  reflect  total
revenues and net loss  constituting  77% and 23%,  respectively,  of the related
consolidated  totals for the year ended December 31, 1999. Those statements were
audited by other  auditors  whose report dated March 15, 2000 has been furnished
to us and our opinion,  insofar as it relates to data included for Vismed,  Inc.
(dba Dicon), is based solely on the report of other auditors.

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

In our  opinion,  based on our  audits  and the  report of other  auditors,  the
financial statements referred to above present fairly, in all material respects,
the financial position of Paradigm Medical  Industries,  Inc. as of December 31,
2000,  and the results of its  operations and its cash flows for the years ended
December 31, 2000 and 1999, in conformity  with  generally  accepted  accounting
principles.


                                      TANNER + CO.


Salt Lake City, Utah
March 2, 2001

--------------------------------------------------------------------------------
                                                                             F-2

<PAGE>

                                                    INDEPENDENT AUDITORS' REPORT








To the Board of Directors
VISMED, INC. dba DICON
San Diego, California

We have audited the accompanying statements of operations, stockholder'  equity,
and cash flows of VISMED,  INC. dba DICON for the year ended December 31,  1999.
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 audit.

We conducted  our audit in  accordance  with U.S.  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the results of operations and cash flows of VISMED, INC.
dba DICON for the year ended December 31, 1999 in conformity with U.S. generally
accepted accounting principles.


                       LAVINE, LOFGREN, MORRIS & ENGELBERG









La Jolla, California
March 15, 2000


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

<PAGE>
<TABLE>
<CAPTION>


                                                                         PARADIGM MEDICAL INDUSTRIES, INC.

                                                                                             Balance Sheet

                                                                                         December 31, 2000
----------------------------------------------------------------------------------------------------------



              Assets
              ------
<S>                                                                                     <C>

Current assets:
     Cash                                                                               $        2,194,000
     Receivables, net                                                                            1,607,000
     Inventories, net                                                                            4,447,000
     Prepaid and other assets                                                                      177,000
                                                                                        ------------------

                  Total current assets                                                           8,425,000

Intangibles, net                                                                                 1,472,000
Property and equipment, net                                                                        738,000
Other assets                                                                                        88,000
                                                                                        ------------------

                  Total assets                                                          $       10,723,000
                                                                                        ------------------

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

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

Current liabilities:
     Payables                                                                           $          687,000
     Accrued liabilities                                                                         1,200,000
     Current portion of long-term debt                                                              22,000
                                                                                        ------------------

                  Total current liabilities                                                      1,909,000
                                                                                        ------------------

Long-term debt                                                                                      10,000
                                                                                        ------------------

Commitments and contingencies                                                                            -

Stockholders' equity:
     Preferred stock, $.001 par value, 5,000,000 shares authorized, 73,693
       shares issued and outstanding (aggregate liquidation
       preference of $159,000)                                                                           -
     Common stock, $.001 par value, 20,000,000 shares authorized,
       12,611,189 shares issued and outstanding                                                     13,000
     Additional paid-in capital                                                                 41,157,000
     Stock subscription receivable                                                                  (8,000)
     Accumulated deficit                                                                       (32,358,000)
                                                                                        ------------------

                  Total stockholders' equity                                                     8,804,000
                                                                                        ------------------

                  Total liabilities and stockholders' equity                            $       10,723,000
                                                                                        ------------------


----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
                                                                                                       F-4
</TABLE>


<PAGE>
<TABLE>
<CAPTION>
                                                                         PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                   Statement of Operations

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




                                                                               2000              1999
                                                                       -----------------------------------

<S>                                                                    <C>                 <C>
Sales                                                                  $       7,989,000   $     7,474,000

Cost of sales                                                                  6,626,000         4,624,000
                                                                       -----------------------------------

         Gross profit                                                          1,363,000         2,850,000
                                                                       -----------------------------------

Operating expenses:
     General and administrative                                                5,432,000         3,383,000
     Marketing and selling                                                     3,950,000         2,956,000
     Research and development                                                  1,425,000         1,220,000
                                                                       -----------------------------------

         Total operating expenses                                             10,807,000         7,559,000
                                                                       -----------------------------------

         Operating loss                                                       (9,444,000)       (4,709,000)
                                                                       -----------------------------------

Other income (expense):
     Interest income                                                             146,000            30,000
     Interest expense                                                            (16,000)          (42,000)
     Other income (expense)                                                        9,000           (10,000)
                                                                       -----------------------------------

         Total other income (expense)                                            139,000           (22,000)
                                                                       -----------------------------------

         Loss before provision for income taxes                               (9,305,000)       (4,731,000)

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

         Net loss                                                      $      (9,305,000)  $    (4,731,000)
                                                                       -----------------------------------

Loss per common share - basic and diluted                              $            (.81)  $          (.62)
                                                                       -----------------------------------

Weighted average common shares - basic and diluted                            11,547,000         7,655,000
                                                                       -----------------------------------

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

<PAGE>
<TABLE>
<CAPTION>

                                                                                           PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           Statement of Stockholders' Equity

                                                                                      Years Ended December 31, 2000 and 1999
----------------------------------------------------------------------------------------------------------------------------

                                                       Preferred Stock
                        ------------------------------------------------------------------------------
                            Series A              Series B            Series C          Series D             Common Stock
                        ----------------------------------------------------------------------------------------------------
                        Shares   Amount     Shares    Amount     Shares    Amount    Shares    Amount      Shares    Amount
                        ----------------------------------------------------------------------------------------------------
<S>                     <C>      <C>       <C>      <C>         <C>      <C>       <C>        <C>        <C>        <C>

Balance at January 1,
1999                     34,619  $     -    31,236  $      -     6,900   $     -          -   $     -    6,421,806  $  6,000

Issuance of Series D
preferred stock for
cash, net of finders
fee of $50,000 paid
to an entity controlled
by members of the board
of directors                  -        -         -         -         -         -   1,140,000    1,000            -         -

Conversion of preferred
stock                   (26,542)       -   (12,000)        -    (6,400)        -    (826,356)  (1,000)   1,238,199     1,000

Issuance of common stock
for:
  Cash                        -        -         -         -         -         -          -         -      920,900     1,000
  Exercise of warrants
    and options               -        -         -         -         -         -          -         -      166,980         -
  Assets                      -        -         -         -         -         -          -         -      819,257     1,000
  Satisfaction of
    payables                  -        -         -         -         -         -          -         -       23,426         -
  Services                    -        -         -         -         -         -          -         -      116,510     1,000

Offering costs for:
    Preferred stock           -        -         -         -         -         -          -         -            -         -
    Common stock              -        -         -         -         -         -          -         -            -         -

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

Issuance of stock options
  and warrants for
  services                    -        -         -         -         -         -          -         -            -         -

</TABLE>

<TABLE>
<CAPTION>



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

                                          Additional     Treasury Stock      Unearned    Stock sub-     Accum-
                                           Paid-In      -----------------     Compen-     scription     ulated
                                           Capital       Shares   Amount      sation      Receivable    Deficit
                                        --------------------------------------------------------------------------

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

Balance at January 1,
1999                                    $  22,282,000    2,600   $  (4,000) $  (94,000) $  (8,000)  $ (18,559,000)

Issuance of Series D
preferred stock for cash                    1,995,000        -           -           -          -               -

Conversion of preferred
stock                                               -        -           -           -          -               -

Issuance of common stock
for:
  Cash                                      2,620,000        -           -           -          -               -
  Exercise of warrants
    and options                               398,000        -           -           -          -               -
  Assets                                    2,656,000        -           -           -          -               -
  Satisfaction of
    payables                                  107,000        -           -           -          -               -
  Services                                    366,000        -           -           -          -               -

Offering costs for:
    Preferred stock                          (347,000)       -           -           -          -               -
    Common stock                             (136,000)       -           -           -          -               -

Amortization of unearned
  compensation                                      -        -           -      94,000          -               -

Issuance of stock options
  and warrants for
  services                                    329,000        -           -           -          -               -


------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
                                                                                                               F-6
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                                                                           PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                           Statement of Stockholders' Equity
                                                                                                                   Continued

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

                                                       Preferred Stock
                        ------------------------------------------------------------------------------
                            Series A              Series B            Series C          Series D             Common Stock
                        ----------------------------------------------------------------------------------------------------
                        Shares   Amount     Shares    Amount     Shares    Amount    Shares    Amount      Shares    Amount
                        ----------------------------------------------------------------------------------------------------
<S>                     <C>      <C>       <C>      <C>         <C>      <C>       <C>        <C>        <C>        <C>

Difference between the
Series D preferred
stock conversion price
and common stock fair
value                         -        -         -         -         -         -           -        -            -         -

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

Balance at
December 31, 1999         8,077        -    19,236         -       500         -     313,644        -    9,707,078    10,000

Treasury stock retired        -        -         -         -         -         -           -        -       (2,600)        -

Conversion of preferred
stock                    (2,120)       -    (4,000)        -      (500)        -    (261,144)       -      297,238         -

Issuance of common stock
for:
  Cash                        -        -         -         -         -         -           -        -      910,933     1,000
  Exercise of warrants
    and stock options         -        -         -         -         -         -           -        -    1,355,646     1,000
  Assets                      -        -         -         -         -         -           -        -      100,000         -
  Services                    -        -         -         -         -         -           -        -      242,894     1,000

Issuance of stock
options and warrants
for services                  -        -         -         -         -         -           -        -            -         -

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

Balance at
December 31, 2000          5,957  $    -    15,236  $      -    $    -         -      52,500  $     -   12,611,189  $ 13,000
                        ------------------------------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>



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

                                          Additional     Treasury Stock      Unearned    Stock sub-     Accum-
                                           Paid-In      -----------------     Compen-     scription     ulated
                                           Capital       Shares   Amount      sation      Receivable    Deficit
                                        --------------------------------------------------------------------------

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

Difference between the
Series D preferred
stock conversion price
and common stock fair
value                                         872,000        -           -           -          -        (872,000)

Net loss                                                                                               (3,622,000)
                                        -------------------------------------------------------------------------

Balance at
December 31, 1999                          31,142,000    2,600      (4,000)          -     (8,000)    (23,053,000)

Treasury stock retired                         (4,000)  (2,600)      4,000           -          -               -

Conversion of preferred
stock                                               -        -           -           -          -               -

Issuance of common stock
for:
  Cash                                      2,571,000        -           -           -          -               -
  Exercise of warrants
    and stock options                       4,841,000        -           -           -          -               -
  Assets                                      675,000        -           -           -          -               -
  Services                                  1,403,000        -           -           -          -               -

Issuance of stock
options and warrants
for services                                  529,000        -           -           -          -               -

Net loss                                            -        -           -           -          -      (9,305,000)
                                        -------------------------------------------------------------------------

Balance at
December 31, 2000                       $  41,157,000        -   $       -  $        -  $  (8,000)  $ (32,358,000)
                                        -------------------------------------------------------------------------


------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
                                                                                                              F-7
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                                                         PARADIGM MEDICAL INDUSTRIES, INC.

                                                                                   Statement of Cash Flows

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



                                                                               2000              1999
                                                                       -----------------------------------

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

Cash flows from operating activities:
     Net loss                                                          $      (9,305,000)  $    (4,731,000)
     Adjustments to reconcile net loss to net
       cash used in operating activities:
         Depreciation and amortization                                           528,000           332,000
         Amortization of unearned compensation                                         -            94,000
         Issuance of common stock for services                                 1,404,000           367,000
         Issuance of stock option/warrant for services                           529,000           329,000
         Provision for losses on receivables                                     (30,000)          345,000
         Provision for losses on inventory                                       489,000                 -
         (Gain) loss on disposal of assets                                        (2,000)            5,000
         Write-down of assets                                                          -           331,000
         (Increase) decrease in:
              Receivables                                                        153,000          (284,000)
              Inventories                                                        449,000          (558,000)
              Prepaid and other assets                                             4,000           134,000
         Increase (decrease) in:
              Payables                                                           140,000            19,000
              Accrued liabilities                                                217,000            48,000
                                                                       -----------------------------------

                  Net cash used in
                  operating activities                                        (5,424,000)       (3,613,000)
                                                                       -----------------------------------

Cash flows from investing activities:
     Purchase of property and equipment                                         (613,000)          (82,000)
     Increase in intangibles                                                     (26,000)          (26,000)
     Proceeds from the disposal of assets                                          9,000            48,000
     Net cash paid in acquisition                                                (95,000)                -
                                                                       -----------------------------------

                  Net cash used in
                  investing activities                                          (725,000)          (16,000)
                                                                       -----------------------------------

Cash flows from financing activities:
     Proceeds from issuance of Series D preferred stock                                -         1,649,000
     Proceeds from issuance of common stock                                    2,572,000         2,485,000
     Principal payments on notes payable and long-term debt                     (189,000)          (38,000)
     Proceeds from note payable                                                        -            92,000
     Proceeds from exercise of common stock warrants and options               4,842,000           398,000
                                                                       -----------------------------------

                  Net cash provided by
                  financing activities                                         7,225,000         4,586,000
                                                                       -----------------------------------

Net increase in cash                                                           1,076,000           957,000

Cash, beginning of year                                                        1,118,000           161,000
                                                                       -----------------------------------

Cash, end of year                                                      $       2,194,000   $     1,118,000
                                                                       -----------------------------------



----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
                                                                                                       F-8
</TABLE>

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements

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

1.   Organization       Organization
     and                Paradigm  Medical  Industries,  Inc.  (the Company) is a
     Significant        Delaware  Corporation  incorporated in October 1989. The
     Accounting         Company   is  engaged   in  the   design,   development,
     Policies           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 pachymeter,
                        an A-Scan, an A/B Scan, a biomicroscope,  a perimeter, a
                        corneal topographer, and a blood flow analyzer.

                        Its  ultrasound   diagnostic  products  technology  were
                        acquired from Humphrey Systems in 1998. In October 1999,
                        the  Company  purchased  the  inventory  and  design and
                        production rights of another line of surgical equipment,
                        also  designed to perform  minimally  invasive  cataract
                        surgery.  The line includes the Mentor SIStem (TM),  the
                        Odyssey (TM), and the Surgitrol  (TM). In November 1999,
                        the Company entered into a Mutual Release and Settlement
                        Agreement  with  the  manufacturer  of the  Precisionist
                        Thirty Thousand (TM) in which the Company  purchased the
                        raw  material  and  finished  goods  inventory  to bring
                        manufacture  of this  product  in-house.  The Dicon (TM)
                        perimeter and the Dicon (TM)  topographer  were acquired
                        when the Company acquired Vismed in June 2000. The blood
                        flow  analyzer was  acquired  when Ocular Blood Flow LTD
                        (OBF) was purchased in June 2000.

                        Liquidity
                        The Company has incurred  net losses and  negative  cash
                        flows  from  operating  activities  for the  year  ended
                        December  31,  2000  and  1999  and  has an  accumulated
                        deficit. The Company currently has a private equity line
                        of  credit  agreement  with  Triton  West  Group,  Inc.,
                        (Triton),  which  allows the Company to sell $20 million
                        of common stock over a three year period  beginning June
                        30, 2000 to Triton by tendering  put notices to purchase
                        shares  (see  note  4).  Management  believes  that  the
                        combination of existing  working capital and the private
                        equity  line of  credit  will be  sufficient  to  assure
                        continuation   of  the  Company's   operations   through
                        December 31, 2001.  In the past,  the Company has relied
                        heavily upon sales of its common and preferred  stock to
                        fund  operations.  There can be no  assurance  that such
                        equity  financing will be available on terms  acceptable
                        to the Company in the  future.  If the Company is unable
                        to obtain such  financing or secure debt  financing,  it
                        may be unable to continue  development  of its  products
                        and may be required to substantially curtail operations.

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

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

1.   Organization       Cash Equivalents
     and                For  purposes  of the  statement  of  cash  flows,  cash
     Significant        includes  all  cash  and   investments   with   original
     Accounting         maturities to the Company of three months or less.
     Policies
     Continued          The Company  maintains its cash in bank deposit accounts
                        which, at times,  may exceed  federally  insured limits.
                        The  Company  has not  experienced  any  losses  in such
                        account   and   believes   it  is  not  exposed  to  any
                        significant credit risk on cash and cash equivalents.

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

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

                        Intangible Assets
                        Intangible  assets  consist  of the  purchase  price  in
                        excess of net assets  acquired in the purchase of Ocular
                        Blood Flow, Ltd., product rights,  capitalized  payments
                        to manufacturers for engineering and design services and
                        patent costs.  These costs are being amortized using the
                        straight line method over a three to ten year period.

                        Evaluation of Intangible and Other Long-Lived Assets
                        The  Company   evaluates  the  carrying   value  of  the
                        unamortized  balances of intangible and 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-10

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

1.   Organization       Income Taxes
     and                Deferred income taxes are provided in amounts sufficient
     Significant        to  give  effect  to   temporary   differences   between
     Accounting         financial  and tax  reporting,  principally  related  to
     Policies           depreciation,  stock compensation  expense,  and accrued
     Continued          liabilities.

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

                        The computation of diluted  earnings per common share is
                        based  on  the   weighted   average   number  of  shares
                        outstanding  during  the  year  plus  the  common  stock
                        equivalents,  which  would  arise from the  exercise  of
                        stock  options  and  warrants   outstanding   using  the
                        treasury  stock method and the average  market price per
                        share during the year.  Options and warrants to purchase
                        3,412,181 and 3,684,990 shares of common stock at prices
                        ranging from $2.30 to $12.98 per share were  outstanding
                        at December  31, 2000 and 1999,  respectively,  but were
                        not   included  in  the  diluted   earnings   per  share
                        calculation   because   the   effect   would  have  been
                        antidilutive.

                        Revenue Recognition
                        Revenues  for sales of products  that  require  specific
                        installation   and   acceptance   by  the  customer  are
                        recognized upon such  installation and acceptance by the
                        customer.  Revenues for sales of other surgical systems,
                        ultrasound  diagnostic devices,  and disposable products
                        are  recognized   when  the  product  is  shipped.   The
                        Company's   policy  is  to  obtain  a  signed   purchase
                        agreement   and  a  deposit  or  payment  in  full  from
                        customers  before a product is shipped.  Title passes at
                        the time of shipment.

                        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.

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

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

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

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

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

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

                        During the year ended December 31, 1999, the Company had
                        sales   to   a   major   customer   which    represented
                        approximately  14% of total net  sales.  During the year
                        ended December 31, 2000, no single customer  represented
                        more than 10% of total net sales.

                        Accounts  receivable are due from medical  distributors,
                        surgery centers,  hospitals and ophthalmologists located
                        throughout  the U.S. and a number of foreign  countries.
                        The receivables are generally due within thirty days for
                        domestic  customers  and  sixty  days for  international
                        customers.   The  Company  maintains  an  allowance  for
                        estimated potentially uncollectible amounts.

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


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

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

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

                        Stock-Based Compensation
                        For stock options and warrants  granted to employees the
                        Company  employs the footnote  disclosure  provisions of
                        Statement of Financial  Accounting  Standards (SFAS) No.
                        123, Accounting for Stock-Based  Compensation.  SFAS No.
                        123  encourages  entities  to adopt a  fair-value  based
                        method of accounting for stock options or similar equity
                        instruments.  However,  it  also  allows  an  entity  to
                        continue  measuring  compensation  cost for  stock-based
                        compensation   using  the   intrinsic-value   method  of
                        accounting  prescribed  by Accounting  Principles  Board
                        (APB)  Opinion No. 25,  Accounting  for Stock  Issued to
                        Employees  (APB 25). The Company has elected to continue
                        to apply the  provisions of APB 25 and provide pro forma
                        footnote  disclosures  required  by SFAS  No.  123.  The
                        appropriate  disclosures  required  by SFAS No.  123 are
                        included in note 11.

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

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

                        Reclassifications
                        Certain  amounts in the 1999 financial  statements  have
                        been  reclassified  to conform with the  presentation of
                        the current year financial statements.


2.   Acquisitions       In June 2000,  the Company  acquired  Vismed,  Inc.  dba
                        Dicon in exchange  for 921,500  shares of common  stock.
                        The business  combination  has been accounted for by the
                        pooling-of-interest  method in  accordance  with APB 16.
                        Accordingly,  the historical  financial  statements have
                        been restated to reflect the combination  with Vismed as
                        if it had  occurred  as of January  1, 1999.  Vismed was
                        founded in 1989 and manufactures  and distributes  Dicon
                        branded  diagnostic  products.  These products include a
                        perimeter  used  to  detect  retinal  sensitivity  and a
                        corneal topographer used to measure the curvature of the
                        cornea which is useful in the fitting of contact  lenses
                        and refractive surgery.

                        In June 2000,  the  Company  completed  the  purchase of
                        Ocular Blood Flow,  Ltd.  (OBF) for $100,000 and 100,000
                        shares  of  common  stock.  This  transaction  has  been
                        accounted for using the purchase  method of  accounting.
                        OBF  manufactures  a blood  flow  analyzer  representing
                        proprietary  technology for measuring  blood flow to the
                        eye. Pro forma results of operations as if the companies
                        had been  combined  have not been  presented  since  OBF
                        operations were not significant.



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

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

3.   Detail of
     Certain
     Balance
     Sheet
     Accounts

Receivables:
     Trade receivables                                       $        1,963,000
     Other                                                               14,000
     Allowance for doubtful accounts                                   (370,000)
                                                             ------------------

                                                             $        1,607,000
                                                             ------------------

Inventories:
     Finished goods                                          $        1,513,000
     Work in process                                                    334,000
     Raw materials                                                    3,089,000
     Reserve for obsolescence                                          (489,000)
                                                             ------------------

                                                             $        4,447,000
                                                             ------------------

Accrued liabilities:
     Warranty and return allowance                           $          475,000
     Customer deposits                                                   38,000
     Payroll and employee benefits                                      191,000
     Royalties                                                           58,000
     Commissions                                                        143,000
     Deferred revenue                                                   121,000
     Other                                                              174,000
                                                             ------------------

                                                             $        1,200,000
                                                             ------------------

Intangible assets:
     Purchase price in excess of net asset acquired          $          799,000
     Product and technology rights                                      773,000
     Engineering and design costs                                       482,000
     Patents                                                            143,000
                                                             ------------------
                                                                      2,197,000
Accumulated amortization                                               (725,000)
                                                             ------------------

Net intangible assets                                        $        1,472,000
                                                             ------------------


                        Amortization  expense for the years ended  December  31,
                        2000 and 1999 was $260,000 and $203,000, respectively.

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

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


3.   Detail of
     Certain
     Balance
     Sheet
     Accounts
     Continued


Preferred stock:
     Series A 500,000 shares authorized, 5,957
       shares issued and outstanding (aggregate
       liquidation preference of $6,000)                      $                -
     Series B, 500,000 shares authorized, 15,236
       shares issued and outstanding (aggregate
       liquidation preference of $61,000)                                      -
     Series C, 30,000 shares authorized, no
       shares issued and outstanding                                           -
     Series D 1,140,000 shares authorized,
       52,500 shares issued and outstanding
       (aggregate liquidation preference of $92,000)                           -
                                                              ------------------

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



4.   Property and       Property and equipment consists of the following:
     Equipment


Office equipment                                          $         547,000
Computer equipment                                                  554,000
Automobile                                                           56,000
Furniture and fixtures                                              258,000
Leasehold improvements                                              182,000
                                                          -----------------

                                                                  1,597,000

Accumulated depreciation and amortization                          (859,000)
                                                          -----------------

                                                          $         738,000
                                                          -----------------




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

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

5.   Equity Line        The  Company  currently  has a  private  equity  line of
     of Credit          credit agreement with Triton West Group, Inc., (Triton),
                        which  allows the  Company to sell $20 million of common
                        stock over a three year period  beginning  June 30, 2000
                        to Triton by tendering  put notices to purchase  shares.
                        The put  notices  may be  tendered by the Company at the
                        Company's  discretion.  Upon the put  notice  Triton  is
                        obligated  to  purchase  shares  at 88%  of  the  lowest
                        closing  bid  price  on  the  trading  day   immediately
                        following a five day period commencing two days prior to
                        put  notice  and  ending  two days after such put notice
                        date.  The total amount per put is  determined  based on
                        the  stock  closing  bid price  and the 30  trading  day
                        volume, with a maximum put amount of $2 million.


6.   Long-Term          Long-term debt consists of the following:
     Debt


                        Note payable to a bank in monthly
                        installments of $418, including interest
                        at 9.95% secured by an automobile, due
                        September 2001                               $    3,000

                        Note payable to a bank in monthly
                        installments of $471, including interest
                        at 1% over the bank's prime lending rate
                        which was 10.5% at December 31, 2000. The
                        note is secured by equipment and is due
                        June 2001                                         3,000

                        Capital lease obligations (see note 6)           26,000
                                                                     ----------

                                                                         32,000

                        Less current portion                             22,000
                                                                     ----------

                                                                     $   10,000
                                                                     ----------


                        Future maturities are as follows:


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

                           2001                           $          22,000
                           2002                                      10,000
                                                          -----------------

                                                          $          32,000
                                                          -----------------


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

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

7.   Lease              During the year ended  December  31,  2000,  the Company
     Obligations        leased certain  equipment under  noncancellable  capital
                        leases.  These leases  provide the Company the option to
                        purchase  the  leased  assets at the end of the  initial
                        lease term.  Assets  under  capital  leases  included in
                        fixed assets and are as follows:

                        Computer and other equipment         $          53,000

                        Less accumulated amortization                  (20,000)
                                                             -----------------

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

                        Amortization  expense  on assets  under  capital  leases
                        during the year  ended  December  31,  2000 and 1999 was
                        $10,000.

                        Capital lease obligations have imputed interest rates of
                        approximately  15% to 22% and are  payable in  aggregate
                        monthly  installments  of  approximately  $2,000 through
                        2001 and $1,000  through  October  2002.  The leases are
                        secured by  equipment.  Future  minimum  payments on the
                        capital lease obligations are as follows:


                        2001                              $          25,000
                        2002                                          5,000
                                                          -----------------

                                                                     30,000

                        Less amount representing
                         interest                                    (4,000)
                                                          -----------------

                        Present value of future
                          minimum lease payments          $          26,000
                                                          -----------------



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

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

7.   Lease              The Company  leases office and warehouse  space under an
     Obligations        operating   lease   agreement.   Future  minimum  rental
     Continued          payments under the  noncancelable  operating lease as of
                        December 31, 2000 is approximately as follows:

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

                           2001                           $         401,000
                           2002                                     410,000
                           2003                                      63,000
                           Thereafter                                     -
                                                          -----------------

                           Total future minimum rental
                             payments                     $         874,007
                                                          -----------------

                        Rent expense related to  noncancelable  operating leases
                        was  approximately  $362,000  and $289,000 for the years
                        ended December 31, 2000 and 1999, respectively.


8.   Income             The provision for income taxes is different than amounts
     Taxes              which  would  be  provided  by  applying  the  statutory
                        federal  income tax rate to loss  before  provision  for
                        income taxes for the following reasons:

                                                     Years Ended
                                                    December 31,
                                          ---------------------------------
                                                2000             1999
                                          ---------------------------------

Federal income tax benefit at
  statutory rate                          $       3,443,000  $      1,806,000
Expiration of research and
  development tax credit
  carryforwards                                    (107,000)              -
Tax credits                                          44,000          49,000
Other                                               (35,000)        (22,000)
Change in valuation allowance                    (3,345,000)     (1,833,000)
                                          ---------------------------------

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



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

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

8.   Income             Deferred tax assets  (liabilities)  are comprised of the
     Taxes              following:
     Continued
                        Net operating loss carryforward       $       9,170,000
                        Depreciation and amortization                   102,000
                        Allowance and reserves                          487,000
                        Research and development tax credit
                         carryforwards                                  240,000
                                                              -----------------

                                                                      9,999,000

                        Valuation allowance                          (9,999,000)
                                                              -----------------

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

                        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, 1999, the Company had net operating loss
                        carryforwards of approximately  $25,000,000 and research
                        and    development   tax   credit    carryforwards    of
                        approximately   $240,000.    These   carryforwards   are
                        available to offset future  taxable  income and begin to
                        expire in 2001 and extend to 2020.  The  utilization  of
                        the net operating loss  carryforwards  is dependent upon
                        the tax laws in  effect  at the  time the net  operating
                        loss  carryforwards can be utilized.  The Tax Reform Act
                        of 1986 significantly  limits the annual amount that can
                        be  utilized  for  certain of these  carryforwards  as a
                        result of the change in ownership.


9.   Capital            The Company has  established a series of preferred stock
     Stock              with a total of  5,000,000  authorized  shares and a par
                        value of $.001,  and one  series of common  stock with a
                        par value of $.001 and a total of 20,000,000  authorized
                        shares.



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

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

9.   Capital Stock      Series A Preferred Stock
     Continued          On September 1, 1993,  the Company  established a series
                        of  non-voting  preferred  shares  designated  as the 6%
                        Series A Preferred  Stock,  consisting of 500,000 shares
                        with $.001 par value.  The Series A Preferred  Stock has
                        the following rights and privileges:

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

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

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

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

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


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

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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



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

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

                        2.  Upon the liquidation of the Company,  the holders of
                            the  Series  B  Preferred   Stock  are  entitled  to
                            receive,  prior to any distribution of any assets or
                            surplus  funds to the  holders  of  shares of common
                            stock or any other  stock,  an amount equal to $4.00
                            per share,  plus any  accrued  and unpaid  dividends
                            related to the fiscal year in which such liquidation
                            occurs.  Such right,  however, is subordinate to the
                            rights of the holders of Series A Preferred Stock to
                            receive  a  distribution  of $1.00  per  share  plus
                            accrued and unpaid dividends.

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

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

                        5.  The Company  may,  at its option,  redeem all of the
                            then  outstanding  share of the  Series B  Preferred
                            Stock at a price of $4.50 per  share,  plus  accrued
                            and unpaid  dividends  related to the fiscal year in
                            which such redemption occurs.


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

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

9.   Capital Stock      Series C Preferred Stock
     Continued          In January 1998, the Company  authorized the issuance of
                        a total of 30,000  shares of Series C  Preferred  Stock,
                        $.001  par  value,  $100  stated  value.  The  Series  C
                        Preferred   Stock   have  the   following   rights   and
                        privileges:

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

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

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

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


                        Series D Preferred Stock
                        In  January  1999,  the  Company's  Board  of  Directors
                        authorized  the issuance of a total of 1,140,000  shares
                        of  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.


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

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

9.   Capital Stock      Series D Preferred Stock - Continued
     Continued
                        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.

                        3.  Each  share is  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 in
                            increase to additional  paid-in capital and a change
                            to accumulated deficit 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.


10.  Stock Option       The  Company has a Stock  Option Plan (the Option  Plan)
     Plan and           which   reserves   300,000   shares  of  the   Company's
     Warrants           authorized but unissued common stock for the granting of
                        stock  options.  An amendment to the Plan  increases the
                        number of shares of common  stock  reserved for issuance
                        thereunder by an aggregate of 300,000 shares.

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


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

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

10.  Stock Option       In addition,  the Company granted the following  options
     Plan and           and warrants to non-employees:
     Warrants
     Continued          During the year ended December 31, 2000:

                        The Company granted  warrants to purchase 300,000 shares
                        of common stock in  connection  with  private  placement
                        offerings  of common  stock,  the  pooling of  interests
                        merger with Dicon, and other equity raising  activities.
                        The   warrants    were    immediately    fully   vested,
                        nonforfeitable,  and  fully  exercisable  at the date of
                        grant.  The exercise price of such warrants was equal to
                        or in excess of the market price of the Company's common
                        stock on the date of grant.  Because these warrants were
                        granted in connection with equity transactions they were
                        recorded as a direct offset to capital rather than as an
                        expense to operations.

                        The Company  also granted  warrants to purchase  120,000
                        shares of common stock as  consideration  for consulting
                        and other services rendered. 70,000 of the warrants were
                        immediately  fully  vested,  nonforfeitable,  and  fully
                        exercisable  at the  date of  grant  and  the  remaining
                        50,000 vest in May of 2001.  The exercise  price of such
                        warrants  was equal to or in excess of the market  price
                        of the  Company's  common  stock on the  date of  grant.
                        These  warrants  were  valued  using  the  Black-Scholes
                        Option  Pricing  Model and an  expense of  $396,000  was
                        recorded  and is included in general and  administrative
                        expense in the  statement of  operations.  An expense of
                        $28,000 related to the warrants vesting in May 2001 will
                        be recorded upon vesting.

                        During the year ended December 31, 1999:

                        The Company granted  warrants to purchase 211,400 shares
                        of common stock in  connection  with  private  placement
                        offering of Series D preferred  stock. The warrants were
                        immediately  fully  vested,  nonforfeitable,  and  fully
                        exercisable at the date of grant.  The exercise price of
                        such  warrants  was equal to or in excess of the  market
                        price  of the  Company's  common  stock  on the  date of
                        grant. Because these warrants were granted in connection
                        with equity  transactions they were recorded as a direct
                        offset  to  capital   rather   than  as  an  expense  to
                        operations.


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

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

10.  Stock Option       The Company  also granted  warrants to purchase  440,000
     Plan and           shares of common stock as  consideration  for consulting
     Warrants           and other  services  rendered.  390,000 of the  warrants
     Continued          were immediately fully vested, nonforfeitable, and fully
                        exercisable  at the  date of  grant  and  the  remaining
                        50,000 vested in May of 2000. The exercise price of such
                        warrants  was equal to or in excess of the market  price
                        of the  Company's  common  stock on the  date of  grant.
                        These  warrants  were  valued  using  the  Black-Scholes
                        Option  Pricing  Model and an  expense of  $329,000  was
                        recorded  and is included in general and  administrative
                        expense in the  statement of  operations.  An expense of
                        $133,000  related to the warrants vested in May 2000 was
                        recorded upon vesting in May 2000.



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

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

10.  Stock Option       A schedule of the options and warrants is as follows:
     Plan and
     Warrants
     Continued
                                                Number of           Exercise
                                   ----------------------------     Price Per
                                          Options      Warrants       Share
                                   --------------------------------------------

Outstanding at January 1,
 1999                                     831,810     2,020,283  $ 3.00 - 12.98
     Granted                              337,872       801,400    2.30 -  7.50
     Exercised                                  -      (166,980)   2.30 -  3.00
     Expired                                    -       (17,945)   3.00 -  4.00
     Forfeited                           (121,450)            -            5.00
                                   --------------------------------------------

Outstanding at December 31,
  1999                                  1,048,232     2,636,758  $ 2.30 - 12.98
     Granted                              746,000       400,000    4.00 -  7.27
     Exercised                           (162,490)   (1,100,056)   2.38 -  8.13
     Expired                              (18,488)     (137,775)   3.33 -  6.49
                                   --------------------------------------------

Outstanding at December 31,
 2000                                   1,613,254     1,798,927  $ 2.30 - 12.98
                                   --------------------------------------------




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

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

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

                                                        Years Ended
                                                        December 31,
                                            ------------------------------------
                                                   2000              1999
                                            ------------------------------------

Net loss - as reported                      $       (9,305,000)  $   (4,731,000)
Net loss - pro forma                        $      (10,180,000)  $   (5,582,000)
Loss per share - as reported                $             (.81)  $         (.62)
Loss per share - pro forma                  $             (.88)  $         (.73)
                                            ------------------------------------

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


                                                   December 31,
                                        -----------------------------------
                                               2000             1999
                                        -----------------------------------

Expected dividend yield                 $               -    $           -
Expected stock price volatility                       106%              81%
Risk-free interest rate                               6.0%             6.0%
Expected life of options                         2-5 years      2 - 5 years
                                        -----------------------------------

                        The  weighted  average  fair  value of  options  granted
                        during the years  ended  December  31, 2000 and 1999 are
                        $2.69 and $1.24, respectively.


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

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

11.  Stock-Based        The following table summarizes  information  about stock
     Compensation       options and warrants outstanding at December 31, 2000:
     Continued
                            Outstanding                      Exercisable
              ------------------------------------------------------------------
                             Weighted
                              Average
                             Remaining     Weighted                  Weighted
   Range of                 Contractual    Average                   Average
   Exercise      Number        Life       Exercise      Number       Exercise
    Prices     Outstanding    (Years)       Price     Exercisable     Price
--------------------------------------------------------------------------------

$ 2.30 - 5.00  1,799,273       4.64     $    4.48    1,307,735      $      4.34
  6.00 - 8.13  1,587,025       1.60          7.21    1,462,025             7.31
        12.98     25,883        N/A         12.98       25,883            12.98
--------------------------------------------------------------------------------

$ 2.30 -12.98  3,412,181       3.19     $    5.81    2,795,643      $      5.97
--------------------------------------------------------------------------------


12.  Related Party      Win Capital Corp.
     Transactions       Patrick M.  Kolenik,  a  director  of the  Company  from
                        November  1997 to January  21,  2000,  is  President,  a
                        director and a 25% shareholder of Win Capital Corp ("Win
                        Capital"),  and  Steven J.  Bayern,  a  director  of the
                        Company  from July 26,  1999 to  January  21,  2000,  is
                        Chairman,  a  director  and a  25%  shareholder  of  Win
                        Capital.



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

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

12.  Related Party      Win Capital Corp. - Continued
     Transactions       The Company  entered into an agreement  with Win Capital
     Continued          dated  August 20,  1997,  wherein Win Capital  agreed to
                        perform unspecified  investment banking services for the
                        Company  for a two year  period,  for which the  Company
                        agreed to pay Win  Capital a monthly  retainer of $2,000
                        for the first six  months of the  agreement,  $4,000 per
                        month for the  second six  months,  and $6,000 per month
                        for the remainder of the agreement.  In connection  with
                        this agreement,  the Company issued warrants to purchase
                        191,000  shares of common  stock at a price of $3.00 per
                        share. The warrants to purchase 191,000 shares of common
                        stock were  granted  in 1997 and were  fully  vested and
                        nonforfeitable  upon  issuance.  The  fair  value of the
                        warrants  of  $317,000  was  calculated   based  on  the
                        Black-Scholes  Option  Pricing Model and was recorded as
                        unearned   compensation  in  the  stockholder'    equity
                        section and was  recognized as expense over the two-year
                        period of the related agreement. In an agreement entered
                        into in February  1999,  as  settlement  of the existing
                        liability under the investment  banking  agreement,  Win
                        Capital  agreed  to accept  $7,500  in cash plus  24,200
                        shares of common  stock,  valued at  $60,500  ($2.50 per
                        share) based on the market price of the Company's common
                        stock on the date of issuance.

                        In addition,  the Company paid a $50,000  finders fee to
                        Win Capital in connection  with the Series D Convertible
                        Preferred Stock  Offering.  Because the fee was directly
                        related  to the  Series D  Convertible  Preferred  Stock
                        offering,  it was  recorded  directly as a reduction  of
                        capital.

                        The  Company  also  entered  into a one-year  consulting
                        agreement  dated  January 19, 1999,  with Win Capital to
                        provide financial  consulting services to the Company in
                        consideration for a fee of $5,000 per month for the term
                        of the agreement.  This  agreement was  terminated  upon
                        entering into a new  consulting  agreement on October 1,
                        1999 with Cyndel & Co., Inc.



--------------------------------------------------------------------------------
                                                                            F-29

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

12.  Related Party      Win Capital Corp. - Continued
     Transactions       Prior to the  initial  closing of the Series D preferred
     Continued          stock offering,  the Company  borrowed  $25,000 from Win
                        Capital.  The loan  bore  interest  at a rate of 10% per
                        annum,  and was paid back at the end of six  months.  In
                        connection with the loan, the Company issued warrants to
                        Win Capital to purchase  35,000  shares of Common Stock,
                        at an exercise  price equal to the closing  price of the
                        Common Stock on the business  day  immediately  prior to
                        the issuance date of the  warrants,  or $2.25 per share.
                        The warrants were  nonforfeitable  and fully vested upon
                        issuance.  The fair value of the warrants of $15,000 was
                        calculated based on the Black-Scholes  pricing model and
                        was recorded as an expense upon issuance.

                        On April 23,  1999,  the  Company  also  agreed to issue
                        warrants  to Win Capital to  purchase  25,000  shares of
                        Common  Stock at an  exercise  price  equal to $4.00 per
                        share,  upon the condition that Win Capital exercise its
                        previously   outstanding  warrants  to  purchase  35,000
                        shares  of Common  Stock at $2.25  per  share  within 72
                        hours after receiving notice that the stock to be issued
                        upon such  exercise had been  registered in an effective
                        Registration Statement.  The exercise price of $4.00 for
                        the  new   warrants   exceeded   the  market   price  of
                        approximately $3.50 at the date of issuance. Because the
                        warrants to purchase 25,000 shares were issued to induce
                        exercise  of  previously  existing  warrants,  they were
                        considered  a  direct  cost  of  capital,  therefore  no
                        expense for such warrants was recorded.

                        Cyndel & Co., Inc.
                        Prior to the  initial  closing of the Series D preferred
                        stock offering, the Company borrowed $75,000 from Cyndel
                        & Co., Inc.  ("Cyndel"),  of which  Messrs.  Kolenik and
                        Bayern  are  each  an  officer,  a  director  and  a 50%
                        shareholder. The loan bore interest at a rate of 10% per
                        annum,  and was paid back at the end of six  months.  In
                        connection with the loan, the Company issued warrants to
                        Cyndel to purchase 105,000 shares of Common Stock, at an
                        exercise  price equal to the closing price of the Common
                        Stock  on the  business  day  immediately  prior  to the
                        issuance date of the warrants,  or $2.25 per share.  The
                        warrants  were  nonforfeitable  and  fully  vested  upon
                        issuance.  The fair value of the warrants of $45,000 was
                        calculated based on the Black-Scholes  pricing model and
                        was recorded as an expense upon issuance.


--------------------------------------------------------------------------------
                                                                            F-30

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

12.  Related Party      Cyndel & Co., Inc. - Continued
     Transactions       In addition,  on April 23, 1999,  the Company  agreed to
     Continued          issue  warrants to Cyndel to purchase  75,000  shares of
                        Common  Stock at an  exercise  price  equal to $4.00 per
                        share,  upon the  condition  that Cyndel  exercises  its
                        previously  outstanding  warrants  to  purchase  105,000
                        shares  of Common  Stock at $2.30  per  share  within 72
                        hours after receiving notice the stock to be issued upon
                        such  exercise  had  been  registered  in  an  effective
                        registration statement.  The exercise price of $4.00 for
                        the  new   warrants   exceeded   the  market   price  of
                        approximately $3.50 at the date of issuance. Because the
                        warrants to purchase 75,000 shares were issued to induce
                        exercise  of  previously  existing  warrants,  they were
                        considered  a  direct  cost  of  capital,  therefore  no
                        expense for such warrants was recorded.

                        On  October  1,  1999,   the  Company   entered  into  a
                        consulting agreement with Cyndel, in which Cyndel agreed
                        to perform  unspecified  investment banking services for
                        the Company for a one-year period, for which the Company
                        agreed to pay Cyndel a monthly  retainer  of  $8,333.33,
                        plus  reimburse  Cyndel  for any  expenses  incurred  in
                        connection with such investment  banking  services.  The
                        October 1, 1999 consulting agreement was terminated when
                        the Company entered into a new consulting agreement with
                        Cyndel on April 1, 2000. Under the terms of the April 1,
                        2000 consulting agreement,  Cyndel has agreed to perform
                        unspecified  investment banking services for the Company
                        for a one-year  period,  for which the Company agreed to
                        pay  Cyndel  a  monthly  retainer  of  $16,666.66,  plus
                        reimburse Cyndel for any expenses incurred in connection
                        with such investment banking services.


--------------------------------------------------------------------------------
                                                                            F-31

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

12.  Related Party      Cyndel & Co., Inc. - Continued
     Transactions       Besides a monthly  retainer,  the  Company has agreed in
     Continued          the April 1, 2000  consulting  agreement  to pay  Cyndel
                        additional  compensation of an unspecified  amount to be
                        mutually  agreed upon if Cyndel  brings to the Company a
                        candidate  for  merger,  acquisition,  joint  venture or
                        other  combination  or  relationship,  and  the  Company
                        enters into a business  relationship  with such  entity.
                        The April 1, 2000 consulting  agreement is automatically
                        renewable for additional,  successive  one-year  periods
                        through March 31, 2003,  unless either party delivers to
                        the other party on or before  January 1 of the  contract
                        year  written  notice  of its  intent  not to renew  the
                        agreement.  In accordance  with this  agreement,  during
                        2000  the  Company  paid  Cyndel   $500,000  and  issued
                        warrants to purchase  150,000  shares of common stock at
                        an exercise price of $4.00 as commission for the private
                        placement  transaction in which 750,000 shares of common
                        stock  were  sold  for  net  proceeds  of  approximately
                        $1,974,000. The warrants issued and the commissions paid
                        were  considered  direct costs of capital,  therefore no
                        expense was recorded but such amounts were recorded as a
                        direct reduction of capital.

                        Thomas F. Motter, Chairman & CEO
                        Thomas  F.  Motter,  Chairman  of the  Board  and  Chief
                        Executive  Officer  of the  Company,  leases  his former
                        residence,  which  he still  owns,  to the  Company  for
                        $2,500 per month.  The  primary  use of the  residential
                        property is for housing accommodations for the Company's
                        employees  living outside of Utah while they are working
                        at the  Company's  corporate  headquarters  in Salt Lake
                        City.  The Company has  obtained  an  appraisal  from an
                        independent  appraiser,  which  has  concluded  that the
                        monthly rate of $2,500  represents  the fair market rate
                        for  leasing  the  residential   property.   This  lease
                        agreement was terminated on October 31, 2000.

--------------------------------------------------------------------------------
                                                                            F-32

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


12.  Related Party      Thomas F. Motter, Chairman & CEO - Continued
     Transactions       On January 21, 2000 the Board of  Directors  granted Mr.
     Continued          Motter,  CEO  and  President,   100,000  shares  of  the
                        Company's  Common  Stock.  61,111  shares of this  total
                        amount were  considered  repayment for 61,111 shares Mr.
                        Motter  previously issued to Douglas A. MacLeod prior to
                        the  Company's  initial  public  offering  in July 1996,
                        under  a  settlement   agreement  to  terminate  certain
                        anti-dilution rights granted Mr. MacLeod by the Company.
                        Prior to its  initial  public  offering  the Company had
                        entered  into  an  agreement   with  Mr.   MacLeod  that
                        prohibited  the Company  from  issuing  shares of common
                        stock that  would  dilute the  holdings  of Mr.  MacLeod
                        below certain levels. In cancellation of this agreement,
                        Mr.  MacLeod  agreed to accept  20,000  shares of common
                        stock from the Company and a total of 100,000  shares of
                        common  stock  from  two  officers  of  the  Company  in
                        exchange for $1,000.  Based on the value assigned by the
                        Company's  investment  banker  of $1.50 per  share,  the
                        Company  recognized  $30,000 of  expense  for the 20,000
                        shares issued by the Company and $149,000 of expense and
                        additional  paid-in  capital for the 100,000 shares sold
                        by the  officers.  On  January  21,  2000,  the Board of
                        Directors  approved the issuance of 61,110 shares to Mr.
                        Motter  as  repayment  of his  personal  shares  used to
                        settle  the  anti-dilution  agreement.  Because  expense
                        associated with the original  settlement was recorded in
                        1997,  no expense was  recorded for the  repayment.  The
                        balance  of 38,889  shares  was deemed by the Board as a
                        bonus for work  done by Mr.  Motter  since  the  initial
                        public  offering.  The market price on the date of grant
                        was $12.50 per share,  and  compensation  expense in the
                        amount of $486,000 was recognized.

                        Other Relationships
                        On  January  21,  2000 the  Board of  Directors  granted
                        Michael W.  Stelzer,  a former  officer of the  Company,
                        20,000 shares of the Company's Common Stock as part of a
                        severance  agreement,  and as part of  settlement of Mr.
                        Stelzer's employment agreement.  The market price on the
                        date of grant was  $12.50 per  share,  and  compensation
                        expense in the amount of $250,000 was recognized.

                        On June 5, 2000 the Company  issued  Mark Miehle  28,500
                        shares of the Company's Common Stock for a signing bonus
                        as part of Mr. Miehle's employment agreement. The market
                        price on the date of the grant was  $6.8125  per  share,
                        and  compensation  expense in the amount of $194,000 was
                        recognized.

--------------------------------------------------------------------------------
                                                                            F-33

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


12.  Related Party      Other Relationships - Continued
     Transactions       Randall A.  Mackey,  a  director  of the  Company  since
     Continued          January 21, 2000,  and a former  director of the Company
                        from  September  1995 to September 3, 1998, is President
                        and a  shareholder  of the law  firm of  Mackey  Price &
                        Williams,  which  rendered legal services to the Company
                        in  connection  with the Company's  public  offering and
                        other corporate matters. Legal fees and expenses paid to
                        Mackey  Price &  Williams  for the  fiscal  years  ended
                        December 31, 2000 and 1999 totaled $167,022 and $53,324,
                        respectively.


13.  Supplemental       During  the year ended  December  31,  2000 the  Company
     Cash Flow          acquired  the assets  and  liabilities  of Ocular  Blood
     Information        Flow,  Ltd.  (OBF)  in  a  purchase   transaction.   The
                        transaction required the payment of $100,000 and 100,000
                        shares  of  common  stock.   The  Company  recorded  the
                        following:

                        Accounts receivable                   $          22,000
                        Prepaids                                         18,000
                        Inventory                                        28,000
                        Intangibles                                     799,000
                        Property, plant and equipment                    25,000
                        Accounts payable                                (48,000)
                        Accrued liabilities                              (8,000)
                        Debt                                            (66,000)
                        Common stock issued                            (675,000)
                                                              -----------------

                        Net cash                              $          95,000
                                                              -----------------


                        During the year ended December 31, 1999:

                        o   The Company  issued  common  stock in  exchange  for
                            inventory  of  $2,528,000,   intangible   assets  of
                            $120,000,  equipment of $9,000 and accounts  payable
                            of $107,000.

                        o   The Company  increased the  accumulated  deficit and
                            additional  paid-in  capital by $872,000  due to the
                            difference  between  the  Series D  preferred  stock
                            conversion price and the common stock fair value.

                        o   The  Company  acquired  property  and  equipment  in
                            exchange for long-term debt of $19,000.


--------------------------------------------------------------------------------
                                                                            F-34

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

13.  Supplemental       Actual amounts paid for interest and income taxes are as
     Cash Flow          follows:
     Information
     Continued                                    Years Ended
                                                   December 31,
                                        -----------------------------------
                                               2000             1999
                                        -----------------------------------

Interest                                $        16,000     $     15,000
                                        -----------------------------------

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



14.  Export Sales       Total sales  include  export  sales by major  geographic
                        area as follows:

                                                    Years Ended
                                                   December 31,
                                        -----------------------------------
Geographic Area                                2000             1999
---------------
                                        -----------------------------------

Far East                                $        2,428,000  $       556,000
South and Central America                          415,000          266,000
Middle East                                        200,000          151,000
Europe                                           1,357,000           30,000
Canada                                             138,000           34,000
                                        -----------------------------------

                                        $        4,538,000  $     1,037,000
                                        -----------------------------------


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

16.  Savings Plan       In  November  1996,  the  Company  established  a 401(k)
                        Retirement  Savings Plan for the Company's  officers and
                        employees. The Plan provisions include eligibility after
                        six months of service,  a three year  vesting  provision
                        and 100% matching  contribution  by the Company up to 3%
                        of a participant's compensation.  During the years ended
                        December  31,  2000 and 1999,  the  Company  contributed
                        approximately   $49,000   and   $44,000   to  the  Plan,
                        respectively.



--------------------------------------------------------------------------------
                                                                            F-35

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

17.  Commitments        Consulting Agreements
     and                During  the year ended  December  31,  1999 the  Company
     Contingencies      entered a consulting  agreement with a former officer of
                        the Company,  which expires in 2004 and requires  annual
                        payments  of  $25,000  through  2003  and a  payment  of
                        $12,500 in 2004.

                        During  the year ended  December  31,  2000 the  Company
                        entered  a  consulting  agreement  with  Cyn  Del  which
                        expires in March 2001 and requires  monthly  payments of
                        $17,000.

                        During the year ended  December 31, 2000,  in connection
                        with the  acquisition  of OBF,  the  Company  entered  a
                        consulting  agreement with the former owner of OBF which
                        requires monthly payments of $6,000 through June 2003.

                        The  Company  has  a   consulting   agreement   with  an
                        individual  requiring payments of 2,000 shares of common
                        stock per month  through  May  2001,  at which  time the
                        agreement is renewable for an additional six months. Per
                        the  agreement,  the Company  also  granted  warrants to
                        purchase  50,000  shares  of  its  common  stock  at  an
                        exercise  price of $4.00 per  share.  The  warrants  are
                        nonforfeitable,  exercisable  for a period  of ten years
                        from the date of  grant  and  become  fully  vested  and
                        exercisable  in May 2001.  The value of the  warrants of
                        $28,000  was  computed  on  the  grant  date  using  the
                        Black-Scholes  pricing  model and will be recorded as an
                        expense upon vesting in May 2001.

                        Employment Agreements
                        The Company has employment  agreements with officers and
                        key  employees  which expire  between  December 2001 and
                        June 2003. The agreements  provide for aggregate  annual
                        compensation of $410,000.  In addition,  the Company has
                        entered into  agreements  which  provide for  additional
                        payments  to be made to the  officer  in the  event  the
                        Company has a change of control.

                        Litigation
                        An action was brought  against the Company in March 2000
                        by  George  Wiseman,  a former  employee,  in the  Third
                        District  Court of Salt Lake County,  State of Utah. The
                        complaint  alleges  that the  Company  owes Mr.  Wiseman
                        6,370 shares of its common stock plus costs,  attorney's
                        fees  and a wage  penalty  pursuant  to  Utah  law.  The
                        Company  believes  the  complaint  is without  merit and
                        intends to vigorously defend against the action.

--------------------------------------------------------------------------------
                                                                            F-36

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

17.  Commitments        Litigation - Continued
     and                An action was brought  against the Company in  September
     Contingencies      2000 by  PhotoMed  International,  Inc.  and  Daniel  M.
     Continued          Eichenbaum  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 with respect to
                        the sales of certain  equipment  plus  attorney's  fees.
                        Currently,  some  discovery  has  taken  place  and  the
                        Company  is  endeavoring  to  determine  the  amount  of
                        royalties that are currently due.

                        The Company has received  demand letters dated September
                        14, 2000 and  October  17, 2000 from Mentor  Corporation
                        ("Mentor")  claiming that the Company failed to register
                        485,751  shares of common  stock  issued to Mentor under
                        the Asset  Purchase  Agreement  dated  October 15, 1999,
                        among the Company, Mentor, Mentor Ophthalmics,  Inc. and
                        Mentor  Medical,   Inc.  The  Asset  Purchase  Agreement
                        related   to  the   Company's   purchase   of   Mentor's
                        phacoemulsification  product line in  consideration  for
                        the issuance by the Company to Mentor of 485,751  shares
                        of its common stock,  valued at the sum of $1,500,000 at
                        the time of closing.

                        The Asset  Purchase  Agreement  required  the Company to
                        register  the 485,751  shares of common  stock issued to
                        Mentor  whenever the Company  determined to register any
                        of its  shares  of common  stock.  Mentor  alleges  that
                        because the Company did not register the 485,751  shares
                        in a Registration  Statement,  which became effective on
                        January  6, 2000  (the  "January  6,  2000  Registration
                        Statement"),  that it was  unable to sell the  shares at
                        the time and, as a result, lost approximately $5,000,000
                        due to Company's  alleged  breach of the Asset  Purchase
                        Agreement.

                        The  Company  maintains  that an  authorized  officer of
                        Mentor agreed to waive the registration rights of Mentor
                        in having the 485,751  shares  registered in the January
                        6, 2000 Registration  Statement.  As a consequence,  the
                        Company  believes  that it has not  breached  the  Asset
                        Purchase  Agreement  and  that  Mentor  is not  owed any
                        moneys  for not  having  registered  the  shares  of the
                        Company's  common stock held by Mentor in the January 6,
                        2000  Registration  Statement.  The  Company  is in  the
                        process  of  further  review of the  matter  and  denies
                        liability and for the damages asserted by Mentor.


--------------------------------------------------------------------------------
                                                                            F-37

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

17.  Commitments        Litigation - Continued
     and                The   Company   may   become  or  is  subject  to  other
     Contingencies      investigations,   claims  or  lawsuits  ensuing  out  of
     Continued          conduct  of its  business,  including  those  related to
                        environmental  safety  and  health,  product  liability,
                        commercial  transactions  etc.  The Company is currently
                        not  aware of any other  such  items  which it  believes
                        could have a material  adverse  effect on  the financial
                        statements.

                        Royalty Agreements
                        The Company has a royalty  agreement  with the president
                        of OBF.  The  agreement  provides for the payment of 10%
                        royalty  of the net  sales  related  to the  Blood  Flow
                        Analyzer.  The  agreement  terminates  in  2020.  As  of
                        December 31, 2000, no  significant  royalties  have been
                        paid under this agreement.

                        The  Company  has  an  agreement  with  a  company  that
                        provides  for the  payment of  royalties  related to the
                        sales of the corneal topography  instrument  referred to
                        as the CT.  During  the year  ended  December  31,  2000
                        payments of  $173,250  were made and $49,350 was accrued
                        at the end of the year.

                        The company has an agreement with a Canadian corporation
                        that  provides for the payment of  royalties  related to
                        the  sales  of  UBM  (Ultrasonic  Bio-Microscopy).   The
                        agreement  outlines payments of 150 Canadian Dollars for
                        each licensed product sold for a period of 12 years that
                        ends in September of 2002. No significant royalties were
                        paid under this agreement during the year ended December
                        31, 2000.

                        The Company has a royalty agreement with another company
                        that developed a promotional CD for the Company. Through
                        the  promotion of the CD, the Company  hopes to increase
                        sales in the  Autoperimiter and assist doctors currently
                        using the unit with the interpretation of visual fields.
                        The  royalty  base with be 50% each until the  Company's
                        share equals the production costs related to development
                        of the disk. Thereafter,  the developer will receive 70%
                        and the Company  will  receive 30% of the royalty  base.
                        Royalties   paid  during  the  year   relating  to  this
                        agreement were not considered material.

--------------------------------------------------------------------------------
                                                                            F-38

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

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


19.  Recent             In June 1999, the FASB issued SFAS No. 137,  "Accounting
     Accounting         for  Derivative   Instruments  and  Hedging  Activities-
     Pronounce-         Deferral of the  Effective  date of FASB  Statement  No.
     ments              133."  SFAS 133  establishes  accounting  and  reporting
                        standards  for  derivative   instruments   and  requires
                        recognition of all  derivatives as assets or liabilities
                        in the statement of financial  position and  measurement
                        of  those  instruments  at fair  value.  SFAS 133 is now
                        effective  for  fiscal  years  beginning  after June 15,
                        2000. The Company believes that the adoption of SFAS 133
                        will not  have  any  material  effect  on the  financial
                        statements of the Company.

 -------------------------------------------------------------------------------
                                                                            F-39

<PAGE>

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

         None.


                                    PART III


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

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

Name                           Age                Position

Thomas F. Motter                52    Chairman of the Board, President and Chief
                                      Executive Officer
Mark R. Miehle                  48    President and Chief Operating Officer
John W. Hemmer                  73    Vice President of Finance Treasurer and
                                      Chief Financial Officer
Randall A. Mackey               54    Secretary and Director, Esq.
David M. Silver, Ph.D.          58    Director
Keith D. Ignotz                 52    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.

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

         Mark R. Miehle has served as President and Chief Operating Officer of
the Company since June 5, 2000. From December 1997 to June 5, 2000, Mr. Miehle
served as President and Chief Executive Officer of Vismed, Inc., d/b/a Dicon, a
start-up company. In 1982, Dicon was acquired by CooperVision diagnostics. From
1982 to 1985, Mr. Miehle was the Vice President of Sales and Marketing of
CooperVision Diagnostics. Mr. Miehle received a B.S. degree in Organic Chemistry
from Tulane University in 1975. He is a member of the Young Presidents'
Organization (YPO), Vision Industry Council of America (VICA).

         John W. Hemmer has served as Vice President of Finance Treasurer and
Chief Financial Officer of the Company since September 20, 2000. Mr. Hemmer
previously served as Vice President of Finance, Treasurer, Chief Financial
Officer and a director of the Company from November 1995 to June 1999. Mr.
Hemmer has served as a director and consultant since 1989 and Chief Financial
Officer since February 2000 of Bio Marine Technologies, Inc. in Gulf Breeze,
Florida, which develops offshore marine production systems licensed and

                                       29
<PAGE>

permitted for use in the Gulf of Mexico. He was the President and Chief
Executive Officer of John W. Hemmer, Inc., a registered broker/dealer firm from
1987 to 1989, which subsequently changed its name to Westfalia Investments Inc.
Prior thereto he was Vice President of Bankers Trust Company in charge of
venture capital and a member of the research and investment management
committees. Mr. Hemmer was also Vice President of Corporate Finance at Dempsey,
Tegler & Company, Inc., a Senior Analyst at Lazard Freres & Company and an
Investment Officer of the Chase Manhattan Bank. Mr. Hemmer received a B.A.
degree in Economics from Queens College in 1951 and a M.S. degree in Banking and
Finance from Columbia University Graduate School of Business in 1952.

         Randall A. Mackey, Esq. has been a director of the Company since
January 2000. He had served as a director of the Company from November 1995 to
September 1998. Since 1989, Mr. Mackey has been President of the Salt Lake City
law firm of Mackey Price & Williams since 1992, and a sharholder 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, a M.B.A. degree from Harvard
University in 1970, a J.D. degree from Columbia University in 1975 and a B.C.L.
degree from Oxford University in 1977. Since January 1998, Mr. Mackey has served
as a director of Cimetrix Incorporated, a software development company. Mr.
Mackey has also served as Chairman of the Board since July 2000 and as a trustee
since 1993 of Salt Lake Community College.

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

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

                                       30
<PAGE>

Technical and Medical Advisory Personnel

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

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

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

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

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

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

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

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

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

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

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

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

                                       31
<PAGE>

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

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

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

Board Meetings and Committees

         The Board of Directors held a total of six meetings during the fiscal
year ended December 31, 2000. The Audit Committee of the Board of Directors
consists of directors Robert L. Frome, Dr. David M. Silver, and Randall A.
Mackey. The Audit Committee met once during the fiscal year. The Audit Committee
is primarily responsible for reviewing the services performed by the Company's
independent public accountants and internal audit department and evaluating the
Company's accounting principles and its system of internal accounting controls.
The Compensation Committee of the Board of Directors consists of directors
Thomas F. Motter, Dr. David M. Silver, and Randall A. Mackey. The Compensation
Committee met three times during the fiscal year. The Compensation Committee is
primarily responsible for reviewing compensation of executive officers and
overseeing the granting of stock options. No director attended fewer than 75% of
all meetings of the Board of Directors during the 2000 fiscal year.

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


Item 10. Executive Compensation

         The following table sets forth, for each of the last three fiscal
years, the compensation received by Thomas F. Motter, Chairman of the Board, and
Chief Executive Officer of the Company and other executive officers
(collectively, the "Named Executive Officers") whose salary and bonus for all
services in all capacities exceed $100,000 for the fiscal years ended December
31, 2000, 1999 and 1998.


                                       32
<PAGE>

Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>


                                                                                     Long Term Compensations
                          Annual Compensation                                   Awards                    Payouts

                                                       Other                  Securities
                                                       Annual     Restricted  Underlying    Long-term    All Other
Name and Principal                                   Compensa-      Stock       Options     Incentive    Compensa-
     Position        Period  Salary($)   Bonus($)    ion ($)(6)   Awards($)   /SARs(#)      Paymout($)    tion($)(4)
--------------------------------------------------------------------------------------------------------------------

<S>                  <C>     <C>        <C>       <C>       <C>         <C>    <C>                   <C>  <C>
Thomas F. Motter     2000(1) $  178,357 $ 486,113 (6)       0           0           0                0    $ 28,792(5)
  Chairman of the    1999(2) $  141,208                     0           0      50,000(7)             0    $  5,000
  Board and Chief    1998(3) $  122,497                     0           0      37,400(8)             0    $  6,000
  Executive Officer

Mark R. Miehle       2000(1) $  235,201 $ 194,000 (9)       0           0           0                0    $  6,000
  President and
  Chief Operating
  Officer

</TABLE>


(1)  For the fiscal year ended December 31, 2000

(2)  For the fiscal year ended December 31, 1999

(3)  For the fiscal year ended December 31, 1998

(4) The amounts under "Other Annual Compensation" for 2000, 1999 and 1998
consist of payments related to the operation of automobiles and/or automobiles
and insurance by the named executives.

(5) The amounts under "Other Annual Compensation" for 2000, 1999 and 1998
consists of payments related to the residential housing accommodations for the
Company's employees, living outside of Utah while they are working at the
Company's Corporate headquarters in Salt Lake City, leased from Mr. Motter at
$2,500 per month.

(6) On January 21, 2000, the Board of Directors approved a bonus to Mr. Motter
in the form of 38,889 shares of the Company's Common Stock. The bonus was valued
at $486,113 on the basis of the closing bid price of the Company's Common Stock
of $12.50 per share on January 21, 2000, the date the board approved the bonus.

(7) On September 10, 1999, the Company granted Mr. Motter option to purchase
50,000 shares of the Company's Common Stock at an exercise price of $4.00 per
share.

(8) On September 14, 1998, the Company granted Mr. Motter options to purchase
37,400 shares of the Company's Common Stock at an exercise price of $5.00 per
share of which 24,000 vested on September 14, 1998 and 13,450 vested on January
1 1999.

(9) On June 5, 2000, the Board of Directors issued Mr. Miehle 28,500 shares of
the Company's Common Stock as a initial bonus as part of his employment
agreement. The market price on the date of grant as $6.8125 per share, and
compensation expense in the amount of $194,000 was recognized.

                                       33
<PAGE>

         The following table sets forth information concerning the exercise of
options to acquire shares of the Company's Common Stock by the Named Executive
Officers during the fiscal year ended December 31,2000, as well as the aggregate
number and value of unexercised options held by the Named Executive Officers on
December 31, 2000.
<TABLE>
<CAPTION>


                                                        Number of Securites Underlying       Value of Unexercised
                                                           Unexercised Options/SARs       In-the-Money Options/SARs
                                                           At December 31, 2000(#)         At December 31, 2000($)
                       Shares Acquired       Value
         Name          On Exercise (#)   Realized ($)    Exercisable     Unexercisable   Exercisable   Unexercisable
  ---------------------------------------------------------------------------------------------------------------------

<S>                                <C>      <C>                 <C>             <C>                 <C>              <C>
  Thomas F. Motter                     -             -          193,450               -             -                -

  Mark R. Miehle                       -             -           40,000         110,000             -                -

  John W. Hemmer                  57,450    $  287,250           75,000               -             -                -

  Curtis G. Page                       -             -           10,620          19,460             -                -

  Richard D. Dirkson              -5,040    $   25,200            3,750          26,250             -                -
</TABLE>



Director Compensation

         On September 10, 1999, the outside directors consisting of Patrick M.
Kolenik, Steven J. Bayern and Robert L. Frome, who were then directors of the
Company, were each granted stock options to purchase 75,000 shares of the
Company's Common Stock at an exercise price of $4.00 per share. Messrs. Kolenik
and Bayern resigned as directors on January 21, 2000, and Randall A. Mackey and
Dr. David M. Silver were appointed to fill the vacancies. On April 19, 2000,
Messrs. Mackey and Silver were each granted options to purchase 75,000 shares of
the Company's Common Stock at an exercise price of $6.00 per share. Outside
directors are also reimbursed for their expenses in attending board and
committee meetings. Directors are not precluded from serving the Company in any
other capacity and receiving compensation therefore. The warrants were not
issued at a discount to the then market price.


Employee 401(k) Plan

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

1995 Stock Option Plan

         The Company adopted a 1995 Stock Option Plan (the "Plan"), for
officers, employees, directors and consultants of the Company on November 7,
1995. The Plan authorized the granting of stock options ("Plan Options") to
purchase an aggregate of not more than 300,000 shares of the Company's Common
Stock. On February 16, 1996, options for substantially all 300,000 shares were
granted. On June 9, 1997, the Company's shareholders approved an amendment to

                                       34
<PAGE>

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, the
Company's 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, the Company's 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.

         The Plan is administered by the Compensation Committee. 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.
Plan Options granted may be either incentive stock options ("ISOs"), as such
term is defined in the Internal Revenue Code, or non-ISOs. ISOs may only be
ranted to persons who are employees of the Company. Non-ISOs may be granted to
any person, including, but not limited to, employees of the Company, independent
agents, consultants as the Compensation Committee believes has contributed, or
will contribute, to the success of the Company as the Compensation Committee
believes has contributed, or will contribute, to the success of the Company. The
Compensation Committee shall determine the exercise price of options granted
under the Plan, provided that, in the case of ISOs, such price may not be less
than 100% (110% in the case of ISOs granted to holders of 10% of voting power of
the Company's stock) of the fair market value (as defined in the Plan) of the
Common Stock on the date of grant. The aggregate fair market value (determined
at the time of option grant) of stock with respect to which ISOs become
exercisable for the first time in any year cannot exceed $100,000.

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


Employment Agreements

         The Company entered into employment agreements with Thomas F. Motter,
which commenced on January 1, 1998 and expires on December 31, 2003. The
agreement requires Mr. Motter to devote substantially all of his working time to
the Company, provided that he may be terminated for "cause" (as provided in the
agreements) and prohibits him from competing with the Company for two years
following the termination of his employment agreement. The agreement provides
for the payment of an initial base salary of $135,000, effective as of January
1, 1998. the agreement also provides for salary increases and bonuses as shall
be determined at the distribution of the Board of Directors. Effective as of
October 1, 1999, the Board of Directors approved an increase in Mr. Motter's
annual base salary to $160,000, and effective as of July 1, 2000, the board
approved an increase in his annual base salary to $200,000.

         The Company entered into employment agreements with Mark R. Miehle,
which commenced on June 5, 2000 and will expire on June 4, 2003. The agreement
requires Mr. Miehle to devote substantially all of his working time to the

                                       35
<PAGE>

Company, provided 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 agreement provides
for the payment of an initial annual base salary of $150,000, effective as of
June 5, 2000, and the issuance of stock options to purchase 150,000 shares of
the Company's Common stock at $6.00 per share, to be vested in equal annual
amounts over a three year period. The agreement also provides for salary
increases and bonuses as shall be determined at the discretion of the Board of
Directors. Mr. Miehle's total compensation for 2000 exceeded the new contract
amount due to payments received prior to effective date.

Limitation of Liability and Indemnification

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

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

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


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

         Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and persons who own more than 10% of any
class of the Company's Common Stock to file initial reports of ownership and
reports of changes of ownership of the Company's Common Stock. For fiscal 2000,
Thomas F. Motter, Chairman and Chief Executive Officer, through an oversight,
filed one late stock transaction report covering one transaction.


                                       36
<PAGE>

Item 11. Security Ownership of Certain Beneficial Owners and Management

         The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of December 31, 2000 for
(i) each executive officer of the Company (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.


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

Thomas F. Motter(3)                  763,950                6.1%
Mark R. Miehle    (4)                198,966                1.6%
John W. Hemmer    (5)                 83,013                 *
Dr. David M. Silver(6)               180,666                1.4%
Randall A. Mackey(6)                 175,384                1.39%
Keith D. Ignotz(7)                    75,000                 *

Executive officers and
directors as a group
     (6 persons)                     673,529                5.3%
---------------

*Less than 1%.

(1) The address for Mr. Motter is c/o Paradigm, 2355 South 1070 West, Salt Lake
City, UT, 84119. The address for Mr. Miehle is 10373 Roselle Street, San Diego,
California 92121. The address for Mr. Hemmer is 88 Meadow Road, Briarcliff
Manor, New York 10510. The address for Dr. Silver is 17 Avalon Court, Bethesda,
Maryland 20816. The address for Mr. Mackey is 1474 Harvard Avenue, Salt Lake
City, Utah 84105. The address for Mr Ignotz is 6025-A Unity Dr., Norcross,
Georgia 30071.

(2) Assumes no exercise of the options or any warrants that the Company may have
issued and no conversion of outstanding shares of the Company's Series A, Series
B, Series C, and Series D Preferred Stock into shares of Common Stock.

(3) Includes options to purchase 193,450 shares of Common Stock granted to Mr.
Motter under the 1995 Option Plan.

(4) Includes options to purchase 150,000 shares of Common Stock granted to Mr.
Miehle under the Company's 1995 Option Plan.

(5) Includes options to purchase 75,000 shares of Common Stock granted to Mr.
Hemmer.

(6) Includes options to purchase 170,000 shares of Common Stock granted to each
of Dr. Silver and Mr. Mackey.

(7) Includes options to purchase 75,000 shares of Common Stock granted to Mr.
Ignotz.

                                       37
<PAGE>


Item 12. Certain Relationships and Related Transactions

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

Win Capital Corp.

         Patrick M. Kolenik, a director of the Company from November 1997 to
January 21, 2000, is President, a director and a 25% shareholder of Win Capital
Corp ("Win Capital"), and Steven J. Bayern, a director of the Company from July
26, 1999 to January 21, 2000, is Chairman, a director and a 25% shareholder of
Win Capital.

         The Company entered into an agreement with Win Capital dated August 20,
1997, wherein Win Capital agreed to perform unspecified investment banking
services for the Company for a two year period, for which the Company agreed to
pay Win Capital a monthly retainer of $2,000 for the first six months of the
agreement, $4,000 per month for the second six months, and $6,000 per month for
the remainder of the agreement. In connection with this agreement, the Company
issued warrants to purchase 191,000 shares of common stock at a price of $3.00
per share. The warrants to purchase 191,000 shares of common stock were granted
in 1997 and were fully vested and nonforfeitable upon issuance. The fair value
of the warrants of $317,000 was calculated based upon Black-Scholes pricing
model and was recorded as unearned compensation in the stockholders' equity
section and was recognized as expense over the two-year period of the related
agreement. In an agreement entered into in February 1999, as settlement of the
existing liability under the investment banking agreement, Win Capital agreed to
accept $7,500 in cash plus 24,200 shares of common stock, valued at $60,500
($2.50 per share) based on the market price of the Company's common stock on the
date of issuance.

         In addition, the Company paid a $50,000 finders fee to Win Capital in
connection with the Series D Convertible Preferred Stock Offering. Because the
fee was directly related to the Series D Convertible Preferred Stock offering,
it was recorded directly as a reduction of capital.

         The Company also entered into a one-year consulting agreement dated
January 19, 1999, with Win Capital to provide financial consulting services to
the Company in consideration for a fee of $5,000 per month for the term of the
agreement. This agreement was terminated upon entering into a new consulting
agreement on October 1, 1999 with Cyndel & Co., Inc. The Company paid $10,000 in
fees to Win Capital during 1999.

         Prior to the initial closing of the Series D preferred stock offering,
the Company borrowed $25,000 from Win Capital. The loan bore interest at a rate
of 10% per annum, and was paid back at the end of six months. In connection with
the loan, the Company issued warrants to Win Capital to purchase 35,000 shares
of Common Stock, at an exercise price equal to the closing price of the Common
Stock on the business day immediately prior to the issuance date of the
warrants, or $2.25 per share. The warrants were nonforfeitable and fully vested
upon issuance. The fair value of the warrants of $15,000 was calculated based on
the Black-Scholes pricing model and was recorded as an expense upon issuance.

         On April 23, 1999, the Company also agreed to issue warrants to Win
Capital to purchase 25,000 shares of Common Stock at an exercise price equal to
$4.00 per share, upon the condition that Win Capital exercise its previously
outstanding warrants to purchase 35,000 shares of Common Stock at $2.25 per
share within 72 hours after receiving notice that the stock to be issued upon
such exercise had been registered in an effective Registration Statement. The
exercise price of $4.00 for the new warrants exceeded the market price of
approximately $3.50 at the date of issuance. Because the warrants to purchase

                                       38
<PAGE>

25,000 shares were issued to induce exercise of previously existing warrants,
they were considered a direct cost of capital, therefore no expense for such
warrants was recorded.

Cyndel & Co., Inc.

         Prior to the initial closing of the Series D preferred stock offering,
the Company borrowed $75,000 from Cyndel & Co., Inc. ("Cyndel"), of which
Messrs. Kolenik and Bayern are each an officer, a director and a 50%
shareholder. The loan bore interest at a rate of 10% per annum, and was paid
back at the end of six months. In connection with the loan, the Company issued
warrants to Cyndel to purchase 105,000 shares of Common Stock, at an exercise
price equal to the closing price of the Common Stock on the business day
immediately prior to the issuance date of the warrants, or $2.25 per share. The
warrants were nonforfeitable and fully vested upon issuance. The fair value of
the warrants of $45,000 was calculated based on the Black-Scholes pricing model
and was recorded as an expense upon issuance.

         In addition, on April 23, 1999, the Company agreed to issue warrants to
Cyndel to purchase 75,000 shares of Common Stock at an exercise price equal to
$4.00 per share, upon the condition that Cyndel exercises its previously
outstanding warrants to purchase 105,000 shares of Common Stock at $2.30 per
share within 72 hours after receiving notice the stock to be issued upon such
exercise had been registered in an effective registration statement. The
exercise price of $4.00 for the new warrants exceeded the market price of
approximately $3.50 at the date of issuance. Because the warrants to purchase
75,000 shares were issued to induce exercise of previously existing warrants,
they were considered a direct cost of capital, therefore no expense for such
warrants was recorded.

         On October 1, 1999, the Company entered into a consulting agreement
with Cyndel, in which Cyndel agreed to perform unspecified investment banking
services for the Company for a one-year period, for which the Company agreed to
pay Cyndel a monthly retainer of $8,333.33, plus reimburse Cyndel for any
expenses incurred in connection with such investment banking services. The
Company paid $33,333.32 in fees to Cyndel during 1999. The October 1, 1999
consulting agreement was terminated when the Company entered into a new
consulting agreement with Cyndel on April 1, 2000. Under the terms of the April
1, 2000 consulting agreement, Cyndel has agreed to perform unspecified
investment banking services for the Company for a one-year period, for which the
Company agreed to pay Cyndel a monthly retainer of $16,666.66, plus reimburse
Cyndel for any expenses incurred in connection with such investment banking
services.

         Besides a monthly retainer, the Company has agreed in the April 1, 2000
consulting agreement to pay Cyndel additional compensation of an unspecified
amount to be mutually agreed upon if Cyndel brings to the Company a candidate
for merger, acquisition, joint venture or other combination or relationship, and
the Company enters into a business relationship with such entity. The April 1,
2000 consulting agreement is automatically renewable for additional, successive
one-year periods through March 31, 2003, unless either party delivers to the
other party on or before January 1 of the contract year written notice of its
intent not to renew the agreement. The Company did not provide written notice to
cancel this contract on or before January 1, 2001. In accordance with this
agreement, during 2000 the Company paid Cyndel $500,000 and issued warrants to
purchase 150,000 shares of common stock at an exercise price of $4.00 as
commission for the private placement transaction in which 750,000 shares of
common stock were sold for net proceeds of approximately $1,974,000. The
warrants issued and the commissions paid were considered direct costs of
capital, therefore no expense was recorded but such amounts were recorded as a
direct reduction of capital.


                                       39
<PAGE>

Thomas F. Motter, Chairman & CEO

         Thomas F. Motter, Chairman of the Board and Chief Executive Officer of
the Company, leases his former residence, which he still owns, to the Company
for $2,500 per month. The primary use of the residential property is for housing
accommodations for the Company's employees living outside of Utah while they are
working at the Company's corporate headquarters in Salt Lake City. The Company
has obtained an appraisal from an independent appraiser, which has concluded
that the monthly rate of $2,500 represents the fair market rate for leasing the
residential property. This lease agreement was terminated on October 31, 2000.

         On January 21, 2000 the Board of Directors granted Mr. Motter, CEO and
President, 100,000 shares of the Company's Common Stock. 61,111 shares of this
total amount were considered repayment for 61,111 shares Mr. Motter previously
issued to Douglas A. MacLeod prior to the Company's initial public offering in
July 1996, under a settlement agreement to terminate certain anti-dilution
rights granted Mr. MacLeod by the Company. Prior to its initial public offering
the Company had entered into an agreement with Mr. MacLeod that prohibited the
Company from issuing shares of common stock that would dilute the holdings of
Mr. MacLeod below certain levels. In cancellation of this agreement, Mr. MacLeod
agreed to accept 20,000 shares of common stock from the Company and a total of
100,000 shares of common stock from two officers of the Company in exchange for
$1,000. Based on the value assigned by the Company's investment banker of $1.50
per share, the Company recognized $30,000 of expense for the 20,000 shares
issued by the Company and $149,000 of expense and additional paid-in capital for
the 100,000 shares sold by the officers. On January 21, 2000, the Board of
Directors approved the issuance of 61,110 shares to Mr. Motter as repayment of
his personal shares used to settle the anti-dilution agreement. Because expense
associated with the original settlement was recorded in 1997, no expense was
recorded for the repayment. The balance of 38,889 shares was deemed by the Board
as a bonus for work done by Mr. Motter since the initial public offering. The
market price on the date of grant was $12.50 per share, and compensation expense
in the amount of $486,000 was recognized.

Other Relationships

         On January 21, 2000 the Board of Directors granted Michael W. Stelzer,
formerly the Vice President of Operations and Chief Operating Officer of the
Company, 20,000 shares of Paradigm common stock as severance under the terms of
a serrlement of Mr. Stelzer'a employment agreement. The market price on the date
of grant was $12.50 per share, and compensation expense in the amount of
$250,000 was recognized.

         On June 5, 2000 the Company issued Mark Miehle 28,500 shares of
Paradigm common stock as a bonus for entering into an employment agreement with
the Company. The market price of the Paradigm common stock on the day the shares
were granted to Mr. Miehle was $6.81 per share, and compensation expense in the
amount of $194,000 was recognized.

         Randall A. Mackey, a director of the Company since January 21, 2000,
and a former director of the Company from September 1995 to September 3, 1998,
is President and a shareholder of the law firm of Mackey Price & Williams, which
rendered legal services to the Company in connection with the Company's public
offering and other corporate matters. Legal fees and expenses paid to Mackey
Price & Williams for the fiscal years ended December 31, 1999 and 2000 totaled
$53,324 and $167,022, respectively.


                                       40
<PAGE>


                                     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.



Table No.              Document
---------              --------

2.1           Amended Agreement and Plan of Merger between Paradigm Medical
              Industries, Inc., a California corporation and Paradigm Medical
              Industries, Inc., a Delaware corporation(1)
3.1           Certificate of Incorporation(1)
3.2           Bylaws(1)
4.1           Warrant Agency Agreement with Continental Stock Transfer & Trust
              Company (3)
4.2           Specimen Common Stock Certificate (2)
4.3           Specimen Class A Warrant Certificate(2)
4.4           Form of Class A Warrant Agreement(2)
4.5           Underwriter's Warrant with Kenneth Jerome & Co., Inc.(3)
4.6           Warrant to Purchase Common Stock with Note Holders re bridge
              financing (1)
4.7           Warrant to Purchase Common Stock with Mackey Price & Williams (1)
4.8           Specimen Series C Convertible Preferred Stock Certificate(4)
4.9           Certificate of the Designations, Powers, Preferences and Rights of
              the Series Convertible Preferred Stock(4)
4.10          Specimen Series D Convertible Preferred Stock Certificate (7)
4.11          Certificate of the Designations, Powers, Preferences and Rights of
              the Series D Convertible Preferred Stock (7)
4.12          Warrant to Purchase Common Stock with Cyndel & Co. (7)
4.13          Warrant Agreement with KSH Investment Group, Inc. (7)
4.14          Warrant to Purchase Common Stock with R.F. Lafferty & Co., Inc.
              (7)
4.15          Warrant to Purchase Common Stock with Dr. David B. Limberg (10)
4.16          Warrant to Purchase Common Stock with John W. Hemmer (10)
4.17          Stock Purchase Warrant with Triton West Group, Inc.(12)
4.18          Warrant to Purchase Common Stock with KSH Investment Group, Inc.
              (12)
4.19          Warrants to Purchase Common Stock with Consulting for Strategic
              Growth, Ltd.(12)
10.1          Exclusive Patent License Agreement with Photomed(1)
10.2          Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3          Lease with Eden Roc (4)
10.4          1995 Stock Option Plan and forms of Stock Option Grant Agreement
              (1)
10.5          Form of Promissory Note with Note Holders re bridge financing (1)
10.6          Co-Distribution Agreement with Pharmacia & Upjohn Company and
              National Healthcare Manufacturing Corporation (5)
10.7          Agreement for Purchase and Sale of Assets with Humphrey Systems
              Division of Carl Zeiss, Inc. (5)
10.8          Employment Agreement with Thomas F. Motter (6)
10.9          Asset Purchase Agreement with Mentor Corp., Mentor Opthalmics,
              Inc. and Mentor or Medical, Inc. (8)
10.10         Transition Services Agreement with Mentor Corp., Mentor
              Opthalmics, Inc., and Mentor Medical, Inc. (8)
10.11         Severance Agreement and General Release with Michael W. Stelzer
              (8)
10.12         Consulting Agreement with Dr. Michael B. Limberg (8)
10.13         Renewed Consulting Agreement with Dr. Michael B. Limberg (10)

                                       41
<PAGE>

10.14         Mutual Release and Settlement Agreement with Zevex International,
              Inc. (8)
10.15         Consulting Agreement with Douglas Adams (8)
10.16         Agreement and Plan of Reorganization with Paradigm Subsidiary,
              Inc., and Vismed, Inc. d/b/a Dicon (9)
10.17         Agreement and Plan of Merger with Paradigm Subsidiary, Inc. and
              Vismed Inc. d/b/a Dicon (9)
10.18         Registration Rights Agreement with Paradigm Subsidiary, Inc. and
              certain shareholders of Vismed, Inc. d/b/a Dicon (9)
10.19         Indemnification Agreement with Paradigm Subsidiary, Inc. and
              certain shareholders of Vismed, Inc. d/b/a Dicon (9)
10.20         Consulting Agreement with Cyndel & Co., Inc. (10)
10.21         Stock Purchase Agreement with Occular Blood Flow, Ltd. and Malcolm
              Redman (10)
10.22         Consulting Agreement with Malcolm Redman (10)
10.23         Royalty Agreement with Malcolm Redman (10)
10.24         Registration Rights with Malcolm Redman (10)
10.25         General Financial Advisory Services Agreement with McDonald
              Investments Inc. (11)
10.26         Agreements with Steven J. Bayern and Patrick M. Kolenik (11)
10.27         Employment Agreement with Mark R. Miehle (12)
10.28         Employment Agreement with John W. Hemmer (12)
10.29         Private Equity Line of Credit Agreement with Triton West Group,
              Inc.(12)
10.30         Renewed General Financial Advisory Services Agreement with
              McDonald Investments. (12)
10.31         Renewed Consulting Agreement with Dr. Michael B. Limberg (12)
10.32         Agreement with KSH Investment Group, Inc. (12)



(1)           Incorporated by reference from Registration Statement on Form
              SB-2, as filed on March 19, 1996.
(2)           Incorporated by reference from Amendment No. 1 to Registration
              Statement on Form SB-2, as filed on May 14, 1996.
(3)           Incorporated by reference from Amendment No. 2 to Registration
              Statement on Form SB-2, as filed on June 13, 1996.
(4)           Incorporated by reference from Annual Report on Form 10-KSB, as
              filed on April 16, 1998.
(5)           Incorporated by reference from Quarterly Report on Form 10-QSB, as
              filed on August 1, 1998.
(6)           Incorporated by reference from Quarter Report on Form 10-QSB, as
              filed on November 12, 1998.
(7)           Incorporated by reference from Registration Statement on Form
              SB-2, as filed on April 29, 1999.
(8)           Incorporated by reference from Annual Report on Form 10-KSB, as
              filed on March 30, 2000.
(9)           Incorporated by reference from Form 8-K, as field on June 5, 2000
(10)          Incorporated by reference from Report on Form 10-QSB, as filed on
              August 16, 2000.
(11)          Incorporated by reference from Report on Form 10-QSB, as filed on
              November 1, 2000.
(12)          Incorporated by reference from Report on Form 10-KSB, as filed on
              April 16, 2001.

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

         No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 2000.


                                       42
<PAGE>

                                   SIGNATURES

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


                                            PARADIGM MEDICAL INDUSTRIES, INC.

Dated:  April 13, 2001                      By:/s/ Thomas F. Motter
                                            -----------------------------
                                            Thomas F. Motter, Chairman of the
                                            Board 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/Thomas F. Motter             Chairman of the Board and         April 13, 2001
-------------------------       Chief Executive Officer
                                (Principal Executive Officer)


/s/John W. Hemmer               Vice President of Finance,        April 13, 2001
-------------------------       Treasurer and Chief Financial
                                Officer (Principal Financial
                                and Accounting Officer)

/s/Randall A. Mackey, Esq.      Secretary and Director            April 13, 2001
-------------------------


/s/David M. Silver, Ph.D        Director                          April 13, 2001
-------------------------


/s/Keith D. Ignotz              Director                          April 13, 2001
-------------------------



                                       43
<PAGE>