SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                  Form 10-KSB/A-2


              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                 For the fiscal year ended December 31, 2003, or

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

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

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

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

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

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

          Securities registered pursuant to Section 12(g) of the Act:


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

              Class A Warrant to Purchase One Share of Common Stock
                                (Title of Class)

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

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

Registrant's  revenues  for  the  fiscal  year  ended  December  31,  2003  were
$3,059,000.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of the last business day of registrant's  most recently  completed
second fiscal quarter was $6,690,000  based on the closing price on that date on
the OTC Bulletin Board.

As of March 31, 2004,  Registrant had  outstanding  25,509,868,shares  of common
stock,  5,627  shares  of Series A  preferred  stock,  8,986  shares of Series B
preferred  stock,  no  shares of Series C  preferred  stock and 5,000  shares of
Series D preferred  stock,  1,000 shares of Series E preferred  stock,  4,598.75
shares of Series F preferred  stock,  and 1,981,560 shares of Series G preferred
stock.

                      DOCUMENTS INCORPORATED BY REFERENCE:

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

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

                                        1

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

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

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

         In June 1997,  the Company  received FDA  clearance to market the Blood
Flow  Analyzer(TM) for measurement of intraocular  pressure and pulsatile ocular
blood flow for the  detection  of glaucoma and other  retina  related  diseases.
Ocular  blood flow is  critical,  the  reduction  of which may cause nerve fiber
bundle death through  oxygen  deprivation,  thus  resulting in visual field loss
associated with glaucoma.  The Company's  Blood Flow  Analyzer(TM) is a portable
automated  in-office system that presents an affordable  method for ocular blood
flow testing for the ophthalmic and optometric  practitioner.  In June 2000, the
Company  purchased  Occular Blood Flow, Ltd., the manufacturer of the Blood Flow
Analyzer(TM).  The terms and  conditions  of the sale were  $100,000 in cash and
100,000  shares  of  common  stock.   In  April  2001,   the  Company   received
authorization  to use a  common  procedure  terminology  or CPT  code  from  the
American  Medical  Association  for  procedures  performed  with the Blood  Flow
Analyzer(TM) , for reimbursement purposes for doctors using the device. However,
certain  payers  have  elected  not to  reimburse  doctors  using the Blood Flow
Analyzer(TM).

         On July 23, 1998,  the Company  entered into an Agreement  for Purchase
and Sale of Assets with the  Humphrey  Systems  Division of Carl Zeiss,  Inc. to
acquire the ownership  and  manufacturing  rights to certain  assets of Humphrey
Systems  that are  used in the  manufacturing  and  marketing  of an  ultrasonic
microprocessor-based  line of ophthalmic diagnostic  instruments,  including the
Ultrasonic  Biometer  Model 820, the A/B Scan System  Model 837, the  Ultrasound
Pachymeter  Model 855,  and the  Ultrasound  Biomicroscope  Model  840,  and all
accessories, packaging and end-user collateral materials for each of the product
lines for the sum of  $500,000,  payable in the form of 78,947  shares of common
stock which were issued to Humphrey  Systems and 26,316  shares of common  stock
which were issued to business broker Douglas Adams. If the net proceeds received
by Humphrey Systems from the sale of the shares issued pursuant to the Agreement
was less than $375,000,  after payment of commissions,  transfer taxes and other

                                        2

<PAGE>

expenses  relating to the sale of such shares,  the Company would be required to
issue  additional  shares of common stock,  or pay additional  funds to Humphrey
Systems as would be necessary to increase the net proceeds  from the sale of the
assets to $375,000.  Since Humphrey Systems realized only $162,818 from the sale
of 78,947  shares of its common  stock,  the Company  issued  80,000  additional
shares in January  1999 to enable  Humphrey  Systems to receive  its  guaranteed
amount.  The amount of $21,431 was paid to the Company as excess  proceeds  from
the sale of this additional stock.

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

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

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

         In January 2002, the Company purchased the Innovatome(TM) microkeratome
of Innovative  Optics,  Inc. by issuing an aggregate of 1,272,825  shares of its
common stock,  warrants to purchase  250,000 shares of its common stock at $5.00
per share,  exercisable  over a period of three years from the closing date, and
$100,000 in cash. The  transaction was accounted for as a purchase in accordance
with Statement of Financial Accounting Standards No. 141.

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

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

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

         On December 3, 2003,  the Company  executed a purchase  agreement  with
American  Optisurgical,  Inc. for the sale of the Mentor surgical products line,
consisting of the Phaco SlStem(TM) and the  Odyssey(TM).  The assets sold in the
transaction included patents, trademarks, software codes and programs, supplies,

                                        3

<PAGE>

work in  process,  finished  goods,  and molds  related  to the  equipment.  The
purchase price paid to the Company by American  Optisurgical  for the assets was
$125,000.  The purchase agreement also contained a noncompete provision in which
the Company agreed for a period of three years from the closing date not to own,
manage,  operate or control any business that  competes  with  cataract  removal
equipment  substantially  the same as the  proprietary  technology  of the Phaco
SlStem(TM) and the Odyssey(TM).

Background

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

Overview

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

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

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

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

         Laser   Technology:   The  term   "laser"  is  an  acronym   for  Light
Amplification  by Stimulated  Emission of  Radiation.  Lasers have been commonly
used for a variety of medical and ophthalmic procedures since the 1960's. Lasers
emit photons into a highly intense beam of energy that  typically  radiates at a
single wavelength or color. Laser energy is generated and intensified in a laser

                                        4

<PAGE>

tube or solid-state  cavity by charging and exciting photons of energy contained
within  material  called the lazing  medium.  This stored  light  energy is then
delivered to targeted tissue through focusing lenses by means of optical mirrors
or fiber optics.  Most laser systems use solid state  crystals or gases as their
lazing  medium.  Differing  wavelengths  of  laser  light  are  produced  by the
selection  of the  lazing  medium.  The  medium  selected  determines  the laser
wavelength  emitted,  which in turn is  absorbed by the  targeted  tissue in the
body.  Different tissues absorb different  wavelengths or colors of laser light.
The degree of absorption by the tissue also varies with the choice of wavelength
and is an important  variable in treating various tissues.  In a surgical laser,
light is emitted in either a continuous  stream or in a series of short duration
"pulses",  thus  interacting  with the  tissue  through  heat and  shock  waves,
respectively.  Several  factors,  including the  wavelength of the laser and the
frequency and duration of the pulse or exposure,  determine the amount of energy
that interacts with the targeted tissue and, thus, the amount of surgical effect
on the tissue.

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

Products

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

         Precisionist ThirtyThousand(TM): The Precisionist ThirtyThousand(TM) is
the Company's core phaco surgical  technology.  The  Precisionist(TM) was placed
into  production  and  offered  for sale in 1997.  As a phaco  cataract  surgery
system, the Company believes the Precisionist(TM) with its new fluidics panel is
equal or  superior  to the  present  competitive  systems in the United  States.
However,  due to the  lack  of  recent  sales,  the  majority  of the  Company's
inventory   associated  with  the  Precisionist  Thirty  Thousand(TM)  has  been
estimated to be obsolete  and  therefore a reserve for such  inventory  has been
recorded.  The system  features a graphic color  display and unique  proprietary
on-board computer and graphic user interface linked to a soft-key membrane panel
for flexible programmable operation.  The system provides real-time "on-the-fly"
adjustment   capabilities  for  each  surgical  parameter  during  the  surgical
procedure  for  high-volume  applications.  In  addition,  the  Precisionist(TM)
provides one hundred  pre-programmable  surgery 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) and related accessories were 0% and 3%
of total revenues in the fiscal years 2003 and 2002, respectively.

         Ocular  Surgery  Workstation(TM):  The Ocular  Surgery  Workstation(TM)
comprises  the base  system of the  Precisionist  ThirtyThousand(TM)  and is the
first system to the Company's knowledge,  which uses the expansive  capabilities
of today's  advanced  computer  technology to offer  seamless open  architecture
expandability of the system hardware and software modules.  The  Workstation(TM)
utilizes an embedded open  architecture  computer  developed for the Company and


                                        5

<PAGE>

controlled  by a  proprietary  software  system  developed  by the Company  that
interfaces with all components of the system. Ultrasound, fluidics (irrigation),
aspiration,  venting,  coagulation and anterior  vitrectomy  (pneumatic) are all
included in the base model.  Each component is controlled as a peripheral module
within this fully integrated system. This approach allows for seamless expansion
and refinement of the Workstation(TM) with the ability to add other hardware and
software features.  Expansion such as the Company's  Photon(TM) laser system and
hardware for additional surgical applications are easily implemented by means of
a pre-existing expansion rack, which resides in the base of the Workstation(TM).
These expanded  capabilities  could  include,  but would not be limited to laser
systems,  video  surgical  fiber  optic  imaging,   cutting  and  electrosurgery
equipment.  However,  there is no  guarantee  that the  Workstation(TM)  will be
accepted in the  marketplace.  If the FDA approves the  Photon(TM),  the Company
will  refer  to  the   Workstation(TM)   as  the   Photon(TM)   Ocular   Surgery
Workstation(TM).  To date, the Company has not commercially developed or offered
for sale any other added hardware or software features to its Workstation(TM).

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

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

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

         The Company's  laser system is based upon the concept that pulsed laser
energy produced with the 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-cataracts tissues within
the eye, the  Company's  Photon(TM)  laser  cataract  system  should only affect
tissues with which it comes into direct contact.

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


                                        6

<PAGE>

         The Photon(TM) Ocular Surgery Workstation(TM) has not been commercially
developed  with any other  added  hardware  or  software  features.  There is no
guarantee  that the  ophthalmic  surgery  market  will  accept the laser in this
capacity or that the FDA will grant approval.  Regulatory approval would require
completion of pending  Photon(TM)  clinical trials and  resubmission of a 510(k)
predicate  device  application to the FDR. Because of the "going concern" status
of the Company,  management has focused efforts on those products and activities
that will, in its opinion,  achieve the most resource efficient  short-term cash
flow to the  Company.  As  reflected  in the  results  for the fiscal year ended
December  31,  2003,  diagnostic  products  consisting  mainly  of the  P40  UBM
Ultrasound Biomicroscope,  perimeter, CT 50 Corneal Topographer,  and Blood Flow
Analyzer(TM)  are  currently the Company's  major focus and the  Photon(TM)  and
other extensive research and development  projects have been put on hold pending
future  evaluation  when the  financial  position of the company  improves.  The
Company's  focus is not on any  specific  diagnostic  product or  products,  but
rather on the entire group of diagnostic products.

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

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

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

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

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

         In April 2001, the Company received written  authorization from the CPT
Editorial   Research  and  Development   Department  of  the  American   Medical
Association to use common procedure terminology or CPT code number 92120 for its
Blood Flow  Analyzer(TM),  for  reimbursement  purposes  for  doctors  using the
device. However,  certain payers have elected not to reimburse doctors using the



                                        7

<PAGE>

Blood Flow  Analyzer(TM).  The Company is continuing its aggressive  campaign to
educate  the payers  about the Blood Flow  Analyzer(TM),  its  purposes  and the
significance   of  its   performance   in  patient  care  in  order  to  achieve
reimbursements  to the doctors.  Currently,  there is reimbursement by insurance
payors to doctors  using the Blood Flow  Analyzer(TM)  in 22 states and  partial
reimbursement in four other states. The amount of reimbursement to doctors using
the Blood Flow Analyzer(TM)  generally ranges from $56.00 to $76.00 per patient,
depending upon the insurance payor. Insurance payors providing reimbursement for
the Blood Flow Analyzer(TM) have the discretion to increase or reduce the amount
of  reimbursement.  The  Company  is  endeavoring  to  obtain  reimbursement  by
insurance payors in other states where there is currently no reimbursement being
made.

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

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

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

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

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

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

         P40 UBM Ultrasound Biomicroscope:  The P40 UBM Ultrasound Biomicroscope
was developed by Humphrey  Systems in conjunction  with the New York Eye and Ear
Infirmary in Manhattan and the University of Toronto. The UBM biomicroscope, and
its  intellectual  property were included in the purchase from Humphrey  Systems
and  gives  the  Company  the  proprietary   rights  to  this  device.  The  UBM
biomicroscope  creates a  high-resolution  computer image of the unseen parts of
the eye that is a "map" for the glaucoma  surgeon.  The UBM  biomicroscope 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
biomicroscope at a price-point targeted for the average practitioners seeking to
add glaucoma filtering surgical procedures and income to their cataract surgical
practice.

         The  P40  UBM  Ultrasound   Biomicroscope  related  surgical  filtering
procedures  are fully  reimbursable  by Medicare and insurance  providers.  This
untapped   new  market   positions   the  Company  with  its   proprietary   UBM
biomicroscope,  and to its knowledge,  the only  commercially  viable product of
this type on the market, as a leader in the rapidly  expanding  glaucoma imaging
and treatment  segment.  In the fall of 2000 the Company  introduced the P45 UBM
Ultrasonic  Biomicroscope,  which combines the P40 UBM Ultrasound  Biomicroscope

                                        8

<PAGE>

and the P37 A/B Scan Ocular Ultrasound Diagnostic in one instrument. The Company
believes that by combining  functions,  the P45 will appeal to a broader market.
The  P40  UBM  Ultrasound  Biomicroscope  and  related  accessories  sales  were
approximately 7% and 12% of the total revenues for 2003 and 2002,  respectively.
The P45 UBM Ultrasound  Biomicroscope and related  accessories sales contributed
approximately 13% and 12% of the total revenues for 2003 and 2002, respectively.

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

         Parts and Services:  The parts and service  revenue from the repair and
service  of  equipment  sold  accounted  for  approximately  8% and 11% of total
revenues in 2003 and 2002, respectively.

         Sales of other products  represented  approximately  1% and 4% of total
revenues in 2003 and 2002, respectively.

         The following table identifies each product class, status of commercial
development,  the percentage of sales  contributed by that class,  reimbursement
status, and status of applicable United States and foreign regulatory approvals:
<TABLE>
<CAPTION>
                                                                                           %
                                                       Commercial       Reimbursement     2003        Regulatory
       Product (1)              Product Class          Development          Status        Sales       Approvals

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

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

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

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

P45 UBM Ultrasound             System, Imaging,         Complete            Yes             13%    FDA 510(K) K844299*
Biomicroscope,              Pulsed Echo Ultrasound                                                  ISO 9001: 1994,
Workstation Plus                  Diagnostic                                                       EN ISO 9001**

BFA Ocular Blood Flow         Tonometer, Manual         Complete            Yes****        16%     FDA 510(K) K844299*
Analyzer(TM)and                     Diagnostic                                                     ISO 9001: 1994,
Disposables                                                                                        EN ISO 9001**

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

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

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

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

SIStem(TM)and                   Phacofragmentation       Sold               Yes            11%     FDA 510(K) K844299*
Odyssey(TM)(2)

Photon(TM)Laser Ocular         Phacoemulsification      Complete             No             0%     IDE G940151
Surgery Workstation                BFA tips                                                        ISO 9001: 1994,
with Surgical Equipment                                                                            EN ISO 9001
and Disposables(3)

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

                                        9

<PAGE>



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

(1)      Except for the Photon(TM) Ocular Surgery Workstation, which can only be
         sold in countries outside the United States, these products can be sold
         in the United States and in foreign countries including but not limited
         to Argentina,  Australia,  Bangladesh,  Borneo,  Brazil, Canada, China,
         Czechoslovakia,  Egypt,  France,  Germany,  Greece,  Hong Kong,  India,
         Israel,  Italy, Japan, Jordan,  Korea,  Malaysia,  Mexico, New Zealand,
         Pakistan,  Peru, Poland,  Puerto Rico, Russia, Saudi Arabia, Spain, Sri
         Lanka,  Taiwan,  Thailand,  Turkey,  United  Kingdom,  and United  Arab
         Emirates
(2)      Due to the lack of recent sales volume,  the inventory  associated with
         the  Precisionist  Thirty  Thousand  (TM),  the  SIStem(TM),   and  the
         Odyssey(TM) has been deemed obsolete and a reserve has been recorded to
         offset such inventory.
(3)      Due to the lack of recent  evidence  to support the  recoverability  of
         inventory  associated with the  Photon(TM),  the Company has recorded a
         reserve to offset the majority of such inventory on hand.
*        FDA 510(K) K844299  represents  domestic  clearance or approval by U.S.
         Food and Drug Administration
**       ISO 9001: 1994, EN ISO 9001 represents international approval
***      IDE G940151 represents approval for international distribution only
****     Represents full reimbursement in 22 states and partial reimbursement in
         four other states.

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

         Any possible  future efforts to complete  development of the Photon(TM)
and obtain the  necessary  regulatory  approvals  would depend on the  Company's
economic  evaluations and adequate funding. If these efforts were undertaken but
proved to be  unsuccessful,  the impact would include the costs  associated with
these  efforts and the  anticipated  future  revenues that the Company would not
receive as expected.  The Company  anticipates  that a majority of the estimated
costs  for  research  and  development  will be used  for  the  enhancement  and
upgrading of its current  products being offered for sale. The Company is unable
to provide a detailed estimate of possible  liquidity needs and expected sources
of funds for possible  future efforts to complete  development of the Photon(TM)
and obtain the necessary  regulatory  approvals since this estimate would depend
on a comprehensive economic evaluation.

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

                                       10

<PAGE>

Marketing and Sales

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

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

         Current Market  Acceptance and Potential:  The principal  purchasers of
the Company's products have been  ophthalmologists,  optometrists and clinics in
many countries  throughout the world.  The Company  believes that the market for
its  products  is being  driven  by: (i) the aging of the  population,  which is
evidenced by the domestic and international cataract surgery volume growth trend
over the past ten years, (The National Eye Institute reported in March 2002 that
the number of blind or visually impaired  Americans is likely to double over the
next 30 years.) (ii) the entry by emerging countries  (including China,  Russia,
and other countries in Asia, Eastern Europe and Africa) into advanced technology
medical care for their populations,  (iii) increased  awareness worldwide of the
benefits  of the  minimally  invasive  phaco  cataract  procedure  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, independent sales representatives, and ophthalmic product
distributors.  As of December  31,  2003,  the Company had five direct  domestic
sales  representatives in the United States and 65 foreign dealers.  These sales
representatives  are  assigned  exclusive  territories  and  have  entered  into
contracts  with the Company  that contain  performance  quotas.  Domestic  sales
channels have been expanded to include  independent  sales  representatives  and
distributors who began training on its products in August 2003. 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 its products.

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

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

         The Company  subcontracts  the  manufacturing  of some of its ancillary
instruments, accessories and disposables through specified vendors in the United
States. These products are contracted in quantities and at costs consistent with
its  financial   purchasing   capabilities   and  pricing  needs.   The  Company
manufactures  certain  accessories  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 location 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.  International  distributors  are  responsible  for
installation,  repair and other customer  service to installed  systems in their
territory.  All systems parts are modular sub-components that are easily removed
and  replaced.  The Company  maintains  adequate  parts  inventory  and provides
overnight replacement parts shipments to its dealers.

                                       11

<PAGE>

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

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

Research and Development

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

         The Company believes its research and development  capabilities provide
it with the  ability  to  respond  to  regulatory  developments,  including  new
products,  new product  features devised from its users and new applications for
its products on a timely and proprietary  basis. The Company intends to continue
investing in research and  development  and to strengthen its ability to enhance
existing products and develop new products.

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

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

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

Competition

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

         Most major competitors  either entered or expanded into the cataract or
glaucoma   markets   through  the   acquisition   of  smaller,   entrepreneurial
high-technology manufacturing companies. Therefore, because existing competitors
or other entities desiring to enter the market could conceivably acquire current

                                       12
<PAGE>

entrepreneurial  enterprises with small market activity, any and all competitors
must be considered to be formidable.

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

         The 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 recognize Bausch & Lomb, Alcon  Laboratories,  and
Allergan  Medical  Optics as its primary  competitors  in the  ultrasound  phaco
cataract equipment market.

         Laser  Equipment  Manufacturers.  There  are  several  other  companies
attempting to develop laser equipment for cataract surgery.  These companies can
be  differentiated  by the laser wavelength  employed for the cataract  surgery.
Based on the  information  currently  available to us;  Er:YAG laser  wavelength
appears  to offer a less  viable  means of  removing  cataracts  than the Nd:YAG
wavelength  used by the  Photon(TM).  One competitor  uses a Nd:YAG  wavelength,
however the laser is used only to vibrate an ultrasonic needle.  Thus the device
remains an  ultrasonic  system  subject to same risk  factors of phaco,  thereby
eliminating  the benefits of using a laser to remove the  cataract.  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 National Eye Institute stated
in 2002 that the number of visually impaired  Americans is likely to double over
the next three  decades.  Their report  estimated that 2.4 million people suffer
some vision  impairment in this country.  The damage caused by these diseases is
irreversible.  The  preconditions  for the  onset  of  macular  degeneration  or
glaucoma are low ocular blood flow and/or high intraocular pressure.  Diagnostic
screening is important for individuals susceptible to these diseases.  People in
high  risk  categories  include:  African  Americans  over 40 years of age,  all
persons  over 60 years of age,  persons  with a family  history of  glaucoma  or
diabetes, and the very nearsighted.  The glaucoma Research Foundation recommends
that these high risk individuals be tested regularly for glaucoma.  According to
the U.S.  Census  Bureau,  in 1995 there were over 30 million adults 65 years of
age and older and 8 million  African  Americans  45 years of age and older.  The
Glaucoma Research  Foundation  reports that glaucoma currently accounts for more
than 7 million visits to physicians annually.

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

                                       13
<PAGE>

Intellectual Property Protection

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

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

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

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

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

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

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

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

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

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

                                       14
<PAGE>

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

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

Regulation

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

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

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

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

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

                                       15
<PAGE>

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

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

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

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

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

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

                                       16
<PAGE>

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

Regulatory Status of Products

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

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

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

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

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

                                       17
<PAGE>

Employees

         As of December 31, 2003, the Company had 31 full-time  employees.  This
number does not include its manufacturer's  representatives  who are independent
contractors  rather  than its  employees.  The  Company  also  utilizes  several
consultants  and  advisors.  There can be no assurance  that the Company will be
successful in recruiting or retaining key personnel. None of its employees are a
member of a labor  union and the  Company  has never  experienced  any  business
interruption as a result of any labor disputes.

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

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  23,238
square feet of leased  office space under a three-year  lease that was to expire
on March 1, 2003 with an additional  three-year renewal option. These facilities
are leased from Eden Roc, a  California  partnership,  at a base monthly rate of
$21,163 plus a $3,342 monthly common area  maintenance fee. In January 2003, the
Company  renegotiated  a  three-year  lease  with Eden Roc at a monthly  rate of
$9,295 plus a $1,859 common area  maintenance  fee for the year 2003,  with rate
increases to $9,574 for 2004 and to $9,861for 2005.  Pursuant to the lease,  the
Company pays all real estate and personal property taxes and the insurance costs
on the premises.

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

Item 3. Legal Proceedings

         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 its common stock) pursuant to Utah law. The action
is based  upon an  extension  of a written  employment  agreement.  The  Company
disputes the amount allegedly owed and intends to vigorously  defend against the
action.

         An action was brought against the Company on March 7, 2000 in the Third
District  Court of Salt Lake County,  State of Utah, by the Merrill  Corporation
that alleges that the Company owes the Merrill Corporation approximately $20,000
together  with  interest  thereon at the rate of 10% per annum  from  August 30,
1999, plus costs and attorney's fees. The complaint alleges a breach of contract
relative to printing services. The Company filed an answer to the complaint.  On
August 12, 2003, the court dismissed the action without prejudice.

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

         It is  anticipated  that  once the  parties  can  agree on the  correct
calculations on the royalties,  the legal action will be dismissed. The issue in
dispute  concerning  the method of  calculating  royalties is whether  royalties
should be paid on returned  equipment.  Since July 1, 2001,  only one Photon(TM)
laser  system  has been  sold and no  systems  returned.  Thus,  the  amount  of
royalties due,  according to its  calculations,  is $600. The Company intends to
make payment of this amount to PhotoMed and Dr.  Eichenbaum and, as a result, to
have the legal action dismissed.  However, if the parties are unable to agree on
a method  for  calculating  royalties,  there is a risk  that  PhotoMed  and Dr.
Eichenbaum  might amend their  complaint to request  termination  of the license
agreement  and, if  successful,  the Company would lose its right to manufacture
and sell the Photon(TM) laser system.

         The  Company  received  a demand  letter  dated  December  9, 2002 from
counsel for Dan Blacklock,  dba Danlin Corp.  The letter demands  payment in the
amount of  $65,160  for  manufacturing  and  supplying  parts for  microkeratome
blades.  The Company's  records show that it received  approximately  $34,824 in
parts from the Danlin  Corp.,  but that the  additional  amounts that the Danlin
Corp  contends  are owed were from parts that were  received but rejected by the
Company  because they had never been  ordered.  On August 14, 2003,  the Company
agreed to make a $13,650  payment to Danlin Corp.  in settlement of the dispute.
The Company has since made the $13,650 payment to Danlin Corp.

                                       18
<PAGE>

         The  Company  received a demand  letter  dated  December  30, 2002 from
counsel for Thomas F. Motter,  its former Chairman and Chief Executive  Officer.
Mr.  Motter  claims in the letter that he was entitled to certain  stock options
that had not been issued to him in a timely manner. By the time the options were
actually issued to him, however,  they had expired.  Mr. Motter contends that if
the options had been issued in a timely manner,  he would have exercised them in
a manner that would have given him a substantial  benefit.  Mr. Motter  requests
restitution  for the loss of the financial  opportunity.  Mr. Motter also claims
that he was  defrauded  by the Company  not being  given an extended  employment
agreement when he terminated the change of control agreement that he had entered
into with us.

         Mr. Motter is further claiming payment for accrued vacation time during
the 13 years he had been employed by the Company,  asserting  that he only had a
total of four weeks of  vacation  during that  period.  Finally,  Mr.  Motter is
threatening a shareholder  derivative  action against the Company because of the
board  of  directors'   alleged  failure  to  conduct  an   investigation   into
conversations  that took place in a chat room on Yahoo.  Mr. Motter asserts that
certain  individuals  participating  in the  conversations  were its officers or
directors   whose   interests   were  in  conflict  with  the  interest  of  the
shareholders.  The Company  believes that Mr. Motter's claims and assertions are
without merit and intends to vigorously defend against any legal action that Mr.
Motter may bring.

         On January 24, 2003, an action was brought by Dr. John Charles Casebeer
against the Company in the Montana Second Judicial  District  Court,  Silver Bow
County,  State of Montana (Civil No.  DU-0326).  The complaint  alleges that Dr.
Casebeer entered into a personal services contract with the Company memorialized
by a letter  agreement  dated April 20,  2002,  with it being  alleged  that Dr.
Casebeer  fully  performed  his  obligations.  Dr.  Casebeer  asserts that he is
entitled to $43,750 per quarter for  consultant  time and as an  incentive to be
granted  each  quarter  $5,000 in options  issued at the fair market  value.  An
additional  purported  incentive  was $50,000 in shares of stock being issued at
the time a formalized contract was to be signed by the parties. In the letter it
is provided that at its election,  the Company may pay the  consideration in the
form of stock or cash and that stock would be issued within 30 days of the close
of the quarter. Prior to the litigation, the Company issued 43,684 shares to Dr.
Casebeer.  The referenced letter provides that termination may be made by either
party upon  giving 90 days  written  notice.  Notice was given by the Company in
early  November  2002.  The Company  recently filed its answer in defense of the
action. Issues included whether or not Dr. Casebeer fully performed as asserted.
The case has been settled through the issuance of 300,000  additional  shares of
its common stock to Dr. Casebeer.

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

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

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

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

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

                                       19
<PAGE>

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

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

         On June 2, 2003, a complaint  was filed in the United  States  District
Court,  captioned Michael Marrone v. Paradigm Medical  Industries,  Inc., Thomas
Motter,  Mark Miehle and John  Hemmer,  Case No. 2:03  CV00513  PGC. On July 11,
2003, a complaint was filed in the same United States District Court,  captioned
Lidia Milian v. Paradigm Medical  Industries,  Inc., Thomas Motter,  Mark Miehle
and John Hemmer,  Case No. 2:03  CV00617PGC.  Both  complaints seek class action
status.  These  cases are  substantially  similar  in nature to the Meyer  case,
including  the  contention  that  as a  result  of  allegedly  false  statements
regarding  the Blood Flow  Analyzer(TM)  and the  purchase  order from  Westland
Financial  Corporation and Valdespino Associates  Enterprises,  the price of the
Company's common stock was  artificially  inflated and the persons who purchased
the  Company's  common  shares  during  the class  period  suffered  substantial
damages.  In a press  release  dated July 11,  2003,  captioned  "Milberg  Weiss
announces the filing of a class action suit against Paradigm Medical Industries,
Inc. on behalf of  investors,"  the law firm of Milberg  Weiss  Bershad  Hynen &
Levach LLP, which represents purchasers of the Company's securities in the class
action  suit  filed  on  July  11,  2003,   stated  that  the  Company   alleged
misrepresentations  caused  the  market  price of the  stock to be  artificially
inflated  during the class  period.  As a result,  it is alleged that  investors
suffered   millions   of  dollars  in  damages   from  the   Company's   alleged
misstatements. The cases request judgment for unspecified damages, together with
interest and attorney's fees. The Company  believes the  consolidated  cases are
without merit and intends to vigorously  defend and protect its interests in the
said cases.

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

         The Company has not paid any amounts toward satisfaction of any part of
the $250,000 retention that is applicable to the consolidated cases. The Company
has  advised  U.S.  Fire that it cannot pay the  $250,000  retention  due to its
current  financial  circumstances.  As a  consequence,  on January 8, 2004,  the
Company  entered into a non-waiver  agreement  with U.S. Fire in which U.S. Fire
agreed to fund and advance the Company's  retention  obligation in consideration
for which the  Company  has agreed to  reimburse  U.S.  Fire the sum of $5,000 a
month,  for a period  of six  months,  with the  first of such  payments  due on
February 15, 2004.  Thereafter,  commencing  on August 15, 2004,  the Company is
currently required to reimburse U.S. Fire the sum of $10,000 per month until the
entire amount of $250,000 has been reimbursed to U.S. Fire.

         In the event  U.S.  Fire  determines  that the  Company  or the  former
officers  and  directors  named in the  consolidated  cases are not  entitled to
coverage  under the policy,  or that it is  entitled  to rescind the policy,  or
should the Company be  declared in default  under the  non-waiver  agreement  on
account  of its  failure  to make the  monthly  payments  owed to U.S.  Fire for
funding the Company's retention obligation,  then the Company agrees to pay U.S.
Fire, on demand,  the full amount of all costs advanced by U.S. Fire, except for
those amounts that the Company may have  reimbursed to U.S. Fire pursuant to the
monthly payments due under the non-waiver agreement.

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

                                       20
<PAGE>

         On July 10,  2003,  an action was filed in the United  States  District
Court,  District  of Utah,  by  Innovative  Optics,  Inc.  and  Barton  Dietrich
Investments,  L.P.  Defendants  include us, Thomas Motter,  Mark Miehle and John
Hemmer, former officers of the company. The complaint claims that Innovative and
Barton entered into an asset purchase  agreement with the Company on January 31,
2002,  in which the Company  agreed to purchase all the assets of  Innovative in
consideration for the issuance of 1,310,000 shares of the Company's common stock
to  Innovative.  The complaint  claims the Company  breached the asset  purchase
agreement.  The complaint also claims that the Company  allegedly made false and
misleading statements pertaining to the Blood Flow Analyzer(TM) and concerning a
purchase order from Valdespino  Associates  Enterprises  and Westland  Financial
Corporation. The purpose of these statements, according to the complaint, was to
induce  Innovative  to sell its assets and purchase the shares of the  Company's
common stock at  artificially  inflated  prices while  simultaneously  deceiving
Innovative and Barton into  believing that the Company's  shares were worth more
than they actually were.  The complaint  contends that had Innovative and Barton
known  the truth  they  would not have  sold  Innovative  to us,  would not have
purchased the Company's  stock for the assets of  Innovative,  or would not have
purchased the stock at the inflated prices that were paid. The complaint further
contends  that as a result of the allegedly  false  statements,  Innovative  and
Barton suffered substantial damages in an amount to be proven at trial.

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

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

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

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

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

                                       21
<PAGE>

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

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

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

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

         No  matters  were  submitted  to a vote of the  Company's  shareholders
during the quarter ended December 31, 2003.

                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters

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

         The  Company's  common  stock  and  Class A  warrants  trade on the OTC
Bulletin Board under the respective  symbols of "PMED.OB" and "PMEDW.OB."  Prior
to July 22, 1996, there was no public market for the common stock. From July 22,
1996 to June 25, 2003,  its common stock and Class A warrants were listed on the
Nasdaq  SmallCap  Market.  Since June 25,  2003,  its  common  stock and Class A
warrants  have  traded on the OTC  Bulletin  Board.  As of April 12,  2004,  the
closing sale prices of the common stock and Class A warrants were $.16 per share
and $.03 per  warrant,  respectively.  The  following  are the high and low sale
prices for the  common  stock and Class A warrants  by  quarter as  reported  by
Nasdaq from January 1, 2000 to June 25, 2003 and by the OTC Bulletin Board since
June 25, 2003.

                                       22
<PAGE>

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

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

2003
    First Quarter....................    .42        .14         .12         .01
    Second Quarter...................    .74        .14         .44         .01
    Third Quarter....................    .42        .18         .18         .01
    Fourth Quarter ..................    .24        .15         .10         .02
2004
    First Quarter ...................    .21        .11         .04         .01

         The  Company's  Series A preferred  stock,  Series B  preferred  stock,
Series C preferred stock,  Series D preferred  stock,  Series E preferred stock,
Series F preferred stock and Series G preferred  stock are not publicly  traded.
As of March 31, 2004,  there were 717 record holders of common stock, six record
holders of Series A preferred  stock,  four record holders of Series B preferred
stock,  no record  holders of Series C  preferred  stock,  one record  holder of
Series D preferred  stock,  14 record  holders of Series E preferred  stock,  52
record holders of Series F preferred  stock,  and two record holders of Series G
preferred stock.

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

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

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

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

Critical Accounting Policies

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

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

                                       23
<PAGE>

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

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

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

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

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

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

General

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

         The Company is engaged in the design, development, manufacture and sale
of high technology  diagnostic and surgical eye care products.  Given the "going
concern" status of the Company, management has focused efforts on those products
and activities  that will, in its opinion,  achieve the most resource  efficient
short-term  cash  flow.  As seen in the  results  for the  twelve  months  ended
December  31,  2003,  diagnostic  products  have  been the  major  focus and the
Photon(TM) and other extensive  research and development  projects have been put
on  hold  pending  future  evaluation  when  the  Company's  financial  position
improves.  The  Company  does not  focus on a  specific  diagnostic  product  or
products but,  instead,  on this entire  diagnostic  product  group.  During the
twelve months ended December 31, 2003,  management  made certain  adjustments to
the financial  statements,  including an increase in the reserve for obsolete or
estimated non- recoverable  inventory of $484,000,  consisting of an increase in
the reserve of $403,000, offset by a decrease of $887,000 due to the sale of the
SIStem and Odyssey  product  lines which were fully  reserved.  The Company also
recorded a net increase in the  allowance  for doubtful  accounts  receivable of
$123,000,  impairment of intangibles  of $150,000,  and increases in accruals to
settle  outstanding  disputes  in the amount of  $446,000.  Although  management
believes  these  adjustments  are  sufficient,  it will  continue to monitor and
evaluate its financial position and the recoverability of its assets.

                                       24
<PAGE>

         The Company's ultrasound  diagnostic products include a P55 pachymetric
analyzer,  a P37 Ultrasound A/B Scan, a P40 Ultrasound  BioMicroscope  and a P45
Plus UBM  Ultrasound  BioMicroscope,  the technology for which was acquired from
Humphrey  Systems in 1998.  The Company  introduced  the P45 Plus in the fall of
2000, which combines the A/B Scan, and the biomicroscope into one instrument. In
addition,  the  Company  markets  its Blood Flow  Analyzer(TM)  acquired  in the
purchase of Ocular Blood Flow Ltd. in June 2000. Other  diagnostic  products are
the Dicon(TM) LD400 Auto Perimeter and the Dicon(TM) CT200e Corneal Topographer,
which were acquired in the  acquisition  of Vismed d/b/a Dicon in June 2000. The
Company purchased the inventory,  design and production rights of the SIStem(TM)
, the Odyssey and the Surgetrol from Mentor  Corporation in October 1999,  which
was designed to perform minimally  invasive cataract surgery.  In November 1999,
the Company  entered into a Mutual  Release and  Settlement  Agreement  with the
manufacturer  of the  Precisionist  ThirtyThousand(TM),  in  which  the  Company
purchased  the  raw  materials  and  finished  goods   inventory  to  bring  the
manufacturing of this product  in-house.  During the fourth quarter of 2003, the
Company  sold all  inventory  and  rights  associated  with the  SIStem(TM)  and
Odyssey(TM) for $125,000. This transaction resulted in sales of $125,000 with $0
cost of sales because a reserve for obsolete  inventory had been recorded on all
SIStem and Odyssey inventory.

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

         Activities for the twelve months ended December 31, 2003 included sales
of the Company's products and related  accessories and disposable  products.  In
March 2003,  the Company  named a new  President  and Chief  Executive  Officer,
Jeffrey F. Poore. The Company named a new Vice President of Sales and Marketing,
Raymond P.C. Cannefax, during the first quarter of 2003 and a new Vice President
of Finance  and Chief  Financial  Officer,  Gregory  C. Hill,  during the second
quarter of 2003.  Mr.  Hill  resigned  as Vice  President  of Finance  and Chief
Financial  Officer on December 5, 2003.  John Y. Yoon was appointed as President
and Chief  Executive  Officer on March 18, 2004, to replace Mr. Poore.  On March
23,  2004,  the Company  named as new Vice  President  of  Operations  and Chief
Operating Officer, Aziz A. Mohabbat.

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

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

         The impact of this nonpayment by certain payors on the Company's future
operations  is a lower  volume  of sales,  particularly  in those  states  where
reimbursement  is  not  yet  approved  or  is  delayed.   Currently,   there  is
reimbursement by insurance payors in 22 states and partial reimbursement in four
other  states.  As  insurance  payors  have the  prerogative  whether to provide
reimbursement  to doctors  using the Blood  Flow  Analyzer(TM),  the  Company is
continuing  to  work  with  insurance   payors  in  states  where  there  is  no
reimbursement  to  doctors  using the CPT code to  demonstrate  the value of the
instrument.   However,   some  insurance  payors  are  currently  not  providing
reimbursement to doctors where a regional or state administrator of Medicare has
elected not to provide Medicare  coverage for the Blood Flow  Analyzer(TM).  The
Company is  continuing  to work with the  regional and state  administrators  of
Medicare who have denied  Medicare  coverage for the Blood Flow  Analyzer(TM) to
demonstrate the value of the instrument.

         There were a number of factors  that  contributed  to the  decrease  in
sales of the Blood Flow  Analyzer (TM) and other  products.  September 11, 2001,
the ensuing Afghanistan  conflict,  and the Iraq war had a significant impact on
the Company's  international  sales.  The U.S.  recessionary  economic trend has
impacted its domestic sales.  Additionally,  the Company  restructured its sales

                                       25
<PAGE>

organization  and sales  channels by  decreasing  its direct sales force who are
full-time  employees from 10 direct sales  employees on January 1, 2003, to five
direct  sales  employees on December 31,  2003.  The  dependent  sales force was
reduced  because the Company  does not have  sufficient  revenues to justify the
larger  direct sales force.  One of the  challenges  for fiscal 2004 will be the
judicious  reconstruction of the sales force in anticipation of increased sales.
The Company is projecting an increase in revenues in 2004,  however there can be
no assurance that this will occur.

         The  Company  intends to increase  its  efforts to sell its  diagnostic
products through  independent  sales  representatives  and ophthalmic  equipment
distributors,  which are paid  commissions  only for their sales. As of December
31,  2003,  the  Company  had  two  independent  sales  representatives  and two
ophthalmic  equipment  distributors  in the United States and 26 ophthalmic  and
medical  product  distributors  outside the United States.  The Company hopes to
benefit from these recently hired sales  representatives and distributors in the
United States as they gain  familiarity,  through  training,  of its  diagnostic
products.  Due to concerns over the budget and the effectiveness of trade shows,
the  Company  exhibited  at only three  trade  shows  during  2003.  The Company
monitors trade show  attendance to determine the extent to which it will exhibit
at future trade shows.

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

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

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

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

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

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

                                       26
<PAGE>

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

Results of Operations

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

         Net sales decreased by $2,309,000, or 43%, to $3,059,000 for the twelve
months ended December 31, 2003,  from  $5,368,000  for the comparable  period in
2002. Sales of the Company's  diagnostic  products and related  accessories were
$2,484,000,  or 81% of total revenues, during the twelve months of 2003 compared
with $4,015,000,  or 75% of total revenues,  for the comparable  period of 2002.
Sales of surgical products and related accessories  totaled $324,000,  or 11% of
total  revenues,  for the twelve months of the current year in  comparison  with
$556,000,  or 10%, of total revenues in the comparable period of 2002.  Surgical
product sales for 2003 include the sale of the SIStem and Odyssey  product lines
for $125,000. In 2003, sales of the P40 and P45 UBM Ultrasound Biomicroscope and
related  accessories  were  $615,000,  or 20% of  total  revenues,  compared  to
$1,303,000, or 24% of total revenues, in the same period of 2002. Sales from the
Blood Flow  Analyzer(TM)  and  related  accessories  decreased  by  $121,000  to
$499,000,  or 16% of total  revenues,  during the year ended  December  31, 2003
compared with  $620,000,  or 12% of total  revenues,  in the same period of last
year. During the twelve months of 2003, sales from other ultrasonic products and
related  accessories  totaled $191,000,  or 6% of total revenues,  compared with
$464,000,  or 9% of total revenues,  in the same period last year.  Sales of the
perimeter and corneal topographer and related accessories  generated $1,100,000,
or 36% of total  revenues,  in 2003  compared with  $1,487,000,  or 28% of total
revenues, during the same period of 2002.

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

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

         Other  reasons  for  the  decrease  in  sales  were  the  uncertainties
resulting from its efforts to reduce costs and  constraints on  availability  of
funds that reduced the Company's ability to upgrade and enhance its products and
pursue further regulatory approvals for its products.  Additionally,  changes in
the exchange rate between these  periods have  generally  made its products more
expensive  to  some  customers  outside  of the  United  States.  The  Company's
objective  is to focus  its  sales  efforts  on the  products  with the  highest
potential for sales and strong margins.

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

         On a quarterly basis, the Company attempts to identify  inventory items
that have shown relatively no movement or very slow movement.  Generally,  if an
item has shown little or no movement for over a year, it is determined not to be
recoverable  and a reserve is  established  for that item.  In addition,  if the
Company identifies products that have become obsolete due to product upgrades or

                                       27
<PAGE>

enhancements, a reserve is established for such products. Such analysis resulted
in material  increases in the reserve for obsolete or estimated  non-recoverable
inventory in 2003 and 2002.  There can be no assurance that the Company will not
identify  further  obsolete  inventory due to  significant  declines in sales of
certain  products or  technological  advances  of  products  in the future.  The
Company intends to make efforts to sell these items at significantly  discounted
prices.  If items are sold, the cash received would be recorded as revenue,  but
there would be no cost of sales on such items due to the  reserve  that has been
recorded.  At the time of sale, the inventory would be reduced for the item sold
and the corresponding  inventory reserve would also be reduced. The Company does
not expect the sales of these  items to be  significant  in the  future.  During
2003, the Company sold all  inventory,  rights,  and  technology  related to the
SIStem and Odyssey product lines for $125,000. All of the inventory sold in this
transaction had previously been fully  reserved.  Therefore,  upon the sale, the
Company  reduced  inventory  by  $887,000  for the  original  book  value of the
inventory,  reduced the reserve for $887,000,  and recorded revenue for the cash
received of $125,000.

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

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

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

         Research,  development and service expenses decreased by $1,786,000, or
63%, to $1,033,000 in 2003,  from  $2,819,000 in 2002.  This decrease was mainly
due to the issuance of common stock to Innovative  Optics in the fourth  quarter
of 2002,  which was valued at $630,000 and expensed as  in-process  research and
development  costs.  Expenses  associated  with the  development of new products
during the twelve months of 2003  decreased  compared to the same period in 2002
as a consequence of the Company's  efforts to reduce costs and focus on products
that are fully  developed  and have the highest  potential  for sales and strong
margins.

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

         Other income and (expense)  increased by $451,000 to income of $415,000
in 2003,  from  expense of $(36,000)  for the same period in 2002.  During 2003,
interest income was $3,000  compared with $10,000 during 2002.  During 2003, the
Company  recorded a gain of  $436,000  on  discounted  settlements  of  accounts
payable and obligations. The Company had a $22,000 reduction in interest expense
to  $(24,000)  in 2003,  from  $(46,000)  in 2002 due to a decrease  in interest
expense related to capital leases.

Liquidity and Capital Resources

         The Company used $707,000 cash in operating  activities  for the twelve
months ended  December 31, 2003,  compared to  $2,782,000  for the twelve months
ended December 31, 2002. The reduction in cash used by operating  activities for
the twelve months of 2003 was primarily attributable to reduced operating costs,
including  the  closure  of the San  Diego  facility,  as well as other  savings
resulting from its ongoing efforts to substantially  reduce costs and management
of its current  assets and  current  liabilities.  The Company  used $2,000 from
investing  activities for the twelve months ended December 31, 2003, compared to
cash  used of  $229,000  in the same  period  in 2002.  Cash  used in  investing

                                       28
<PAGE>

activities  in the twelve  months of 2002 was  primarily due to the cash paid in
the  acquisition of certain assets of Innovative  Optics and capital  equipment.
Net cash  provided by financing  activities  was $647,000 for the twelve  months
ended December 31, 2003 versus  $503,000 in the same period in 2002.  During the
twelve months ended December 31, 2003, the Company raised approximately  $84,000
through  a  $20,000,000  equity  line of credit  and  $700,000  through  private
placements  from the sale of the  Company's  common stock and Series G preferred
stock  and  warrants.  However,  the  equity  line of  credit  is not  currently
available  as a  source  of  equity  because  a  registration  statement  is not
currently  effective  registering  the shares  issuable under the equity line of
credit. 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
funding will be available on terms acceptable to the Company in the future.

         The Company will  continue to seek funding to meet its working  capital
requirements  through   collaborative   arrangements  and  strategic  alliances,
additional public offerings and private  placements of its securities,  and bank
borrowings.  The Company is uncertain whether or not the combination of existing
working  capital and benefits  from sales of its products  will be sufficient to
assure continued  operations through December 31, 2004. As of December 31, 2003,
the Company had accounts payable of $706,000,  a significant portion of which is
over 90 days  past  due.  The  Company  has  contacted  many of the  vendors  or
companies  that have  significant  amounts of payables  past due in an effort to
delay  payment,  renegotiate  a  reduced  settlement  payment,  or  establish  a
longer-term  payment plan. While  someompanies  have been willing to renegotiate
the outstanding  amounts,  others have demanded  payment in full.  Under certain
conditions,  including but not limited to judgments rendered against the Company
in a court of law, a group of creditors  could force it into  bankruptcy  due to
its inability to pay the liabilities arising out of such judgments at that time.
In  addition  to  the  accounts  payable  noted  above,  the  Company  also  has
noncancellable  capital lease  obligations and operating lease  obligations that
require the payment of  approximately  $187,000 in 2004,  $172,000 in 2005,  and
$14,000 in 2006.

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

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

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

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

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

         At December 31, 2003, the Company had net operating loss  carryforwards
of   approximately   $44,000,000   and  research  and   development  tax  credit
carryforwards of approximately  $34,000.  These loss carryforwards are available
to offset future  taxable  income,  if any, and have begun to expire in 2001 and
extend  for twenty  years.  The  Company's  ability  to use net  operating  loss
carryforwards to offset future income is dependant upon certain limitations as a
result of the pooling  transaction with Vismed and the tax laws in effect at the
time of the loss  carryforwards  can be  utilized.  The Tax  Reform  Act of 1986
significantly limits the annual amount that can be utilized for certain of these
loss carryforwards as a result of change of ownership.

         As  of  December  31,  2003,  the  Company  had  raised   approximately
$1,584,000  through a  $20,000,000  equity  line of credit  under an  investment
banking  arrangement.  As of December 31, 2003,  approximately  $18,416,000  was
available  under the equity line of credit.  However,  the equity line of credit
expired by its terms on December 8, 2003,  but the Company is  currently  in the
process of  renewing  the  agreement.  Moreover,  the  equity  line of credit is
currently  unavailable  as a source  of equity  because  there is  currently  no
registration  statement that is effective  registering  the shares of its common
stock that may be sold under the equity line of credit. 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 funding will be available
on terms  acceptable to the Company in the future.  The Company will continue to
seek  funding to meet its working  capital  requirements  through  collaborative
arrangements and strategic alliances, additional public offerings and/or private
placements  of its  securities  or bank  borrowings.  The  Company is  uncertain
whether or not the  combination  of existing  working  capital and benefits from
sales of its  products  will be  sufficient  to assure  its  operations  through
December 31, 2003.

         The  Company has taken  measures to reduce the amount of  uncollectible
accounts  receivable  such as  more  thorough  and  stringent  credit  approval,
improved  training and  instruction  by sales  personnel,  and  frequent  direct
communication  with the  customer  subsequent  to delivery  of the  system.  The
allowance for doubtful accounts was 27% of total  outstanding  receivables as of
December 31, 2002 and 40% as of December  31, 2003.  Much of the increase in the
allowance relates to outstanding receivable balances pertaining to international
dealers.  The  downturn  in the economy  worldwide  has  resulted  in  increased
difficulty in collecting certain accounts.  Certain  international  dealers have
some aged unpaid invoices that have not been resolved. The Company has addressed
its credit  procedures  and collection  efforts and has instituted  changes that

                                       29
<PAGE>

require  more  payments  at the time of sale via  letters of credit and not on a
credit term basis.  The  Company  intends to continue  its efforts to reduce the
allowance  as a  percentage  of accounts  receivable.  While the  allowance as a
percentage  of  accounts  receivable  has  grown,  it is  mainly a result of the
significant  decline in sales.  The total amount of the  allowance has increased
from  $347,000 at December  31,  2002,  to $470,000 at December  31,  2003.  The
majority of the receivables  included in the allowance for doubtful accounts are
a result of sales before the Company  implemented the various changes to improve
the  collectibility  of its  receivables.  During  2002,  the  Company had a net
recovery of receivables  previously allowed for of $23,000 and during the twelve
months  ended  December  31,  2003,  the Company  added a net of $123,000 to the
allowance for doubtful accounts.  The Company believes that by requiring a large
portion of payment prior to shipment, it has greatly improved the collectibility
of its receivables.

         The  Company   carried  an   allowance   for   obsolete  or   estimated
non-recoverable  inventory of $1,642,000 at December 31, 2003, and $2,126,000 as
of  December  31,  2002,  or  approximately  62%  and  45% of  total  inventory,
respectively.  This  inventory  reserve was  increased by $403,000 in the twelve
months of 2003 and $1,755,000 during 2002 mainly due to the decline in sales and
the  discontinuance  of the  microkeratome  purchased from Innovative  Optics in
2002,  however the  increase in 2003 was offset by a decrease of $887,000 due to
the sale of inventory that was fully reserved.  The Company's means of expansion
and  development  of product has been largely from  acquisition  of  businesses,
product lines, existing inventory, and the rights to specific products.  Through
such acquisitions, the Company has acquired substantial inventory, some of which
the eventual use and recoverability was uncertain.  In addition, the Company has
a significant amount of inventory relating to the Photon(TM) laser system, which
does not yet  have FDA  approval  in  order  to sell the  product  domestically.
Therefore,  the allowance for  inventory  was  established  to reserve for these
potential eventualities.

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

         At this time, the Company's Photon(TM) Laser Ocular Surgery Workstation
requires additional  development and regulatory  approvals.  Any possible future
efforts to  complete  development  of the  Photon(TM)  and obtain the  necessary
regulatory approvals would depend on the Company obtaining adequate funding. The
Company  estimates  that the  liquidity  needed to complete  development  of the
Photon(TM)  and obtain the necessary  regulatory  approvals to be  approximately
$225,000.

Effect of Inflation and Foreign Currency Exchange

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

Impact of New Accounting Pronouncements

         In  November  2002,  the EITF  reached a consensus  on Issue  No.00-21,
Revenue Arrangements with Multiple  Deliverables.  EITF Issue No. 00-21 provides
guidance on how to account for certain arrangements that involve the delivery or
performance  of multiple  products,  services  and/or rights to use assets.  The
provisions  of EITF Issue No. 00-21 will apply to revenue  arrangements  entered
into in fiscal periods beginning after June 15, 2003. The adoption of EITF Issue
No.  00-21 did not have a material  impact on  operating  results  or  financial
condition of the Company as the Company  followed the provisions of Statement of
Position ("SOP") 97-2,  Software Revenue  Recognition,  as modified by SOP 98-9,
Modification  of SOP 97-2 with Respect to Certain  Transactions,  which  provide
guidance for revenue recognition of arrangements with multiple deliverables.

         In December  2003,  the FASB issued  Interpretation  No. 46 ("FIN 46R")
(revised  December  2003),  Consolidation  of  Variable  Interest  Entities,  an
Interpretation  of  Accounting  Research  Bulletin  No.  51  ("ARB  51"),  which
addresses how a business enterprise should evaluate whether it has a controlling
interest in an entity  though  means other than  voting  rights and  accordingly
should consolidate the entity. FIN 46R replaces FASB  Interpretation No. 46 (FIN
46), which was issued in January 2003.  Before concluding that it is appropriate
to apply ARB 51 voting interest  consolidation model to an entity, an enterprise
must first determine that the entity is not a variable interest entity (VIE). As
of the effective  date of FIN 46R, an enterprise  must evaluate its  involvement
with all  entities or legal  structures  created  before  February  1, 2003,  to
determine whether consolidation requirements of FIN 46R apply to those entities.
There is no  grandfathering  of existing  entities.  Public companies must apply
either FIN 46 or FIN 46R immediately to entities  created after January 31, 2003
and no later than the end of the first reporting period that ends after December
15,  2004.  The adoption of FIN 46 had no effect on the  Company's  consolidated
financial position, results of operations or cash flows.

                                       30
<PAGE>

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

         In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments  with  Characteristics  of Both  Liabilities  and  Equity.  SFAS 150
clarifies the accounting for certain financial  instruments with characteristics
of both liabilities and equity and requires that those instruments be classified
as liabilities in statements of financial  position.  Previously,  many of those
financial  instruments  were  classified  as equity.  SFAS 150 is effective  for
financial  instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period  beginning  after June
15,  2003.  On November 7, 2003,  FASB Staff  Position  150-3 was issued,  which
indefinitely  deferred  the  effective  date of SFAS 150 for  certain  mandatory
redeemable  non-controlling interests. As the Company does not have any of these
financial  instruments,  the adoption of SFAS 150 did not have any impact on the
Company's  consolidated  financial statements.  In December 2003, the Securities
and Exchange  Commission (SEC) issued Staff  Accounting  Bulletin (SAB) No. 104,
Revenue  Recognition.  SAB 104 revises or rescinds  portions of the interpretive
guidance included in Topic 13 of the codification of staff accounting  bulletins
in  order  to  make  this   interpretive   guidance   consistent   with  current
authoritative  accounting and auditing  guidance and SEC rules and  regulations.
The adoption of SAB 104 did not have a material effect on the Company's  results
of operations or financial position.



Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

         The Company has no  activities  in  derivative  financial  or commodity
instruments.  The Company's exposure to market risks (i.e.,  interest rate risk,
foreign  currency  exchange  rate risk and  equity  price  risk)  through  other
financial instruments, including cash equivalents, accounts receivable and lines
of credit, is not material.

                                       31
<PAGE>

Item 8. Financial Statements and Supplementary Data
<PAGE>

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

<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Index to Financial Statements

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

                                                                          Page
                                                                          ----

Report of Tanner + Co.                                                     F-2


Balance Sheet                                                              F-3


Statement of Operations                                                    F-4


Statement of Stockholders' Equity                                          F-5


Statement of Cash Flows                                                    F-6


Notes to Financial Statements                                              F-7



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

                                                                             F-1

<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, 2003,  and the related  statements  of  operations,
stockholders'  equity,  and cash flows for the years ended December 31, 2003 and
2002.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

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

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


/s/TANNER + CO.

Salt Lake City, Utah
March 5, 2004




                                                                             F-2

<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                                   Balance Sheet

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

        Assets
        ------

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

        Total current assets                                          1,984,000

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

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

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

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

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

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

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

Commitments and contingencies

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

        Total stockholders' equity                                      680,000
                                                                ----------------

        Total liabilities and stockholders' equity              $     2,922,000
                                                                ----------------


--------------------------------------------------------------------------------
See accompanying notes to financial statements.                              F-3
<PAGE>
<TABLE>
<CAPTION>

                                                          PARADIGM MEDICAL INDUSTRIES, INC.
                                                                    Statement of Operations

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


                                                         2003                 2002
                                                     --------------------------------------
<S>                                                  <C>                   <C>
Sales                                                $        3,059,000    $     5,368,000

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

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

Operating expenses:
  General and administrative                                  2,446,000          3,702,000
  Marketing and selling                                         920,000          2,795,000
  Research, development and service                           1,033,000          2,819,000
  Impairment of assets                                          150,000          2,961,000
                                                     --------------------------------------

        Operating loss                                       (3,576,000)       (11,119,000)

Other income (expense):
  Interest income                                                 3,000             10,000
  Interest expense                                              (24,000)           (46,000)
  Gain on settlement of liabilities                             436,000                  -
                                                     --------------------------------------

        Total other income (expense)                            415,000            (36,000)
                                                     --------------------------------------

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

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

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

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

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

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

Loss per common share - basic and diluted            $            (0.14)   $         (0.63)
                                                     --------------------------------------

Weighted average common shares - basic and diluted           24,058,000         17,736,000
                                                     --------------------------------------

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

<PAGE>
<TABLE>
<CAPTION>

                                                                            PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                      Statement of Cash Flows

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

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

        Net cash used in operating activities                                     (707,000)        (2,782,000)
                                                                           ----------------------------------

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

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

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

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

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

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

Cash, end of year                                                          $       132,000    $       194,000
                                                                           ----------------------------------

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

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

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

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

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

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

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

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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


1.   Organization       Intangible Assets
     and Significant    As of December 31, 2003,  intangible assets consisted of
     Accounting         goodwill  related to the  purchase of Ocular Blood Flow,
     Policies           Ltd.,   product   rights,    capitalized   payments   to
     Continued          manufacturers  for  engineering  and design services and
                        patent costs.

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

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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


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

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

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

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

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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


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

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

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

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

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

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

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


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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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



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

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

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

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

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

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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


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

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

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

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

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

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

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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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



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

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

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

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

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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


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

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


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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


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

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

                         Inventory                          $       225,000
                         Property, plant and equipment               35,000
                         Intangibles:
                              Patents, rights, trade name           530,000
                              Goodwill                            1,419,000
                         Equity:
                              Common stock issued               (1,814,000)
                              Warrants issued                     (295,000)
                                                            ----------------

                         Net cash paid                      $       100,000
                                                            ----------------

                        The  Company  was  required  to use its best  efforts to
                        implement,  within 90 days of the closing,  Phase I of a
                        Blade   Price   Reduction   Program  as  prepared  by  a
                        consultant.  Immediately  after such 90 day period,  the
                        Disbursing Agent was to distribute  three-fourths of the
                        shares held in escrow,  or 477,309 shares, to Innovative
                        Optics,  unless the  Company had  certified  that it had
                        implemented   Phase  I  of  the  Blade  Price  Reduction
                        Program.

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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


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

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

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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


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

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

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

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

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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


4.   Detail of
     Certain
     Balance
     Sheet
     Accounts

Receivables:
      Trade receivables                                   $       1,178,000
      Allowance for Doubtful accounts                              (470,000)
                                                          ------------------

                                                          $         708,000
                                                          ------------------
Inventories:
      Finished goods                                      $         703,000
      Raw materials                                               1,942,000
      Reserve for obsolescence                                  (1,642,000)
                                                          ------------------

                                                          $       1,003,000
                                                          ------------------
 Accrued liabilities:
      Payroll and employee benefits                       $         540,000
      Warranty and return allowance                                 413,000
      Customer deposits                                             207,000
      Consulting and other                                          108,000
      Deferred revenue                                               90,000
      Royalties                                                      61,000
                                                          ------------------

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


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


      Goodwill                                            $         799,000
      Product and technology rights                                 700,000
      Engineering and design costs                                  482,000
      Patents                                                        92,000
                                                          ------------------

                                                                  2,073,000

 Accumulated amortization                                        (1,391,000)
                                                          ------------------

 Net intangible assets                                    $         682,000
                                                          ------------------

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



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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



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

6.   Property and       Property and equipment consists of the following:
     Equipment
                  Office equipment                         $        750,000
                  Computer equipment                                658,000
                  Automobile                                         53,000
                  Furniture and fixtures                            264,000
                  Leasehold improvements                            166,000
                                                           -----------------

                                                                  1,891,000

                  Accumulated depreciation and
                     amortization                                (1,635,000)
                                                           -----------------

                                                           $        256,000
                                                           -----------------

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


 Computer and other equipment                              $         291,000

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

                                                           $         114,000
                                                           ------------------

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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


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

          2004                                              $         72,000
          2005                                                        54,000
          2006                                                        14,000
                                                            -----------------

                                                                     140,000

 Less amount representing interest                                  (33,000)
                                                            -----------------

 Present value of future minimum lease payments                      117,000

 Less current portion                                               (56,000)
                                                            -----------------

 Long-term portion                                          $         61,000
                                                            -----------------

                        The Company  leases office and warehouse  space under an
                        operating   lease   agreement.   Future  minimum  rental
                        payments under the noncancellable  operating lease as of
                        December 31, 2003 are approximately as follows:


                        Year Ending December 31,                  Amount
                                                            ------------------
                             2004                           $         115,000
                             2005                                     118,000
                                                            ------------------

                       Total future minimum
                        rental payments                     $         233,000
                                                            ------------------

                        Rent expense related to  noncancelable  operating leases
                        was  approximately  $159,000  and $437,000 for the years
                        ended December 31, 2003 and 2002, respectively.


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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



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

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

 Income tax benefit at
   statutory rate                        $      1,170,000 $       4,127,000
 Expiration of research and
   development tax credit
   carryforwards                                        -           (25,000)
 Meals and entertainment                           (7,000)          (33,000)
 Other                                              2,000             1,000
 Change in valuation allowance                 (1,165,000)       (4,070,000)
                                         -----------------------------------

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

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

 Net operating loss carryforward                           $     16,384,000
 Depreciation, amortization, and impairment                         883,000
 Allowance and reserves                                           1,122,000
 Impairment of investment in IBS                                    325,000
 Research and development tax credit
   carryforwards                                                     34,000
                                                           -----------------

                                                                 18,748,000

 Valuation allowance                                           (18,748,000)
                                                           -----------------

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

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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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



8.   Income             At December 31, 2003, the Company had net operating loss
     Taxes              carryforwards of approximately  $44 million and research
     Continued          and    development   tax   credit    carryforwards    of
                        approximately $34,000. These carryforwards are available
                        to  offset  future  taxable  income  and  expire in 2004
                        through 2020. The  utilization of the net operating loss
                        carryforwards  is dependent  upon the tax laws in effect
                        at the time the net operating loss  carryforwards can be
                        utilized.  The  Tax  Reform  Act of  1986  significantly
                        limits  the  annual  amount  that  can be  utilized  for
                        certain of these carryforwards as a result of the change
                        in ownership.

9.   Capital            The Company has  established a series of preferred stock
     Stock              with a total of  5,000,000  authorized  shares and a par
                        value of $.001,  and one  series of common  stock with a
                        par value of $.001 and a total of 40,000,000  authorized
                        shares.

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

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

                        2.    Upon the  liquidation of the Company,  the holders
                              of the Series A  Preferred  Stock are  entitled to
                              receive,  prior to any  distribution of any assets
                              or  surplus  funds to the  holders  of  shares  of
                              common stock or any other  stock,  an amount equal
                              to $1.00 per share,  plus any  accrued  and unpaid
                              dividends related to the fiscal year in which such
                              liquidation occurs.  Total liquidation  preference
                              at December 31, 2003 was $6,000.

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

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



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


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

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

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

                        2.    Upon the  liquidation of the Company,  the holders
                              of the Series B  Preferred  Stock are  entitled to
                              receive,  prior to any  distribution of any assets
                              or  surplus  funds to the  holders  of  shares  of
                              common stock or any other  stock,  an amount equal
                              to $4.00 per share,  plus any  accrued  and unpaid
                              dividends related to the fiscal year in which such
                              liquidation  occurs.   Such  right,   however,  is
                              subordinate to the rights of the holders of Series
                              A  Preferred  Stock to receive a  distribution  of
                              $1.00 per share plus accrued and unpaid dividends.
                              Total liquidation  preference at December 31, 2003
                              was $36,000.

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

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

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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


9.   Capital            Series C Preferred Stock
     Stock              In January 1998, the Company  authorized the issuance of
     Continued          a total of 30,000  shares of Series C  Preferred  Stock,
                        $.001 par value,  $100 stated value.  As of December 31,
                        2003 there were no Series C Preferred  Stock  issued and
                        outstanding.  The  Series  C  Preferred  Stock  have the
                        following rights and privileges:

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

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

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

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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


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

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

                        2.    Upon the  liquidation of the Company,  the holders
                              of the Series D  Preferred  Stock are  entitled to
                              receive an amount per share  equal to the  greater
                              of (a) the amount  they would  have  received  had
                              they   converted  the  shares  into  Common  Stock
                              immediately  prior  to such  liquidation  plus all
                              declared but unpaid  dividends;  or (b) the stated
                              value,  subject to adjustment.  Total  liquidation
                              preference at December 31, 2003 was $9,000.

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

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

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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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



9.   Capital            Series E Preferred Stock
     Stock              In May 2001,  the Company  authorized  the issuance of a
     Continued          total of 50,000 shares of Series E Preferred Stock $.001
                        par value,  $100  stated  value.  The Series E Preferred
                        Stock has the following rights and privileges:

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

                        2.    Upon the  liquidation of the Company,  the holders
                              of the Series E  Preferred  Stock are  entitled to
                              receive an amount per share  equal to the  greater
                              of (a) the amount  they would  have  received  had
                              they   converted  the  shares  into  Common  Stock
                              immediately  prior  to such  liquidation  plus all
                              declared but unpaid  dividends;  or (b) the stated
                              value,  subject to adjustment.  Total  liquidation
                              preference at December 31, 2003 was $100,000.

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

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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


9.   Capital            Series E Preferred  Stock - Continued
     Stock
     Continued          4.    The holders of the shares have no voting rights.

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

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

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

                        2.    Upon the  liquidation of the Company,  the holders
                              of the Series F  Preferred  Stock are  entitled to
                              receive an amount per share  equal to the  greater
                              of (a) the amount  they would  have  received  had
                              they   converted  the  shares  into  Common  Stock
                              immediately  prior  to such  liquidation  plus all
                              declared but unpaid  dividends;  or (b) the stated
                              value,  subject to adjustment.  Total  liquidation
                              preference at December 31, 2003 was $460,000.

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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


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

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

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

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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


9.   Capital            2.    Upon the  liquidation of the Company,  the holders
     Stock                    of the Series G  Preferred  Stock are  entitled to
     Continued                receive an amount per share  equal to the  greater
                              of (a) the amount  they would  have  received  had
                              they   converted  the  shares  into  Common  Stock
                              immediately  prior  to such  liquidation  plus all
                              declared but unpaid  dividends;  or (b) the stated
                              value of $.25 per share plus  declared  but unpaid
                              dividends.   Total   liquidation   preference   at
                              December 31, 2003 was $495,000.

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

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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


9.   Capital            The following table summarizes  preferred stock activity
     Stock              during the years ended December 31, 2003 and 2002:
     Continued

<TABLE>
<CAPTION>




                         Series A         Series B         Series C          Series D           Series E            Series F
                       Shares  Amount  Shares   Amount  Shares   Amount  Shares    Amount  Shares    Amount    Shares   Amount
                     ------------------------------------------------------------------------------------------------------------
<C>                   <C>   <C>        <C>    <C>               <C>       <C>     <C>       <C>          <C>   <C>          <C>

Balance at January
1, 2002                5,747 $     -    8,986  $     -      -    $   -     10,000  $    -    19,300       $ -   47,359       $ -

Conversion of
preferred stock         (120)      -        -        -      -        -     (5,000)      -   (17,800)        -  (41,087)        -
                     ------------------------------------------------------------------------------------------------------------

Balance at December
31, 2002               5,627       -    8,986        -      -        -      5,000       -     1,500         -    6,272         -

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

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

Conversion of
preferred stock            -       -        -        -      -        -          -       -      (500)        -   (1,675)        -
                     ------------------------------------------------------------------------------------------------------------

Balance at December
31, 2003               5,627 $     -    8,986  $     -      -    $   -      5,000  $    -     1,000       $ -    4,597       $ -
                     ------------------------------------------------------------------------------------------------------------

Authorized           500,000       -  500,000        - 30,000        -  1,140,000       -    50,000         -   50,000         -
                     ------------------------------------------------------------------------------------------------------------

Liquidation
preference                 - $ 6,000           $36,000           $   -             $9,000           $ 100,000          $ 460,000
                     ------------------------------------------------------------------------------------------------------------


</TABLE>
<TABLE>
<CAPTION>



                                      Series G
                                 Shares    Amount
                                --------------------------
<C>                             <C>        <C>

Balance at January
1, 2002                                 -       $ -

Conversion of
preferred stock                         -         -
                                -------------------------

Balance at December
31, 2002                                -         -

Issuance of Series
G preferred stock
for cash                        1,764,706     2,000

Issuance of Series
G preferred stock
for commissions                   216,854         -

Conversion of
preferred stock                         -         -
                                -------------------------

Balance at December
31, 2003                        1,981,560   $ 2,000
                                -------------------------

Authorized                      2,000,000         -
                                ------------------------

Liquidation
preference                                $ 495,000
                                --------------------------
</TABLE>

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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

10.  Stock  Option          The  Company  has a Stock  Option  Plan (the  Option
     Plan and               Plan),   which  reserves  shares  of  the Company's
     Warrants               authorized but unissued  common stock for the
                            the  granting of stock  options.  Amendments  to the
                            Option Plan increased the number of shares of common
                            stock   reserved  for  issuance   thereunder  to  an
                            aggregate of 3,700,000 shares.

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

                            Options were issued to employees and directors of
                            the Company during 2003 for 2,145,000 shares of
                            common stock with vesting periods ranging from 3 to
                            7 years. The exercise price of the options ranges
                            from $0.16 to $0.25

                            The Company granted the following options and
                            warrants to non-employees during the year ended
                            December 31, 2003:

                            o        Warrants to purchase 200,000 shares of
                                     common stock at an exercise price of $0.16
                                     per share in return for consulting
                                     services.

                            o        Warrants to investors to purchase 422,633
                                     shares of common stock at an exercise price
                                     of $0.75.

                            o        In connection with the Series G Preferred
                                     Stock offering, the Company issued warrants
                                     to purchase, in aggregate 382,353 shares of
                                     common stock at exercise prices ranging
                                     from $0.25 to $0.50.


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


10.  Stock Option           During 2002, in connection with the Innovative
     Plan and               Optics acquisition (see note 3), Plan and the
     Warrants               Company granted warrants to purchase 250,000 shares
      Continued             of common stock at an Warrants exercise price of
                            $5.00 per share. These warrants were nonforfeitable,
                            vested  Continued and fully  exercisable at the time
                            of grant.  The exercise prices of these options were
                            not issued at a discount to the then market price of
                            the common  stock.  The  options and  warrants  were
                            valued according to the Black-Scholes pricing model.
                            As a result of these warrants,  the Company included
                            approximately   $295,000  in  the   purchase   price
                            relating  to  the  acquisition  of the  assets  from
                            Innovative Optics, Inc.

                            A schedule of the options and warrants is as
                            follows:


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

Outstanding at
   January 1, 2002                   3,906,776      2,315,022  $  2.00 - 12.98
Granted                                 70,000        250,000      2.00 - 5.00
Exercised                                    -              -               -
Expired                               (115,479)             -             5.00
Forfeited                           (1,374,762)             -      2.31 - 5.00
                                -----------------------------------------------
Outstanding at
  December 31, 2002                  2,486,535      2,565,022     2.00 - 12.98
Granted                              2,150,000      1,404,986      0.16 - 0.25

Exercised                                    -              -                -

Expired                                      -     (1,162,025)     5.06 - 8.12
Forfeited                           (1,008,079)             -      0.21 - 6.00
                                -----------------------------------------------
Outstanding at
  December 31, 2003                  3,628,456      2,807,983   $ 0.16 - 12.98
                                ------------------------------------------------


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


10.  Stock Option           The following table  summarizes  information  about
     Plan and               stock options and warrants outstanding at
     Warrants               December 31, 2003:
     Continued

                      Outstanding                          Exercisable
 --------------------------------------------------  -----------------------
                               Weighted
                                Average
                               Remaining    Weighted                 Weighted
  Range of                    Contractual   Average                   Average
  Exercise          Number       Life       Exercise      Number     Exercise
   Prices        Outstanding    (Years)      Price      Exercisable    Price
---------------------------------------------------  ------------------------

  $ 0.16 - 0.75    3,474,986     4.23   $      0.25     2,661,653   $   0.32
    2.00 - 5.00    2,660,570     2.89          3.32     2,599,154       3.75
    6.00 - 8.13      275,000     1.46          3.27       275,000       6.55
          12.98       25,883      N/A         12.98        25,883      12.98
---------------------------------------------------  ------------------------

  $ 0.16 - 12.98   6,436,439      3.5   $      1.71     5,561,689   $   2.29
---------------------------------------------------  ------------------------

11. Related Party           Thomas F. Motter,  former  Chairman of the Board and
    Transactions            Chief Executive  Officer of the Company,  leased his
                            former  residence  to the  Company  for  $2,500  per
                            month.  The primary use of the residential  property
                            was for  housing  accommodations  for the  Company's
                            employees  living  outside  of Utah  while they were
                            working at the Company's  corporate  headquarters in
                            Salt Lake City.  The Company  obtained an  appraisal
                            from an independent  appraiser,  which had concluded
                            that the monthly rate of $2,500  represents the fair
                            market rate for leasing  the  residential  property.
                            The  Company  paid $2,500 and $14,000 in rent during
                            2003 and 2002.  This  agreement  was  terminated  on
                            January 31, 2003.

                            The Company entered into a consulting agreement with
                            a former executive officer of the Company commencing
                            in September 2002 and ending February 2003. The
                            Company paid approximately $1,000 and $15,000 under
                            this agreement during 2003 and 2002, respectively,
                            and had an accrual of approximately $14,000 and
                            $5,000 as of December 31, 2003 and 2002,
                            respectively.



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


11. Related Party           A law firm,  of which the  chairman  of the board of
    Transactions            directors  of  the  Company  is a  shareholder,  has
     Continued              rendered legal services to the Company.  The Company
                            paid this firm $97,000 and  $167,000,  for the years
                            ended December 31, 2003 and 2002,  respectively.  As
                            of December  31,  2003,  the Company  owed this firm
                            $136,000, which is included in accounts payable.


12. Supplemental            During  the  year  ended   December  31,  2003,  the
    Cash Flow               Company:
    Information
                            o        Granted  200,000  warrants  for  consulting
                                     services,  which is recorded as an increase
                                     to general and  administrative  expense and
                                     additional paid-in capital of $35,000.

                            o        Issued  1,562,000  shares of common  stock,
                                     valued  at  $258,000  based on the  trading
                                     prices   on  the  date  of   issuance,   as
                                     settlement  of potential  litigation.  This
                                     amount   is   included   in   general   and
                                     administrative   expenses  and   additional
                                     paid-in capital.

                            o        Incurred an obligation of approximately
                                     $46,000 for the settlement of accrued
                                     liabilities of approximately $83,000 and
                                     recorded a corresponding gain of $37,000.

                            o        Reduced subscription receivable and
                                     additional paid-in capital for $294,000.



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


12. Supplemental            During  the  year  ended   December  31,  2002,  the
    Cash Flow               Company:
    Information
     Continued              o        Acquired   certain   assets  of  Innovative
                                     Optics, Inc. in a purchase transaction (see
                                     note  3).  The  transaction   required  the
                                     payment  of   $100,000   and  a   potential
                                     issuance  of  1,272,000  shares  of  common
                                     stock. In connection with this acquisition,
                                     the Company recorded the following:

                                Inventory                      $       225,000
                                Property, and equipment                 35,000
                                Intangibles:
                                  Patents, rights, trade name          530,000
                                  Goodwill                           1,419,000
                                Equity:
                                  Common stock issued               (1,814,000)
                                  Warrants issued                     (295,000)
                                                               ----------------

                                Net cash paid                  $       100,000
                                                               ----------------

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

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

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

                                Interest      $    24,000      $       46,000
                                              --------------------------------

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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


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


                                              Years Ended
                                ----------------------------------------------
                                                         December 31,
                                ----------------------------------------------
                                Geographic Area           2003     2002
                                ----------------------------------------------
                                Far East           $     272,000 $  1,171,000
                                South America              9,000      308,000
                                Middle East              228,000      337,000
                                Europe                   363,000      505,000
                                Canada                    62,000      121,000
                                Mexico                     9,000       61,000

                                ----------------------------------------------
                                                   $     943,000 $  2,503,000
                                ----------------------------------------------


14.  Savings Plan           In November 1996,  the Company  established a 401(k)
                            Retirement  Savings Plan for the Company's  officers
                            and   employees.   The   Plan   provisions   include
                            eligibility  after six  months of  service,  a three
                            year vesting provision and matching contributions at
                            the  Company's  discretion.  During the years  ended
                            December 31, 2003 and 2002, the Company  contributed
                            approximately   $1,000  and  $64,000  to  the  Plan,
                            respectively.


15. Connitments             Consulting Agreements During the year ended December
    and                     31, 1999 the Company entered a consulting  agreement
    Contingencies           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, in
                            connection with the acquisition of OBF, the Company
                            entered a consulting agreement with the former owner
                            of OBF, which required monthly payments of $6,000
                            through June 2003. As of December 31, 2003, this
                            agreement was settled in conjunction with the
                            royalty agreement for the Blood Flow Analyzer (see
                            Royalty Agreements in Note 15).



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


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

                            An action was brought against us on March 7, 2000 in
                            the Third District Court of Salt Lake County, State
                            of Utah, by the Merrill Corporation that alleges
                            that we owe the Merrill Corporation approximately
                            $20,000 together with interest thereon at the rate
                            of 10% per annum from August 30, 1999, plus costs
                            and attorney's fees. The complaint alleges a breach
                            of contract relative to printing services. We filed
                            an answer to the complaint. On August 12, 2003, the
                            court dismissed the action without prejudice.

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



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


15. Commitments             Litigation - Continued It is  anticipated  that once
    and                     the parties can agree on the correct calculations on
    Contingencies           the  royalties,  the legal action will be dismissed.
     Continued              The  issue  in  dispute  concerning  the  method  of
                            calculating royalties is whether royalties should be
                            paid on returned equipment. Since July 1, 2001, only
                            one  Photon(TM)  laser  system  has been sold and no
                            systems returned. Thus, the amount of royalties due,
                            according to our calculations, is $600. We intend to
                            make  payment  of this  amount to  PhotoMed  and Dr.
                            Eichenbaum  and,  as a  result,  to have  the  legal
                            action dismissed. However, if the parties are unable
                            to  agree  on a method  for  calculating  royalties,
                            there is a risk  that  PhotoMed  and Dr.  Eichenbaum
                            might amend their  complaint to request  termination
                            of the  license  agreement  and, if  successful,  we
                            would  lose our  right to  manufacture  and sell the
                            Photon(TM) laser system.

                            We received a demand letter dated December 9, 2002
                            from counsel for Dan Blacklock, dba Danlin Corp. The
                            letter demands payment in the amount of $65,160 for
                            manufacturing and supplying parts for microkeratome
                            blades. Our records show that we received
                            approximately $34,824 in parts from the Danlin
                            Corp., but that the additional amounts that the
                            Danlin Corp contends are owed were from parts that
                            were received but rejected by us because they had
                            never been ordered. On August 14, 2003, we agreed to
                            make a $13,650 payment to Danlin Corp. in settlement
                            of the dispute. We have since made the $13,650
                            payment to Danlin Corp.

                            We received a demand letter dated December 30, 2002
                            from counsel for Thomas F. Motter, our former
                            Chairman and Chief Executive Officer. Mr. Motter
                            claims in the letter that he was entitled to certain
                            stock options that had not been issued to him in a
                            timely manner. By the time the options were actually
                            issued to him, however, they had expired. Mr. Motter
                            contends that if the options had been issued in a
                            timely manner, he would have exercised them in a
                            manner that would have given him a substantial
                            benefit. Mr. Motter requests restitution for the
                            loss of the financial opportunity. Mr. Motter also
                            claims that he was defrauded by us by not being
                            given an extended employment agreement when he
                            terminated the change of control agreement that he
                            had entered into with us.



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


15. Commitments             Litigation  -  Continued   Mr.   Motter  is  further
    and                     claiming  payment for accrued  vacation  time during
    Contingencies           the 13 years he had been  employed  by the  Company,
     Continued              asserting  that he only had a total of four weeks of
                            vacation during that period.  Finally, Mr. Motter is
                            threatening a shareholder  derivative action against
                            us  because  of  the  board  of  directors'  alleged
                            failure   to   conduct   an    investigation    into
                            conversations  that  took  place  in a chat  room on
                            Yahoo.  Mr. Motter asserts that certain  individuals
                            participating in the conversations were our officers
                            or directors  whose  interests were in conflict with
                            the  interest of the  shareholders.  We believe that
                            Mr. Motter's claims and assertions are without merit
                            and intend to  vigorously  defend  against any legal
                            action that Mr. Motter may bring.

                            On January 24, 2003, an action was brought by Dr.
                            John Charles Casebeer against us in the Montana
                            Second Judicial District Court, Silver Bow County,
                            State of Montana (Civil No. DU-0326). The complaint
                            alleges that Dr. Casebeer entered into a personal
                            services contract with us memorialized by a letter
                            dated April 20, 2002, with it being alleged that Dr.
                            Casebeer fully performed his obligations. Dr.
                            Casebeer asserts that he is entitled to $43,750 per
                            quarter for consultant time and as an incentive to
                            be granted each quarter $5,000 in options issued at
                            the fair market value. An additional purported
                            incentive was $50,000 in shares of stock being
                            issued at the time a formalized contract was to be
                            signed by the parties. In the letter it is provided
                            that at its election, we may pay the consideration
                            in the form of stock or cash and that stock would be
                            issued within 30 days of the close of the quarter.
                            Prior to the litigation, we issued 43,684 shares to
                            Dr. Casebeer. The referenced letter provides that
                            termination may be made by either party upon giving
                            90 days written notice. Notice was given by us in
                            early November 2002. We recently filed its answer in
                            defense of the action. Issues include whether or not
                            Dr. Casebeer fully performed as asserted. The case
                            has been settled through the issuance of 300,000
                            additional shares of our common stock to Dr.
                            Casebeer.



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


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

                            More specifically, the complaint alleges that we
                            falsely stated in our Securities and Exchange
                            Commission filings and press releases that we had
                            received authorization to use an insurance
                            reimbursement CPT code from the CPT Code Research
                            and Development Division of the American Medical
                            Association in connection with the Blood Flow
                            Analyzer(TM), adding that the CPT code provides for
                            a reimbursement to doctors of $57.00 per patient for
                            use of the Blood Flow Analyzer(TM). The complaint
                            also alleges that on July 11, 2002, we issued a
                            press release falsely announcing that we had
                            received a purchase order from Valdespino Associates
                            Enterprises and Westland Financial Corporation for
                            200 sets of our entire portfolio of products, with
                            $70 million in systems to be delivered over a
                            two-year period, then another $35 million of orders
                            to be completed in the third year. As a result of
                            these statements, the complaint contends that the
                            price of our shares of common stock was artificially
                            inflated during the period from April 25, 2001
                            through May 14, 2003, and the persons who purchased
                            our common shares during that period suffered
                            substantial damages. The complaint requests judgment
                            for unspecified damages, together with interest and
                            attorney's fees.



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


15. Commitments             Litigation  -  Continued  We dispute  having  issued
    and                     false and misleading statements concerning the Blood
    Contingencies           Analyzer(TM)  and a purchase  order from  Valdespino
     Continued              Associates   Enterprises   and  Westland   Financial
                            Corporation.  On April 25,  2001,  we issued a press
                            release that stated we had received authorization to
                            use common procedure  terminology or CPT code number
                            92120 for our Blood  Flow  Analyzer(TM).  This press
                            release was based on a letter we  received  from the
                            CPT Editorial Research and Development Department of
                            the American Medical Association  authorizing use of
                            common  procedure  terminology  or CPT  code  number
                            92120  for  our   Blood   Flow   Analyzer(TM),   for
                            reimbursement purposes for doctors using the device.

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



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


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

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



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


15. Commitments             Litigation  - Continued On June 2, 2003, a complaint
    and                     was  filed  in  the  United  States  District  Court
    Contingencies           captioned   Michael  Marrone  v.  Paradigm   Medical
     Continued              Industries,  Inc.,  Thomas  Motter,  Mark Miehle and
                            John Hemmer,  Case No. 2:03 CV00513 PGC. On or about
                            June 11,  2003,  a  complaint  was filed in the same
                            United States  District  Court  captioned  Milian v.
                            Paradigm Medical  Industries,  Inc.,  Thomas Motter,
                            Mark   Miehle  and  John   Hemmer,   Case  No.  2:03
                            CV00617PGC.   Both   complaints  seek  class  action
                            status.  These  cases are  substantially  similar in
                            nature to the Meyer case,  including the  contention
                            that  as a  result  of  allegedly  false  statements
                            regarding  the  Blood  Flow   Analyzer(TM)  and  the
                            purchase    order   from    Valdespino    Associates
                            Enterprises and Westland Financial Corporation,  the
                            price of our common stock was artificially  inflated
                            and the  persons  who  purchased  our common  shares
                            during  the  class   period   suffered   substantial
                            damages.  The cases request judgment for unspecified
                            damages, together with interest and attorneys' fees.
                            These  cases  have  now been  consolidated  with the
                            Meyer  case into a single  action.  We  believe  the
                            consolidated  cases are without  merit and intend to
                            vigorously  defend and protect our  interests in the
                            said cases.

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



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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

15. Commitments             Litigation  - Continued We have not paid any amounts
    and                     toward  satisfaction  of any  part  of the  $250,000
    Contingencies           retention  that is  applicable  to the  consolidated
     Continued              cases.  We have advised U.S. Fire that we cannot pay
                            the $250,000  retention due to our current financial
                            circumstances. As a consequence, on January 8, 2004,
                            we entered  into a  non-waiver  agreement  with U.S.
                            Fire in which U.S.  Fire  agreed to fund and advance
                            our retention  obligation in consideration for which
                            we have  agreed to  reimburse  U.S.  Fire the sum of
                            $5,000 a month, for a period of six months, with the
                            first of such  payments  due on February  15,  2004.
                            Thereafter,  commencing  on August 15, 2004,  we are
                            currently required to reimburse U.S. Fire the sum of
                            $10,000  per  month  until  the  entire   amount  of
                            $250,000 has been reimbursed to U.S. Fire.

                            In the event U.S. Fire determines that we or the
                            former officers and directors named in the
                            consolidated cases are not entitled to coverage
                            under the policy, or that it is entitled to rescind
                            the policy, or should we be declared in default
                            under the non-waiver agreement, then we agree to pay
                            U.S. Fire, on demand, the full amount of all costs
                            advanced by U.S. Fire, except for those amounts that
                            we may have reimbursed to U.S. Fire pursuant to the
                            monthly payments due under the non-waiver agreement.

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



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


15. Commitments             Litigation - Continued  On July 10, 2003,  an action
    and                     was  filed  in the  United  States  District  Court,
    Contingencies           District of Utah,  by  Innovative  Optics,  Inc. and
     Continued              Barton Dietrich Investments, L.P. Defendants include
                            us,  Thomas  Motter,  Mark  Miehle and John  Hemmer,
                            former officers of the company. The complaint claims
                            that  Innovative  and Barton  entered  into an asset
                            purchase  agreement  with us on January 31, 2002, in
                            which  we  agreed  to  purchase  all the  assets  of
                            Innovative  in  consideration  for the  issuance  of
                            1,310,000  shares of the  Company's  common stock to
                            Innovative.  The  complaint  claims we breached  the
                            asset purchase agreement.  The complaint also claims
                            that  we   allegedly   made  false  and   misleading
                            statements pertaining to the Blood Flow Analyzer(TM)
                            and  concerning  a purchase  order  from  Valdespino
                            Associates   Enterprises   and  Westland   Financial
                            Corporation.   The  purpose  of  these   statements,
                            according to the complaint, was to induce Innovative
                            to sell its  assets and  purchase  the shares of our
                            common stock at  artificially  inflated prices while
                            simultaneously  deceiving Innovative and Barton into
                            believing that the Company's  shares were worth more
                            than they actually  were.  Had Innovative and Barton
                            known the truth, the complaint contends,  they would
                            not  have  sold  Innovative  to us,  would  not have
                            purchased our stock for the assets of Innovative, or
                            would not have  purchased  the stock at the inflated
                            prices  that  were  paid.   The  complaint   further
                            contends  that  as a  result  of  these  statements,
                            Innovative and Barton suffered  substantial  damages
                            in an amount to be proven at trial.

                            The complaint also claims that 491,250 of the shares
                            to be issued to Innovative in the asset purchase
                            transaction were not issued on a timely basis and we
                            also did not file a registration statement with the
                            Securities and Exchange Commission within five
                            months of the closing date of the asset purchase
                            transaction. As a result, the complaint alleges that
                            the value of the shares of our common stock issued
                            to Innovative in the transaction declined, and
                            Innovative and Barton suffered damages in an amount
                            to be proven at trial. We filed an answer to the
                            complaint and also filed counterclaims against
                            Innovative and Barton for breach of contract. We
                            believe the complaint is without merit and intend to
                            vigorously defend and protect our interests in the
                            action.



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


15. Commitments             Litigation - Continued If we are not  successful  in
    and                     defending  and  protecting  our  interests  in  this
    Contingencies           action,  resulting  in a  judgment  against  us  for
     Continued              substantial  damages,  and U.S. Fire denies coverage
                            in the  litigation  under the Directors and Officers
                            Liability and Company Reimbursement Policy, we would
                            not be able to pay such  liability and, as a result,
                            would be forced to seek bankruptcy protection.

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

--------------------------------------------------------------------------------
                                                                            F-46
<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


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

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

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


--------------------------------------------------------------------------------
                                                                            F-47
<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


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

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



--------------------------------------------------------------------------------
                                                                            F-48
<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


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

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

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

                            Royalty Agreements
                            The Company had a royalty agreement with the
                            president of OBF. The agreement provided for the
                            payment of 10% royalty of the net sales related to
                            the Blood Flow Analyzer.

                            During 2003, a settlement was reached with the
                            president of OBF whereby the royalty payments were
                            forfeited and no longer are an obligation of the
                            Company. The over-accrued amount of $147,000 was
                            reversed during 2003 to reflect the settlement
                            agreement.

                            The Company has an amended exclusive patent license
                            agreement with a company which owns the patent for
                            the laser-probe used on the Photon machine. The
                            agreement provides for the payment of a 1% royalty
                            on all sales proceeds related directly or
                            indirectly, to the Photon machine. The agreement
                            expires when the United States patent rights expire
                            in September 2004. Through December 31, 2003, no
                            significant royalties have been paid under this
                            agreement.


--------------------------------------------------------------------------------
                                                                            F-49
<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


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


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


17. Recent                  In November  2002,  the EITF  reached a consensus on
    Accounting              Issue No.00-21,  Revenue  Arrangements with Multiple
    Pronouncements          Deliverables. EITF Issue No. 00-21 provides guidance
                            on how to  account  for  certain  arrangements  that
                            involve  the  delivery  or  performance  of multiple
                            products,  services and/or rights to use assets. The
                            provisions  of EITF  Issue No.  00-21  will apply to
                            revenue  arrangements entered into in fiscal periods
                            beginning  after June 15, 2003. The adoption of EITF
                            Issue No.  00-21 did not have a  material  impact on
                            operating  results  or  financial  condition  of the
                            Company as the Company  followed the  provisions  of
                            Statement of Position ("SOP") 97-2, Software Revenue
                            Recognition,  as modified by SOP 98-9,  Modification
                            of SOP 97-2 with  Respect to  Certain  Transactions,
                            which provide  guidance for revenue  recognition  of
                            arrangements with multiple deliverables.



--------------------------------------------------------------------------------
                                                                            F-50
<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


17. Recent                  In December 2003, the FASB issued Interpretation No.
    Accounting              46   ("FIN   46R")    (revised    December    2003),
    Pronouncements          Consolidation  of  Variable  Interest  Entities,  an
     Continued              Interpretation  of Accounting  Research Bulletin No.
                            51  ("ARB  51"),  which  addresses  how  a  business
                            enterprise   should   evaluate   whether  it  has  a
                            controlling interest in an entity though means other
                            than   voting   rights   and   accordingly    should
                            consolidate  the  entity.   FIN  46R  replaces  FASB
                            Interpretation  No. 46 (FIN 46), which was issued in
                            January   2003.   Before   concluding   that  it  is
                            appropriate   to  apply  ARB  51   voting   interest
                            consolidation model to an entity, an enterprise must
                            first  determine  that the  entity is not a variable
                            interest  entity (VIE).  As of the effective date of
                            FIN 46R, an enterprise must evaluate its involvement
                            with all entities or legal structures created before
                            February 1, 2003, to determine whether consolidation
                            requirements  of FIN 46R  apply to  those  entities.
                            There is no  grandfathering  of  existing  entities.
                            Public companies must apply either FIN 46 or FIN 46R
                            immediately  to entities  created  after January 31,
                            2003  and  no  later  than  the  end  of  the  first
                            reporting  period that ends after December 15, 2004.
                            The  adoption  of  FIN  46  had  no  effect  on  the
                            Company's consolidated  financial position,  results
                            of operations or cash flows.

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



--------------------------------------------------------------------------------
                                                                            F-51
<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

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


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

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



--------------------------------------------------------------------------------
                                                                            F-52
<PAGE>


Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosures

         None.

Item 9A.  Controls and Procedures

         Under the  supervision  and with the  participation  of our management,
including our principal  executive officer and principal  financial officer,  we
evaluated  the  effectiveness  of the design  and  operation  of our  disclosure
controls and  procedures  (as defined in Rule  13a-15(e) or 15d-15(e)  under the
Securities  Exchange  Act  of  1934  (the  "Exchange  Act")).  Based  upon  that
evaluation,  the principal  executive  officer and principal  financial  officer
concluded  that,  as of the  end of the  period  covered  by  this  report,  our
disclosure  controls and procedures  were  effective and adequately  designed to
ensure that information required to be disclosed by us in the reports we file or
submit under the Exchange Act is recorded,  processed,  summarized  and reported
within the time  periods  specified  in  applicable  rules and forms;  provided,
however,  our principal  executive officer and principal  financial officer have
determined  that review of our SEC filings by our outside  advisors will need to
occur  earlier in the process of  preparing  such  filings so such  advisors can
assist us in better  understanding and satisfying rapidly developing  regulatory
and disclosure  requirements.  We believe the only  consequence of the disclosed
deficiency  was the  delay  in  filing  our Form  10-KSB/A  and the need to file
Form 12b-25.

         During  the  fourth  fiscal  quarter,  there  has been no change in our
internal  control  over  financial  reporting  (as defined in Rule  13a-15(f) or
15d-15(f) under the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.


                                    PART III


Item  10.  Directors,   Executive  Officers,   Promoters  and  Control  Persons;
Compliance with Section 16(a) of the Exchange Act.

         As of March 31, 2004, the Company's  executive  officers and directors,
their ages and their positions are set forth below:

  Name                         Age     Position
  ----                         ---     --------
  John Y. Yoon                 40      President and Chief Executive Officer
  Aziz A. Mohabbat             44      Vice President of Operations and Chief
                                       Operating Officer
  Randall A. Mackey, Esq.      58      Chairman of the Board, Secretary and
                                       Director
  David M. Silver, PhD.        62      Director
  Keith D. Ignotz              56      Director

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

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

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

                                       32
<PAGE>

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

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

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

Appointment of New President and Chief Executive Officer

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

Appointment of New Chief Operating Officer

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

Board Meetings and Committees

         The Board of Directors  held a total of six meetings  during the fiscal
year  ended  December  31,  2003.  No  director  attended  fewer than 75% of all
meetings  of the Board of  Directors  during  the 2003  fiscal  year.  The Audit
Committee of the Board of Directors  consists of directors  Dr. David M. Silver,
Randall A. Mackey and Keith D. Ignotz.  The Audit  Committee met one time during
the fiscal year. The Audit Committee is primarily  responsible for reviewing the
services  performed by its  independent  public  accountants  and internal audit
department and  evaluating its accounting  principles and its system of internal
accounting  controls.  The  Compensation  Committee  of the  Board of  Directors
consists  of  directors  Dr.  David M.  Silver,  Randall A.  Mackey and Keith D.
Ignotz.  The  Compensation  Committee  met one time during the fiscal year.  The
Compensation  Committee is primarily  responsible for reviewing  compensation of
executive officers and overseeing the granting of stock options.

         Pursuant to Item 406 of Regulation  S-K under the  Securities  Exchange
Act of 1934,  the Company  has not yet adopted a code of ethics that  applies to
its principle  executive officer,  principal  financial  officer,  controller or
persons  performing  similar  functions.  The Company is still in the process of
studying this issue and intends to adopt a code of ethics in the near future.

         The Company's  Board of Directors has determined  that Keith D. Ignotz,
who  currently  serves as a director  of the  Company as well as a member of the
Company's audit committee, is an independent audit committee financial expert.

                                       33
<PAGE>

Item 11.  Executive Compensation

         The  following  table sets  forth,  for each of the last  three  fiscal
years,  the  compensation  received by Thomas F. Motter,  former Chairman of the
Board and Chief Executive Officer, and other executive officers whose salary and
bonus for all services in all  capacities  exceed  $100,000 for the fiscal years
ended December 31, 2003, 2002 and 2001.
<TABLE>
<CAPTION>

                           Summary Compensation Table


                                             Annual Compensation                              Long Term Compensation
                                                                                   Awards                      Payouts
                                                          Other                            Securities
                                                          Annual          Restricted       Underlying     Long-term    All Other
Name and                                                  Compen-         Stock             Options/      Incentive    Compensa-
Principal Position     Year      Salary$     Bonus($)     sation($)(6)    Awards($)          SARs(#)      Payouts($)   tion($)
------------------     ----      -------     --------     ------------    ---------          -------      ----------   ---------
<S>                    <C>       <C>         <C>          <C>                   <C>     <C>                     <C>  <C>
Jeffrey F. Poore       2003(1)   $136,015            0          0               0       1,000,000(6)            0          0
Former President
and Chief
Executive Officer

David I.               2003(1)   $ 22,312            0    $16,616(7)            0         150,000(8)            0          0
Cullumber,
Former Chief
Operating Officer
and Chief
Technical Officer

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

Thomas F. Motter       2002(2)   $187,483(9)         0          0               0               0               0    $19,750(4)(5)
Former Chairman        2001(3)   $200,000    $  22,380(10)      0               0         925,000(11)           0    $ 6,000(4)
of the Board and
Chief Executive                                      0
Officer

Mark R. Miehle         2002(2)   $134,202            0          0               0          55,000(12)           0    $18,000(4)(14)
Former President       2001(3)   $150,000            0          0               0         110,000(13)           0    $ 6,000(4)
and Chief
Operating Officer

Aziz A.                2003(1)   $ 24,219            0          0               0               0               0          0
Mohabbat               2002(2)   $126,878            0          0               0               0               0          0
Vice President of
Operations(15)

Heber C.               2003(1)   $ 36,855            0          0               0         150,000(17)           0          0
Maughan                2002(2)   $114,416            0          0               0               0               0          0
Former Chief           2001(3)   $ 27,500            0          0               0          30,000(18)           0          0
Financial
Officer(16)
</TABLE>

--------------------
(1)      For the fiscal year ended December 31, 2003
(2)      For the fiscal year ended December 31, 2002
(3)      For the fiscal year ended December 31, 2001
(4)      The  amounts  under "All Other  Compensation"  for 2003,  2002 and 2001
         include  payments  related  to  the  operation  of  automobiles  and/or
         automobiles and insurance by the named executives.

                                       34
<PAGE>

(5)      The amounts under "All Other  Compensation"  for 2002 include  payments
         related to the residential  housing  accommodations  for its employees,
         living  outside  of Utah  while  they  were  working  at its  corporate
         headquarters  in Salt Lake City,  leased from Mr.  Motter at $2,500 per
         month.
(6)      On March 19, 2003, its board of directors  granted Mr. Poore options to
         purchase  1,000,000  shares of its common stock at an exercise price of
         $.16 per share.
(7)      The  Company  paid  A-Mech  Engineering,  Inc. a total of  $16,616  for
         consulting  services  during  2003.  From  1982  to  August  2003,  Mr.
         Cullumber served as President of A-Mech Engineering, Inc.
(8)      On  November 6, 2003,  its board of  directors  granted  Mr.  Cullumber
         options to purchase  150,000  shares of its common stock at an exercise
         price of $.21 per share.
(9)      Although Mr. Motter resigned as Chairman and Chief Executive Officer on
         August 30, 2002,  he continued to receive his salary under the terms of
         his employment agreement through December 16, 2002.
(10)     The Company awarded Mr. Motter a cash bonus in June 2001.
(11)     On  September  11,  2001,  the Company  granted Mr.  Motter  options to
         purchase  925,000  shares of its common  stock at an exercise  price of
         $2.75 per share.
(12)     On January 29,  2002,  the  Company's  Board of  Directors  granted Mr.
         Miehle  options to purchase the 55,000 shares of its common stock at an
         exercise price of $2.75 per share.
(13)     On September  11, 2001,  the Company's  Board of Directors  granted Mr.
         Miehle  options to purchase  110,000  shares of its common  stock at an
         exercise price of $2.75 per share.
(14)     On September 3, 2002, the Company  entered into a consulting  agreement
         with Mr.  Miehle in which the  Company is  required  to pay him monthly
         consulting fees of $5,000 over a period of six months. The Company paid
         him a total of $15,000  for  consulting  services  during the months of
         September, October and November of 2002.
(15)     Mr. Mohabbat was named as Interim Chief Operating Officer on August 30,
         2002. He was not an officer in prior years.
(16)     Mr. Maughan was named as Interim Chief Executive  Officer on August 30,
         2002. He was appointed Vice  President of Finance,  Treasurer and Chief
         Financial Officer on October 1, 2001.
(17)     On May 13, 2003, the Company's  Board of Directors  granted Mr. Maughan
         options to purchase  150,000  shares of its common stock at an exercise
         price of $.16 per share.
(18)     On October 1, 2001, the Company's  Board of Directors  granted  options
         Mr. Maughan options to purchase 30,000 shares of its common stock at an
         exercise price of $2.75 per share.

Options

         The  following  table sets forth  information  regarding  stock options
granted during the fiscal year ended December 31, 2003, to each named  executive
officer.
<TABLE>
<CAPTION>
                                                 Option Grants in Last Fiscal Year


                                                                Individual Grants
                                              Percentage of
                               Number of          Total
                              Securities         Options          Exercise
                              Underlying        Granted to         Price
                                Options        Employees in      Per Share     Expiration
Name                          Granted (#)     Fiscal Year(%)       ($/Sh)         Date
----                          -----------     --------------       ------         ----
<S>                         <C>                  <C>                  <C>         <C>  <C>
Jeffrey F. Poore.............1,000,000(1)        56.3%                $.16        3/19/08
David I. Cullumber...........  150,000(2)         8.5%                $.21         11/6/08
Gregory C. Hill..............           0          --                  --            --
Heber C. Maughan.............  150,000(3)         8.5%                $.16        5/13/08
Aziz A. Mohabbat.............           0          --                  --            -
</TABLE>

(1)      Options for 800,000  shares  vested on March 19,  2003,  options for an
         additional  100,000  shares vest on March 19, 2004, and options for the
         remaining 100,000 shares vest on March 19, 2005.
(2)      Options vest in three equal annual installments,  beginning on November
         6, 2003. (3) Options vest in three equal annual installments, beginning
         on May 13, 2003.

         The  following  table  sets  forth  information  regarding  unexercised
options to acquire shares of the Company's  common stock held as of December 31,
2003, by each named executive officer.

                                       35
<PAGE>

               Aggregated Option Exercises in Last Fiscal Year and
                         Fiscal Year-End Option Values
<TABLE>
<CAPTION>
                                                                      Number of Securities
                                                                           Underlying                    Value of Unexercised
                                                                       Unexercised Options               In-the-Money Options
                                                                     at December 31, 2003(#)            at December 31, 2003($)
                                                                     -----------------------            -----------------------
                             Shares Acquired       Value
Name                           on Exercise      Realized($)       Exercisable      Unexercisable      Exercisable     Unexercisable
----                           -----------      -----------       -----------      -------------      -----------     -------------
<S>                                 <C>              <C>                  <C>               <C>            <C>              <C>
Jeffrey F. Poore..........          0                0                    800,000           200,000        0                0
David I. Cullumber........          0                0                     50,000           100,000        0                0
Gregory C. Hill...........          0                0                          0                 0        0                0
Heber C. Maughan............        0                0                     50,000           100,000        0                0
Aziz A. Mohabbat............        0                0                          0                 0        0                0
</TABLE>

Director Compensation

         On July 11, 2003,  Messrs.  Randall A. Mackey,  Dr. David M. Silver and
Keith D. Ignotz, directors of the Company, were each granted options to purchase
125,000  shares of its common stock at an exercise  price of $.25 per share.  In
addition,  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 options
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 plan.

1995 Stock Option Plan

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

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

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

                                       36
<PAGE>

Employment Agreements

         The Company entered into an employment agreement with Thomas F. Motter,
which  commenced  on  January 1, 1998 and  expires on  December  31,  2002.  The
employment  agreement  requires Mr.  Motter to devote  substantially  all of his
working time as the Company's  Chairman and Chief  Executive  Officer,  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 employment agreement provides for
the payment of an initial  base salary of  $135,000,  effective as of January 1,
1998. The employment agreement also provides for salary increases and bonuses as
shall be determined at the discretion of the Board of Directors. Effective as of
October 1, 1999,  the Board of  Directors  approved an increase in Mr.  Motter's
annual base salary to  $160,000,  and  effective  as of July 1, 2000,  the board
approved an increase in his annual base salary to  $200,000,  which  remained in
effect during 2002. Mr. Motter resigned as Chairman and Chief Executive  Officer
on August 30,  2002.  He  continued to receive his salary under the terms of the
employment agreement through December 16, 2002.

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

         The Company entered into an employment agreement with Jeffrey F. Poore,
which  commenced on March 19, 2003 and expires on March 19, 2006. The employment
agreement requires Mr. Poore to devote  substantially all of his working time as
the Company's  President and Chief  Executive  Officer,  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 employment  agreement provides for the payment of an
initial base salary of $175,000,  effective as of March 19, 2003. The employment
agreement also provides for salary  increases and bonuses as shall be determined
at the discretion of the Board of Directors.  The employment  agreement  further
provides for the issuance of stock options to purchase  1,000,000  shares of the
Company's  common stock at $.16 per share, of which options to purchase  800,000
shares of common stock shall vest on March 19, 2003,  options for an  additional
100,000  shares of common stock shall vest on March 19, 2004, and options for an
additional 100,000 shares of common stock shall vest on March 19, 2005.

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

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

Severance Agreement

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

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


                                       37
<PAGE>

Consulting Agreement

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

Item 12. 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, 2003 for
(i) each executive  officer (ii) each  director,  (iii) each person known to the
Company to be the beneficial  owner of more than 5% of the  outstanding  shares,
and (iv) all directors and officers as a group.



                                                                     Percent of
Name and Address(1)                         Number of Shares          Ownership
-------------------                         ----------------          ---------
Douglas A. MacLeod, M.D. (2)
    502 South M Street
    Tacoma Washington 98405                      2,538,451              10.0%
John Y. Yoon                                             -                  *
Jeffrey F. Poore(3)                                800,000               3.1%
Dr. David M. Silver(4)                             741,166               2.9%
Randall A. Mackey(4)                               725,000               2.8%
Keith D. Ignotz(5)                                 454,560               1.8%
David I. Cullumber                                  50,000                  *
Gregory C. Hill                                          -                  *
Heber C. Maughan(6)                                 50,000                  *
Aziz A. Mohabbat                                         -                  *
Executive officers and directors
   as a group (eight persons)                    2,820,726              11.1%
         -----------------
         *Less than 1%.

(1)      Unless otherwise  indicated,  the address of each listed stockholder is
         c/o Paradigm Medical Industries,  Inc., 2355 South 1070 West, Salt Lake
         City, Utah, 84119.
(2)      Includes  the stock held by Douglas A.  MacLeod,  M.D.  Profit  Sharing
         Trust, St. Mark's Eye Institute and Milan Holdings, Ltd.
(3)      Includes  options to purchase 800,000 shares of common stock granted to
         Dr. Poore that are  currently  exercisable  or will become  exercisable
         within 60 days of December 31, 2003.
(4)      Includes  options to purchase 725,000 shares of common stock granted to
         each of Dr.  Silver and Mr. Mackey that are  currently  exercisable  or
         will become exercisable within 60 days of December 31, 2003.
(5)      Includes  options to purchase 453,851 shares of common stock granted to
         Mr. Ignotz that are currently  exercisable  or will become  exercisable
         within 60 days of December 31, 2003.
(6)      Includes  options to purchase  50,000 shares of common stock granted to
         Mr. Maughan that are currently  exercisable or will become  exercisable
         within 60 days of December 31, 2003.

Item 13. Certain Relationships and Related Transactions

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

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

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

                                       38
<PAGE>

         Randall  A.  Mackey,  a  director  since  January  21,  2000,  and from
September  1995 to  September 3, 1998 and chairman of the board since August 30,
2002, is President and a shareholder of the law firm of Mackey Price & Thompson,
which  rendered  legal services in connection  with various  corporate  matters.
Legal fees and  expenses  paid to Mackey  Price & Thompson  for the fiscal years
ended December 31, 2003 and 2002, totaled $97,000 and $167,000, respectively. As
of December 31, 2003, the Company owed this firm $136,000,  which is included in
accounts payable.
                                     PART IV

Item 14. Principal Accountant Fees and Services

         Fees for the 2003 annual audit of the financial  statements and related
quarterly review services were  approximately  $51,000.  Fees in 2003 related to
the review of  registration  statements  and  assistance  in  responding  to SEC
comments were  approximately  $14,000.  Fees in 2003 for edgarization of filings
were  approximately  $8,000.  Fees  in  2003  for tax  return  preparation  were
approximately  $10,000.  Other fees in 2003 for meetings and other  consultation
were approximately $3,000.

         Fees for the 2002 annual audit of the financial  statements and related
quarterly review services were  approximately  $43,000.  Fees in 2002 related to
the review of registration  statements,  private  placement  memorandums,  proxy
statements, other SEC filings, and assistance in responding to SEC comments were
approximately   $20,000.   Fees  in  2002  for   edgarization  of  filings  were
approximately  $9,000.  Other fees in 2002 for meetings  and other  consultation
were approximately $2,000.

Item 15. Exhibits and Reports on Form 8-K

       (a)  Exhibits

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

Exhibit
  No.                      Document Description
-------                    --------------------

2.1      Amended   Agreement  and  Plan  of  Merger  between   Paradigm  Medical
         Industries,   Inc.,  a  California  corporation  and  Paradigm  Medical
         Industries, Inc., a Delaware corporation(1)
3.1      Certificate of Incorporation(1)
3.2      Amended Certificate of Incorporation(10)
3.3      Bylaws(1)
4.1      Warrant  Agency  Agreement  with  Continental  Stock  Transfer  & Trust
         Company(3)
4.2      Specimen Common Stock Certificate (2)
4.3      Specimen Class A Warrant Certificate(2)
4.4      Form of Class A Warrant Agreement(2)
4.5      Underwriter's Warrant with Kenneth Jerome & Co., Inc.(3)
4.6      Warrant to Purchase Common Stock with Note Holders re bridge  financing
         (1)
4.7      Specimen Series C Convertible Preferred Stock Certificate(4)
4.8      Certificate of the Designations,  Powers, Preferences and Rights of the
         Series C Convertible Preferred Stock(4)
4.9      Specimen Series D Convertible Preferred Stock Certificate (6)
4.10     Certificate of the Designations,  Powers, Preferences and Rights of the
         Series D Convertible Preferred Stock (7)
4.11     Warrant to Purchase Common Stock with Cyndel & Co. (6)
4.12     Warrant to Purchase Common Stock with R.F. Lafferty & Co., Inc. (6)
4.13     Warrant to Purchase Common Stock with Dr. Michael B. Limberg (7)
4.14     Warrant to Purchase Common Stock with John W. Hemmer (7)
4.15     Stock Purchase Warrant with Triton West Group, Inc.(9)
4.16     Warrant to Purchase Common Stock with KSH Investment Group, Inc.(9)
4.17     Warrant to Purchase Common Stock with Consulting for Strategic  Growth,
         Ltd.(9)
4.18     Certificate  of  Designations,  Powers,  Preferences  and Rights of the
         Series G Convertible Preferred Stock (14)
5.1      Opinion of Mackey Price & Thompson
10.1     Exclusive Patent License Agreement with PhotoMed(1)
10.2     Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3     1995 Stock Option Plan (1)
10.4     Employment Agreement with Thomas F. Motter (5)
10.5     Stock  Purchase  Agreement  with Ocular  Blood Flow,  Ltd.  and Malcolm
         Redman (7)
10.6     Consulting Agreement with Malcolm Redman (7)
10.7     Royalty Agreement with Malcolm Redman (7)
10.8     Registration Rights with Malcolm Redman (7)
10.9     Employment Agreement with Mark R. Miehle (8)
10.10    Agreements with Steven J. Bayern and Patrick M. Kolenik (8)
10.11    Private Equity Line of Credit  Agreement  with Triton West Group,  Inc.
         (9)
10.12    Asset  Purchase  Agreement  with  Innovative  Optics,  Inc.  and Barton
         Dietrich Investments, L.P.(10)
10.13    Escrow  Agreement  with  Innovative   Optics,   Inc.,  Barton  Dietrich
         Investments, L.P. (10)
10.14    Assignment and Assumption Agreement with Innovative Optics, Inc.(10)
10.15    General Assignment and Bill of Sale with Innovative Optics, Inc.(10)
10.16    Non-Competition and Confidentiality Agreement with Mario F. Barton(10)
10.17    Termination of Employment Agreement with Mark R. Miehle(12)
10.18    Consulting Agreement with Mark R. Miehle(12)

                                       39
<PAGE>

10.19    Employment Agreement with Jeffrey F. Poore (13)
10.20    License Agreement with Sunnybrook Health Science Center(15)
10.21    Major Account Facilitator Contract(15)
10.22    Mutual Release with Douglas A. MacLeod, M.D. and Others(15)
10.23    Purchase Agreement with American Optisurgical, Inc.(15)
10.24    Purchase Order with Westland Financial Corporation(16)
10.25    Non-Waiver Agreement with United States Fire Insurance Company(16)
10.26    Employment Agreement with John Y. Yoon(17)
10.27    Consulting Agreement with Dr. John Charles Casebeer(18)
10.28    Consulting Agreement with Kinexsys Corporation(18)
31.1     Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section
         302 of the Sarbanes-Oxley Act of 2002
31.2     Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section
         302 of the Sarbanes-Oxley Act of 2002
32.1     Certification  pursuant to 18 U.S.C.  Section 1350, as adopted pursuant
         to Section 906 of the Sarbanes-Oxley Act of 2002
32.2     Certification  pursuant to 18 U.S.C.  Section 1350, as adopted pursuant
         to Section 906 of the Sarbanes-Oxley Act of 2002

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

(1)      Incorporated by reference from Registration  Statement on Form SB-2, as
         filed on March 19, 1996.
(2)      Incorporated   by  reference  from  Amendment  No.  1  to  Registration
         Statement on Form SB-2, as filed on May 14, 1996.
(3)      Incorporated   by  reference  from  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  Report on Form  10-QSB,  as filed on
         November 12, 1998.
(6)      Incorporated by reference from Registration  Statement on Form SB-2, as
         filed on April 29, 1999.
(7)      Incorporated  by  reference  from  Report on Form  10-QSB,  as filed on
         August 16, 2000.
(8)      Incorporated  by  reference  from  Report on Form  10-QSB,  as filed on
         November 1, 2000.
(9)      Incorporated by reference from Report on Form 10-KSB, as filed on April
         16, 2001.
(10)     Incorporated  by reference from Current Report on Form 8-K, as filed on
         March 5, 2002.
(11)     Incorporated   by  reference  from  Amendment  No.  1  to  Registration
         Statement on Form S-3, as filed on March 20, 2002.
(12)     Incorporated  by  reference  from  Report on Form  10-QSB,  as filed on
         November 18, 2002.
(13)     Incorporated by reference from Registration  Statement on Form SB-2, as
         filed on July 7, 2003.
(14)     Incorporated  by  reference  from  Report on Form  10-QSB,  as filed on
         November 14, 2003.
(15)     Incorporated   by  reference  from  Amendment  No.  2  to  Registration
         Statement on Form SB-2, as filed on December 15, 2003.
(16)     Incorporated   by  reference  from  Amendment  No.  3  to  Registration
         Statement on Form SB-2, as filed on February 27, 2004.
(17)     Incorporated  by reference from Current Report on Form 8-K, as filed on
         March 23, 2004.
(18)     Incorporated by reference from Report on Form 10-KSB, as filed on April
         14, 2004.

     (b)  Reports on Form 8-K

         No  reports on Form 8-K were filed by the  Company  during the  quarter
ended December 31, 2003.

                                       40
<PAGE>

                                   SIGNATURES

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


                                     PARADIGM MEDICAL INDUSTRIES, INC.




Dated: November 4, 2004                By:  /s/John Y. Yoon
                                        -------------------------------------
                                        John Y. Yoon,
                                        President and Chief Executive Officer

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

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

/s/Randall A. Mackey        Chairman of the Board and           November 4, 2004
----------------------      Secretary
Randall A. Mackey



/s/David M. Silver          Director                            November 4, 2004
----------------------
David M. Silver, Ph.D.



/s/Keith D. Ignotz          Director                            November 4, 2004
----------------------
Keith D. Ignotz



/s/John Y. Yoon             President and Chief Executive       November 4, 2004
----------------------      Officer(Principal Executive
John Y. Yoon                Officer)



/s/Luis A. Mostacero        Controller (Principal Financial     November 4, 2004
----------------------      and Accounting Officer)
Luis A. Mostacero



                                       41