SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  Form 10-KSB/A

              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                 For the fiscal year ended December 31, 2004, 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, 2004 were
$3,062,000.

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
first fiscal quarter was $2,499,000 based on the closing price on that date on
the OTC Bulletin Board.

As of March 31, 2005, Registrant had outstanding 27,764,868,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 1,726,560 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]


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                                     PART I

Item 1. Description of Business

General

         The Company develops, manufactures, sources, markets and sells
ophthalmic surgical and diagnostic instrumentation and related accessories,
including disposable products. The Company's surgical equipment is designed for
minimally invasive cataract treatment. The Company 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 Photon(TM) and the Precisionist
ThirtyThousand(TM) are manufactured as an Ocular Surgery Workstation(TM). The
Company is considering marketing the Photon(TM) and other lasers for use in eye
care.

         The Company's diagnostic products include a pachymeter, a P55
pachymetric analyzer, a P37 Ultrasonic A/B Scan, 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

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

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

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

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

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

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

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

         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

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

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

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

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.

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         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
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

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system provides greater control for the surgeon and allows the safe operation at
much higher vacuum settings by sampling changes in aspiration 100 times per
second. Greater vacuum in phaco surgery means less use of ultrasound or laser
energy to fragment the cataract and less chance for surrounding tissue damage.
In addition to the full complement of surgical modalities (e.g., irrigation,
aspiration, bipolar coagulation and anterior vitrectomy), system automation
includes "dimensional" audio feedback of vacuum levels and voice confirmation
for major system functions, providing an intuitive environment in which the
advanced phaco surgeon can concentrate on the surgical technique rather than the
equipment. Sales of the Precisionist(TM) and related accessories were 0% of
total revenues in both the fiscal years 2004 and 2003, 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
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 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

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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.

         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 a full-featured, cost-effective,
reliable phaco machines; however, due to the lack of sales in 2002, the products
were determined to be obsolete. Sales of the SIStem(TM), the Odyssey(TM) and
related accessories represented approximately 4% and 0% of the total revenues
for fiscal years 2004 and 2003, 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% of total revenues for both 2004 and 2003,
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

                                       7
<PAGE>

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
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 19% and 16% of total sales for the fiscal years
ended December 31, 2004 and 2003, 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% of the total revenues for both 2004 and 2003, 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 6% and 9% of
the total revenues for 2004 and 2003, 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 2004 and 2003,
respectively.

         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 __% and 2% of the total
revenues for 2004 and 2003, respectively.

                                       8
<PAGE>

         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 8% and 4% of the total
revenues for 2004 and 2003, respectively.

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

         The P40 biomicroscope related surgical filtering procedures are fully
reimbursable by Medicare and insurance providers. This untapped new market
positions the Company with its proprietary P40 biomicroscope and, to its
knowledge, the only commercially viable product of this type on the market, as a
leader in the rapidly expanding glaucoma imaging and treatment segment. In the
fall of 2000, the Company introduced the P45 UBM Ultrasonic Biomicroscope, which
combines the P40 biomicroscope and the P37 A/B Scan Ocular Ultrasound Diagnostic
in one instrument. The Company believes that by combining functions, the P45
will appeal to a broader market. The P40 biomicroscope and related accessories
sales were approximately 12% and 7% of the total revenues for 2004 and 2003,
respectively. The P45 biomicroscope and related accessories sales contributed
approximately 16% and 13% of the total revenues for 2004 and 2003, respectively.

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

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

         In July of 2000, 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% of total revenues in
both 2004 and 2003, respectively.

         Sales of other products represented approximately 1% of total revenues
in both 2004 and 2003, 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:

                                       9
<PAGE>
<TABLE>
<CAPTION>


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

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

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

P37 A/B Scan Ocular      Transducer, Ultrasound     Complete           Yes            4%        8%     FDA 510(K) K844299*
Ultrasound Diagnostic          Diagnostic                                                              ISO 9001: 1994,
                                                                                                       EN ISO 9001**

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

P45 UBM Ultrasound      System, Imaging, Pulsed     Complete           Yes           13%       16%     FDA 510(K) K844299*
Biomicroscope,              Echo Ultrasound                                                            ISO 9001: 1994,
Workstation Plus               Diagnostic                                                              EN ISO 9001**

BFA Ocular Blood Flow      Tonometer, Manual        Complete                         16%       19%     FDA 510(K) K844299*
Analyzer(TM) and              Diagnostic                               Yes****                         ISO 9001: 1994,
Disposables                                                                                            EN ISO 9001**

CT 200 Corneal            Topographer Corneal       Complete           Yes            9%        6%     FDA 510(K) K844299*
Topography System              AC-Powered                                                              ISO 9001: 1994,
                               Diagnostic                                                              EN ISO 9001**

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

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

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

SIStem(TM) and             Phacofragmentation         Sold             Yes           11%       0%      FDA 510(K) K844299*
Odyssey(TM)(2)

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

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

</TABLE>

                                       10
<PAGE>
(1)      Except for the Photon(TM) Ocular Surgery Workstation, which can only be
         sold in countries outside the United States, these products can be sold
         in the United States and in foreign countries including but not limited
         to Argentina, Australia, Bangladesh, Borneo, Brazil, Canada, China,
         Czechoslovakia, Egypt, France, Germany, Greece, Hong Kong, India,
         Israel, Italy, Japan, Jordan, Korea, Malaysia, Mexico, New Zealand,
         Pakistan, Peru, Poland, Puerto Rico, Russia, Saudi Arabia, Spain, Sri
         Lanka, Taiwan, Thailand, Turkey, United Kingdom, and United Arab
         Emirates
(2)      Due to the lack of recent sales volume, the inventory associated with
         the Precisionist Thirty Thousand (TM), the SIStem(TM) and the
         Odyssey(TM) has been deemed obsolete and a reserve has been recorded to
         offset such inventory.
(3)      Due to the lack of recent evidence to support the recoverability of
         inventory associated with the Photon(TM), the Company has recorded a
         reserve to offset the majority of such inventory on hand.
(4)      The Photon(TM) is in-process and not complete because the Company has
         not completed the clinical trials in order to obtain FDA regulatory
         approval.
*        FDA 510(K) K844299 represents domestic approval by U.S. Food and Drug
         Administration
**       ISO 9001: 1994, EN ISO 9001 represents international approval
***      IDE G940151 represents approval for international distribution only
****     Represents full reimbursement in 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.

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.

                                       11
<PAGE>

         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.

         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.

                                       12
<PAGE>

Research and Development

         The Company's primary market for its surgical products is the cataract
surgery market. However, the Company believes that its laser systems may
potentially have broader ophthalmic applications. Consequently, the Company
believes that a strong research and development capability is important for 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
$264,000, or 26%, to $768,000 for the twelve months ended December 31, 2004,
from $1,033,000 for the same period in 2003 None of the costs of research and
development activities during 2004 and 2003 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
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.

                                       13
<PAGE>

         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.

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.

                                       14
<PAGE>

         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.

         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


                                       15
<PAGE>

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.

         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.

                                       16
<PAGE>

         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.

         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

                                       17
<PAGE>

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.

Employees

         As of March 31, 2005, the Company had 27 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

                                       18
<PAGE>

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 during the twelve months ended December
31, 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 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. Certain discovery
has taken place and the Company has paid royalties of $15,717, which the Company
believes brings all payments current as of the date of last payment on January
7, 2005. The Company has been working with PhotoMed and Dr. Eichenbaum to ensure
that the calculations have been correctly made on the royalties paid as well as
the proper method of calculation for the future.

         It is anticipated that once the parties can agree on the correct
calculations on the royalties, the legal action will be dismissed. An issue in
dispute concerning the method of calculating royalties is whether royalties
should be paid on returned equipment. Since July 1, 2001, only one Photon(TM)
laser system has been sold and no systems returned. 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.

         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.

                                       19
<PAGE>

         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 CPT Editorial Research and Development Department of
the American Medical Association has informed the Company that CPT code number
92120 is the appropriate code for doctors to use when reporting certain
procedures performed with the Blood Flow Analyzer(TM).

         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.

                                       20
<PAGE>

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

         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 paid $30,000 to U.S. Fire toward satisfaction 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. The Company has made payments to U.S.
Fire in the aggregate amount of $30,000 of which its last payment of $10,000 was
made on October 11, 2004. These payments were for the $5,000 monthly payments
due during the six month period from February 15 to July 15, 2004, leaving a
remaining retention obligation to U.S. Fire of $220,000.

         In the event U.S. Fire determines that 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. Moreover, if U.S. Fire
denies coverage for the consolidated cases under the policy, the Cmpany would
owe its litigation counsel in the class action lawsuits, for any legal fees not
paid by U.S. Fire. However, U.S. Fire has currently agreed to pay the legal fees
relating to the class action lawsuits.

         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.

         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

                                       21
<PAGE>

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.

         On January 26, 2005, the Company completed a written settlement
agreement to settle the lawsuit that Innovative Optics, Inc. and Barton Dietrich
Investments, L.P. brought against the Company and its former executive officers.
Under the terms of the settlement, U.S. Fire agreed to pay Innovative Optics,
Inc. and Barton Dietrich Investments, L.P. the sum of $367,500 in cash. Payment
of this amount is contingent, however, upon the courts in the federal and state
class action lawsuits granting final approval of the settlements reached in
those respective actions, and such orders becoming final and non-appealable.

         On February 23, 2005, the Company executed written settlement
agreements to settle the federal and state court class action lawsuits that were
filed against the Company and its former executive officers. Under the terms of
settlement of the federal court class action lawsuit, U.S. Fire agreed to pay
the sum of $1,507,500 in cash to the class members that purchased the Company's
securities during the period between April 17, 2002 and November 4, 2002. Under
the terms of settlement of the state court class action lawsuit, U.S. Fire
agreed to pay the sum of $625,000 in cash to the class members that purchased
shares of Series E Convertible preferred stock on or about July 11, 2001.

     As a condition to the settlement agreements to settle the federal and state
court class action lawsuits, the courts in such lawsuits must have entered
orders granting final approval of the settlements reached in those respective
actions, and such orders must have become final and non-appealable. On March 3,
2005, the federal court entered an order granting preliminary approval of the
settlement in the federal court class action lawsuit and providing for notice to
be sent to potential class members. On April 18, 2005, a hearing was held in the
state court and the court entered a minute entry granting preliminary approval
of the settlement in the state court class action lawsuit.

         As a further condition to the settlement agreements to settle the
federal and state court class action lawsuits, both settlement agreements
provide that U.S. Fire must not have exercised its option to terminate the
settlement agreements. U.S. Fire has the option to terminate the settlement
agreements if the cumulative dollar value of the claims held by individuals or
entities that "opt out" of the federal and state class action lawsuits exceeds
$250,000. If such "opt outs" exceed $250,000, however, plaintiffs in the federal
and state court class action lawsuits will have five days to cure by reducing
the amount of "opt outs" to less than $250,000.

                                       22
<PAGE>

         If U.S. Fire exercises its option to terminate the settlement
agreements, then all parties to the settlement agreements will be restored to
their respective positions in the various actions as of the date of the
settlement agreements. In addition, the terms and provisions of the settlement
agreements will have no further force and effect on the various parties and will
be deemed null and void in their entirety.

         Under the terms of the settlement agreements regarding the federal and
state court class action lawsuits and the lawsuit that Innovative Optics, Inc.
and Barton Dietrich Investors, L.P. brought against the Company and its former
executive officers, U.S. Fire has agreed to pay a total of $2,500,000 in cash to
the classes in the class action lawsuits and to Innovative Optics, Inc. and
Barton Dietrich Investments, L.P. in settlement of these lawsuits. Under the
terms of settlement, Paradigm Medical is to pay U.S. Fire the sum of $220,000
representing the remaining amount owing under the $250,000 retention obligation
in the insurance policy, and to execute a policy release in favor of U.S. Fire
as to coverage under the insurance policy.

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

         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. As of March 31, 2005, the Company has
made 19 monthly payments of $2,300 each to Franklin Funding.

         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. On March 29, 2005, the Company agreed to a settlement with Ms. Powell
of her claims for unpaid business expenses, accrued vacation days, and unpaid
commissions by agreeing to pay her $13,000. The Company has not yet made payment
to Ms. Powell for the agreed upon settlement amount.

         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 has filed an answer in which it denies any
liability to Mr. Hicks. Formal discovery in the matter has commenced. The
Company disputes the amount allegedly owed and intends to vigorously defend
against such action.

                                       23
<PAGE>

         On November 7, 2003, a complaint was filed against the Company by Todd
Smith, a former employee, in the Third Judicial District Court, Salt Lake
County, State of Utah (Civil No. 030924951 CN). Defendants consist of the
Company and Randall Mackey, a director of the Company. The complaint alleges
that while an employee of the Company, Mr. Smith was granted stock options to
purchase 16,800 shares of common stock exercisable at $5.00 per share. Mr. Smith
claims unpaid wages in the amount of the fair market value of the stock options
he claims he was prevented from exercising, attorney's fees, and a continuing
wage penalty under Utah law. The Company believes the claims are without merit
and intends to vigorously defend against such action.

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

         On August 9, 2004, a third party complaint was brought against the
Company by Wakefield Eye Center and Dr. Kenneth C. Westfield (collectively
"Westfield"). The original action was brought by American Express Business
Finance Corporation against Westfield on May 27, 2004 in the District Court,
Clark County, State of Nevada (Civil No. A486307, Dept. No. XXI) concerning the
financing of the purchase of a Blood Flow Analyzer(TM) involving Westfield Eye
Center. The transaction took place during the latter half of 2001. Westfield
takes the position that if there is liability of Westfield to American Express
this liability is ultimately ours and the other third-party defendants. The
amount being sought against Westfield by American Express in the original action
includes the sum of $29,765.83, together with interest and attorney's fees.
Westfield's alleged claims against the Company include fraud, breach of
contract, promissory estoppel, declaratory relief, negligence, negligent
supervision, damages for injuries resulting from actions of employee/contractor,
wilful and wanton misconduct, conspiracy, and breach of fiduciary duty as well
as costs and attorney's fees. Westfield also seeks punitive damages. The Company
has filed an answer to the third party complaint in which the Company denies
liability. Formal discovery in the matter involving us has commenced. The case
has been referred to arbitration. The Company intends to vigorously defend the
action.

         On March 31, 2005, an action was filed against the Company by Joseph W.
Spadafora in the United States District Court, District of Utah (Civil No.
2:05CV00278 TS). The complaint alleges that Dr. Spadafora was a clinical
investigator in the study for the FDA involving the Company's Photon(TM) laser
system where he performed numerous surgeries using the Photon(TM). Dr. Spadafora
contends that in meetings with Company personnel he suggested ways in which the
handpiece on the Photon(TM) could be improved. Dr. Spadafora further contends
that on August 5, 1999, the Company filed a patent application for an improved
handpiece with the United States Patent and Trademark Office but he was not
named as one of the inventors or a co-inventor on the patent application.

         On September 24, 2004, the Company was issued a patent entitled, "Laser
Surgival Handpiece with Photon Trap." Because the Company did not list Dr.
Spadafora as one of the inventors or a co-inventor on the patent, Dr. Spadafora
is requesting in his complaint that a court order be entered declaring that he
is the inventor or co-inventor of the patent and, as a result, is entitled to
all or part of the royalties and profits that the Company earned or will earn
from the sale of any product incorporating or using the improved handpiece, plus
interest and attorney's fees. The Company disputes the claims made by Dr.
Spadafora 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, 2004.


                                     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.

                                       24
<PAGE>

         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 26, 2005, the
closing sale prices of the common stock and Class A warrants were $.07 per share
and $.01 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.
                                                                     Class A
                                                   Common Stock      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
                                                                             .05
     Second Quarter............................    1.91     .60     .32      .08
     Third Quarter.............................    1.50     .16     .20      .01
     Fourth Quarter............................     .30     .13     .10

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

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

2005
     First Quarter ............................     .10     .08     .02      .01
     Second Quarter (through April 26, 2005)...     .09     .07     .01      .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.

                                       25
<PAGE>

         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.

         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 does not recognize revenue, until
the sales price is fixed.

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

                                       26
<PAGE>

         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, 2004, diagnostic products have been the major focus and the
Photon(TM) and other extensive research and development projects have been put
on hold pending future evaluation when the Company's financial position
improves. The Company does not focus on a specific diagnostic product or
products but, instead, on this entire diagnostic product group.

         During the year ended December 31, 2004, the Company recorded a
reduction in the warranty accrual of approximately $308,000. This reduction was
a result of a comprehensive analysis by management regarding historical warranty
costs. Historically, the Company has recorded a monthly warranty expense and
related increase to the warranty accrual. However, in recent periods the usage
of the warranty accrual has continued to decline. After reviewing the recent
historical data, management determined that the warranty accrual should be
reduced by approximately $308,000. Management will continue to closely monitor
the warranty accrual usage to ensure that the proper amount has been accrued.

         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(TM) and the Odyssey(TM) 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 $443,000.

                                       27
<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 no
cost of sales because a reserve for obsolete inventory had been recorded on all
SIStem(TM) and Odyssey(TM) inventory.

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

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

         Activities for the twelve months ended December 31, 2004 and 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. Mr. Poore was subsequently replaced by John Y. Yoon
as President and Chief Executive Officer on March 18, 2004. The Company named a
new vice president of sales and marketing, Ray Cannefax, during the first
quarter of 2003, and a new vice president of finance and chief financial
officer, Gregory C. Hill, during the second quarter of 2003. Mr. Hill resigned
as vice president of finance and chief financial officer on December 5, 2003.

         On March 18, 2004, the Company named a new President and Chief
Executive Officer, John Y. Yoon. 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(TM). The Company is in the
process of generating the additional clinical information in response to the
letter. The Company cannot market or sell the Photon(TM) in the United States
until FDA approval is granted. On November 4, 2002, the Company received FDA
approval for expanded indications of use of the Blood Flow Analyzer(TM) for

                                       28
<PAGE>

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
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, 2004. 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 2005 will be the
judicious reconstruction of the sales force in anticipation of increased sales.

         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, 2004, 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 the Company's
diagnostic products. Due to concerns over the budget and the effectiveness of
trade shows, the Company exhibited at only two trade shows during 2004. The
Company monitors trade show attendance to determine the extent to which it will
exhibit at future trade shows.

         On September 19, 2002, the Company completed a transaction with
International Bio-Immune Systems, Inc., a privately held biotechnology based,
cancer diagnostic and immunotherapy company, in which the Company acquired
2,663,254 of its shares, or 19.9% of its outstanding shares, and warrants to
purchase 1,200,000 shares of common stock of International Bio-Immune Systems at
$2.50 per share for a period of two years, through the exchange and issuance of
736,945 shares of the Company's common stock, the lending of 300,000 shares of
the Company's common stock to the company, and the payment of certain of its
expenses through the issuance of an aggregate of 94,000 shares of common stock
to International Bio-Immune Systems and its counsel. On August 3, 2004, the
Company sold its investment in International Bio-Immune Systems for net proceeds
of $505,000 pursuant to a stock purchase and sale agreement with William Ungar,
a current director and shareholder of International Bio-Immune Systems. The
securities sold to Mr. Ungar consisted of 2,663,254 common shares of
International Bio-Immune Systems and warrants to purchase 1,200,000 common
shares of International Bio-Immune Systems at $2.50 per share. Because, for book
purposes, the Company's investment in International Bio-Immune Systems had been
reduced to $0, the full amount of the $505,000 received from the sale of the
International Bio-Immune Systems common shares and warrants was reported as a
gain in 2004.

                                       29
<PAGE>

Results of Operations

         Fiscal Year Ended December 31, 2004 Compared to Fiscal Year Ended
December 31, 2003

         Net sales increased by $3,000, or 0.1%, to $3,062,000 for the twelve
months ended December 31, 2004, from $3,059,000 for the comparable period in
2003. Sales of the Company's diagnostic products and related accessories
increased by $296,000, or 19%, to $2,780,000, or 91% of revenues, during the
twelve months ended December 31, 2004 compared with $2,484,000, or 81% of total
revenues, for the comparable period of 2003.

         In 2004, sales of the Company's P40 and P45 UBM Ultrasound
Biomicroscopes and related accessories were $855,000, or 28% of total revenues,
compared to $615,000, or 20% of total revenues, in the same period of 2003.
Sales from the Blood Flow Analyzer(TM) and related accessories increased by
$175,000 to $674,000, or 22% of total revenues, during the year ended December
31, 2004 compared with $499,000, or 13% of total revenues, in the same period of
2003.

         During 2004, sales from P37 A/B Scan Ocular Ultrasound Diagnostic
increased to $257,000, or 8% of total revenue, slightly up from the $133,000, or
4% of total revenues, in the same period last year. Sales of the LD 400 and TKS
5000 Autoperimeters and the CT 200 Corneal Topographer and related accessories
were slightly lower, with total revenue of $1,022,000, or 33% of total revenues,
in 2004 compared with $1,100,000, or 36% of total revenues, during the same
period of 2003.

         Sales of surgical products are at a standstill pending FDA approval of
the Photon(TM) laser system. In the twelve month period ended December 31 2004,
the Company realized a loss of $3,000 in the surgical line consisting of the
Precissionist Thirty Thousand (TM) and the Photon(TM) laser system. This
compared to $94,000 in sales for the comparable period of 2003, which was mainly
from the sale of the SIStem(TM) and Odyssey(TM) product lines.

         There were a number of material reasons that contributed to flat sales
during the twelve months ended December 31, 2004, compared to the period of
2003. Along with generally weak economic conditions in the United States, the
Company initiated aggressive cost-cutting efforts and was able to successfully
reduce operating expenses. One of the negative consequences of such aggressive
cost cutting was a slow down in the upgrade programs for the Company's product
lines. The Company's objective is to focus its sales efforts on the products
with the highest potential for sales and strong margins.

         During 2004, the Company hired three sales representatives and replaced
one bringing the total to four domestic and one international sales
representative and one independent representative. International sales were
impacted by weakness in the economies of the large industrial countries and by
the residual impact of the situation in the Middle East, which had a negative
impact on sales to the Middle East, Pakistan, India and other countries in that
region.

         Gross profit for the twelve months ended December 31, 2004 increased to
60% of total revenues, compared to 32% of total revenues for the same period in
2003. The increase was mainly due to an increase in the inventory reserve of
$403,000 in the twelve months ending December 31, 2003. The $403,000 increase in
inventory reserve in 2003 resulted in an increase to cost of sales. There was no
increase or decrease to cost of sales as a result of a change to the reserve for
obsolete inventory in 2004. The other major contributing factor to the improved
margins was greater operational efficiencies and more timely production planning
and scheduling.

         On a quarterly basis, we attempt to identify inventory items that have
shown relatively no movement or very slow movement. Generally, if an item has
shown little or no movement for over a year, it is determined not to be
recoverable and a reserve is established for that item. In addition, if we
identify products that have become obsolete due to product upgrades or
enhancements, a reserve is established for such products. Such analysis resulted
in a material increase in the reserve for obsolete or estimated non-recoverable

                                       30
<PAGE>

inventory in 2003. There can be no assurance that we will not identify further
obsolete inventory due to significant declines in sales of certain products or
technological advances of products in the future. We intend to make efforts to
sell many of these items at significantly discounted prices. If items are sold,
the cash received would be recorded as revenue, but there would be no cost of
sales on such items due to the reserve that has been recorded. At the time of
sale, the inventory would be reduced for the item sold and the corresponding
inventory reserve would also be reduced. We do not expect the sales of these
items to be significant in the future. During 2003, we sold all inventory,
rights, and technology related to the SIStem and Odyssey product lines for
$125,000. All of the inventory sold in this transaction had previously been
fully reserved. Therefore, upon the sale, we reduced inventory by $887,000 for
the original book value of the inventory, reduced the reserve for $887,000, and
recorded revenue for the cash received of $125,000.

         Marketing and selling expenses decreased by $119,000, or 13%, to
$801,000 for the twelve months ended December 31, 2004, from $920,000 for the
comparable period in 2003. This reduction was due primarily to more effective
use of marketing programs. During this period three additional full-time
salespersons were added, a print advertising campaign initiated, and plans were
made to support a major trade show in the fourth quarter of 2004. At the same
time, the use of consultant services declined considerably enabling an overall
savings.

         General and administrative expenses decreased by $1,572,000, or 64%, to
$874,000 for the twelve months ended December 31, 2004, from $2,446,000 for the
same period in 2003. The favorable reduction in general and administrative
expense in 2004 also reflected the ongoing results of the Company's new budget
management and cost reduction programs. In addition, during the period ended
December 31, 2004, the Company recorded a reduction in the warranty accrual of
approximately $308,000. This reduction was a result of a comprehensive analysis
by management regarding historical warranty costs. Historically, the Company has
recorded a monthly warranty expense and related increase to the warranty
accrual. However, in recent periods the usage of the warranty accrual has
continued to decline. After reviewing the recent historical data, management
determined that the warranty accrual should be reduced by approximately
$308,000. Management will continue to closely monitor the warranty accrual usage
to ensure that the proper amount has been accrued. The general and
administrative expenses during the twelve months ended December 30, 2003 also
included $443,000 in accruals to settle outstanding disputes.

         In addition, during 2004, the Company collected approximately $87,000
in receivables that were previously allowed for the in the allowance for
doubtful accounts. During 2003, the Company increased the allowance for doubtful
accounts by $123,000. General and administrative expense for the twelve months
ended December 31, 2003 also included $259,000 for 1,562,000 shares of common
stock issued to settle potential litigation. The Company issued 1,262,000 common
shares to six investors due to a dispute arising from a private offering that
was completed on January 22, 2003. We agreed to issue the shares to the
investors in the offering at $.25 per share rather than $.50 per share, the
original offering price (or an additional 1,262,000 shares) to resolve a dispute
with the investors concerning certain statements made by a former officer in
connection with the sale of said shares. The additional 300,000 shares were
issued to settle an outstanding dispute with a consultant regarding services
performed by such consultant.

         Research, development expenses decreased by $265,000, or 26%, to
$768,000 for the twelve months ended December 31, 2004, from $1,033,000 for the
same period in 2003. Expenses associated with the development of new products
during 2004 decreased compared to 2003, as a result of the Company's efforts to
reduce costs and focus on products that are fully developed with the highest
potential for sales and high margins.

         There was no impairment of assets for the twelve months ended December
31, 2004, compared to $150,000 in 2003. The impairment expense for 2003 was due
to a reduction in the value of certain intangible assets based on their then
current estimated fair value.

         Due to our ongoing cash flow difficulties, most of the Company's
vendors and suppliers were contacted during 2003 and 2004 with attempts to
negotiate reduced payments and settlement of outstanding accounts payable. While
some vendors refused to negotiate and demanded payment in full, some vendors
were willing to settle for a reduced amount. The accounts payable forgiven by
vendors and suppliers resulted in a gain of $206,000 and $436,000 during the
years ended December 31, 2004 and 2003, respectively.

         Other income mainly consisted of a gain recorded from the sale of the
Company's investment in International Bio-Immune Systems, Inc. In July 2004, the
Company sold its investment in International Bio-Immune Systems, Inc. for net
proceeds of $505,000 cash. Because, for book purposes, the Company's investment
in International Bio-Immune Systems had previously been reduced to $0, the full
amount of $505,000 was recorded as a gain in 2004.

                                       31
<PAGE>

Liquidity and Capital Resources

         The Company used $77,000 cash in operating activities for the twelve
months ended December 31, 2004, compared to $707,000 for the twelve months ended
December 31, 2003. The reduction in cash used by operating activities for the
twelve months ended December 31, 2004 was primarily attributable to a
significant reduction in net loss and decreases in accounts receivable and
inventory, partially offset by a decrease in accrued liabilities. The Company's
efforts to substantially reduce costs and manage current assets and current
liabilities continued to minimize cash used for operating activities. Net cash
used in financing activities was $56,000 for the twelve months ended December
31, 2004, versus cash provided of $647,000 in the same period in 2003. During
the twelve months ended December 31, 2004, the Company did not sell any shares
of common or preferred stock. In the past, the Company has relied heavily upon
sales of the Company's common and preferred stock to fund operations. There can
be no assurance that such equity funding will be available on terms acceptable
to the Company in the future.

         The Company had working capital deficit of $84,000 as of December 31,
2004. 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 the Company's securities; and bank
borrowings. In July 2004, the Company sold its investment in International
Bio-Immune Systems, Inc. for net proceeds of $505,000 in cash. The Company is
uncertain whether or not the combination of the cash received from the sale of
International Bio-Immune Systems, Inc. stock and the benefits from sales of its
products will be sufficient to assure its operations through December 31, 2005.
The Company will continue to seek funding through the sale of common and
preferred stock.

         As of December 31, 2004, the Company had net operating loss
carry-forwards (NOLs) of approximately $48 million. These loss carry-forwards
are available to offset future taxable income, if any, and have begun to expire
in 2001 and extend for twenty years. The Company's ability to use net operating
loss carryforwards (NOLs) to offset future income is dependant upon certain
limitations as a result of the pooling transaction with Vismed and the tax laws
in effect at the time of the NOLs can be utilized. The Tax Reform Act of 1986
significantly limits the annual amount that can be utilized for certain of these
carryforwards as a result of change of ownership.

         As of December 31, 2004, the Company had accounts payable of $752,000,
a significant portion of which was over 90 days past due. The Company has
contacted many of the vendors or companies that have significant amounts of
payables past due in an effort to delay payment, renegotiate a reduced
settlement payment, or establish a longer-term payment plan. While some
companies have been willing to renegotiate the outstanding amounts, others have
demanded payment in full. Under certain conditions, including but not limited to
judgments rendered against the Company in a court of law, a group of creditors
could force the Company into bankruptcy due to its inability to pay the
liabilities arising out of such judgments at that time. In addition to the
accounts payable noted above, the Company also has non-cancelable capital lease
obligations and operating lease obligations that require the payment of
approximately $194,000 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.

                                       32
<PAGE>

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

         The Company has taken measures to reduce the amount of uncollectible
accounts receivable such as more thorough and stringent credit approval,
improved training and instruction by sales personnel, and frequent direct
communication with the customer subsequent to delivery of the system. The
allowance for doubtful accounts was 14% of total outstanding receivables as of
December 31, 2004 and 40% as of December 31, 2003. The allowance for doubtful
accounts has decreased from $470,000 at December 31, 2003 to $101,000 at
December 31, 2004. The decrease in the allowance for doubtful accounts was the
result of the collection of approximately $87,000 of receivables that was
previously allowed as part of the allowance for doubtful accounts and the write
off of $282,000 of receivables against the allowance. 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 require more payments at the
time of sale through letters of credit and not on a credit term basis.

         The Company intends to continue its efforts to reduce the allowance for
doubtful accounts as a percentage of accounts receivable. The Company has
ongoing efforts to collect a significant portion of the sales price in advance
of the sale or in a timely manner after delivery. During the twelve months ended
December 31, 2004, the Company had a net recovery of receivables previously
allowed for of $87,000, and during the twelve months ended December 31, 2003,
the Company added a net of $123,000 to the allowance for doubtful. 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 $1,418,000 at December 31, 2004 and $1,642,000 at
December 31, 2003, or approximately 66% and 62% of total inventory,
respectively. This inventory reserve was decreased by $224,000 during the twelve
months ended December 31, 2004 due to a direct write-off of inventory against
the reserve; therefore, this decrease in the reserve did not impact cost of
sales. 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 regulatory FDA approval in order to be sold in the United States. Any
possible future efforts to complete the clinical trials on the Photon(TM) in
order to file for FDA approval would depend on the Company obtaining adequate
funding. The Company estimates that the funds needed to complete the clinical
trials in order to obtain the necessary regulatory approval on the Photon(TM) to
be approximately $225,000.

                                       33
<PAGE>

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 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 through 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 November 2004, the FASB issued SFAS 151 "Inventory Costs--an
amendment of ARB No. 43." This statement amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that "[u]nder
some circumstances, items such as idle facility expense, excessive spoilage,
double freight, and re-handling costs may be so abnormal as to require treatment
as current period charges. . . ." This statement requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal." In addition, this statement requires that allocation
of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of this statement shall be
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. The Company does not believe adoption of SFAS 151 will have any impact
on the Company's consolidated financial statements.

         In December 2004, FASB issued SFAS 153 "Exchanges of Nonmonetary
Assets--an amendment of APB Opinion No. 29." The guidance in APB Opinion No. 29,
Accounting for Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that opinion, however, included certain
exceptions to that principle. This statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The Company does not believe adoption of SFAS 153 will have any
impact on the Company's consolidated financial statements.

         In December 2004, the FASB issued FASB Statement No. 123 (revised
2004), "Shared-Based Payment." Statement 123(R) addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
Statement 123(R) requires an entity to recognize the grant-date fair-value of
stock options and other equity-based compensation issued to employees in the
income statement. The revised statement generally requires that an entity
account for those transactions using the fair-value-based method, and eliminates
the intrinsic value method of accounting in APB Opinion No. 25, "Accounting for
Stock Issued to Employees", which was permitted under Statement 123, as
originally issued. The revised statement requires entities to disclose
information about the nature of the share-based payment transactions and the
effects of those transactions on the financial statements.

                                       34
<PAGE>

         Statement 123(R) is effective for public companies that do not file as
small business issuers as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. For public companies that file
as small business issuers, Statement 123(R) is effective as of the beginning of
the first interim or annual reporting period that begins after December 15, 2005
(i.e., first quarter 2006 for the Company). All public companies must use either
the modified prospective or the modified retrospective transition method. Early
adoption of this statement for interim or annual periods for which financial
statements or interim reports have not been issued is encouraged. The Company
believes that the adoption of this pronouncement may have a material impact on
the Company's financial statements.

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.

Item 8. Financial Statements and Supplementary Data


PARADIGM MEDICAL INDUSTRIES, INC.
Financial Statements
December 31, 2004 and 2003


                                       35
<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Index to Financial Statements

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


                                                                          Page
                                                                          ----


Report of Chisholm, Bierwolf & Nilson                                     F-2


Report of Tanner LC                                                       F-3


Balance Sheet                                                             F-4


Statements of Operations                                                  F-5


Statements of Stockholders' Equity                                        F-6


Statements of Cash Flows                                                  F-7


Notes to Financial Statements                                             F-8



--------------------------------------------------------------------------------
                                                                             F-1
<PAGE>




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying  balance sheet of Paradigm Medical  Industries,
Inc.  (the  Company) as of December  31,  2004,  and the related  statements  of
operations,  stockholders'  equity and cash flows for the year then ended. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we engaged  to  perform,  audits of its  internal  control  over
financial reporting.  Our audit included  consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  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, 2004, and the results of their operations and their cash
flows  for the  year  then  ended,  in  conformity  with  accounting  principles
generally accepted in the United States of America.

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

Chisholm, Bierwolf & Nilson
Bountiful, Utah
April 8, 2005


                                                                             F-2

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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

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

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects  the  results of  operations  and cash flows of Paradigm
Medical  Industries,  Inc. for the year ended  December 31, 2003,  in conformity
with U.S. generally accepted accounting principles.

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.


Tanner LC
Salt Lake City, Utah
March 5, 2004

                                                                             F-3
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                                   Balance Sheet

                                                               December 31, 2004
--------------------------------------------------------------------------------

              Assets
              ------

Current assets:
     Cash                                                     $         131,000
     Receivables, net                                                   657,000
     Inventories, net                                                   720,000
     Prepaid and other assets                                            65,000
                                                              ------------------

                  Total current assets                                1,573,000

Intangibles, net                                                        679,000
Property and equipment, net                                             109,000
                                                              ------------------

                  Total assets                                $       2,361,000
                                                              ------------------

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

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

Current liabilities:
     Accounts payable                                         $         752,000
     Accrued liabilities                                                858,000
     Current portion of capital lease obligations                        47,000
                                                              ------------------

                  Total current liabilities                           1,657,000
                                                              ------------------

Capital lease obligations, net of current portion                        14,000
                                                              ------------------

Commitments and contingencies                                                 -

Stockholders' equity:
     Preferred stock, $.001 par value, 5,000,000
       shares authorized, 1,751,770 shares issued
       and outstanding (aggregate liquidation
       preference of $1,043,000)                                          2,000
     Common stock, $.001 par value, 80,000,000
       shares authorized, 25,627,764 shares issued
       and outstanding                                                   25,000
     Additional paid-in capital                                      57,470,000
     Accumulated deficit                                            (56,807,000)
                                                              ------------------

                  Total stockholders' equity                            690,000
                                                              ------------------

                  Total liabilities and stockholders' equity  $       2,361,000
                                                              ------------------

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

See accompanying notes to financial statements.                              F-4

<PAGE>
<TABLE>
<CAPTION>

                                                                PARADIGM MEDICAL INDUSTRIES, INC.
                                                                         Statements of Operations

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


                                                                    2004              2003
                                                               ----------------------------------
<S>                                                           <C>                 <C>
Sales                                                         $       3,062,000   $     3,059,000
Cost of sales                                                         1,217,000         2,086,000
                                                              -----------------------------------

         Gross profit                                                 1,845,000           973,000
                                                              -----------------------------------

Operating expenses:
     General and administrative                                        (874,000)       (2,446,000)
     Marketing and selling                                             (801,000)         (920,000)
      Research and development                                         (768,000)       (1,033,000)
      Impairment of assets                                                    -          (150,000)
      Gain on settlement of liabilities                                 206,000           436,000
                                                              -----------------------------------

         Total operating expenses                                    (2,237,000)       (4,113,000)
                                                              -----------------------------------

         Operating loss                                                (392,000)       (3,140,000)
                                                              -----------------------------------
Other income (expense):
     Interest income                                                          -             3,000
      Other expenses                                                    (27,000)                -
     Interest expense                                                   (22,000)          (24,000)
      Gain on sale of investment                                        505,000                 -
                                                              -----------------------------------

         Total other income (expense)                                   456,000           (21,000)
                                                              -----------------------------------

         Income (loss) before provision for income taxes                 64,000        (3,161,000)
Provision for income taxes                                                    -                 -
                                                              -----------------------------------

         Net income (loss)                                    $          64,000   $    (3,161,000)
                                                              -----------------------------------

Beneficial conversion feature on Series G preferred stock                     -          (217,000)
Series G preferred stock dividend due to registration rights            (54,000)                -
Deemed dividend from Series G preferred detachable
  warrants                                                                    -           (53,000)
                                                              -----------------------------------

Net income (loss) applicable to common shareholders           $          10,000   $    (3,431,000)
                                                              -----------------------------------
Earnings (loss) per common share - basic                      $               -   $         (0.14)
                                                              -----------------------------------
Earnings (loss) per common share - diluted                    $               -   $         (0.14)
                                                              -----------------------------------
Weighted average common shares - basic                               25,405,000        24,058,000
                                                              -----------------------------------
Weighted average common shares - diluted                             27,669,000        24,058,000
                                                              -----------------------------------


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

See accompanying notes to financial statements.                                               F-5

</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                      Statements of Stockholders' Equity

                                                                                  Years Ended December 31, 2004 and 2003
------------------------------------------------------------------------------------------------------------------------

                                        Preferred                          Additional      Stock
                                          Stock      Common                  Paid-In     Subscription       Accumulated
                                       (See Note 8)  Shares     Amount      Capital      Receivable           Deficit
                                        --------------------------------------------------------------------------------

<S>                                     <C>        <C>         <C>        <C>            <C>               <C>
Balance at January 1, 2003              $     -    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 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 at December 31, 2003              2,000    25,372,794    25,000    57,470,0000            -          (56,817,000)

Conversion of preferred stock                 -       255,000         -              -            -                    -

Series G preferred stock dividend due
  to registration rights                      -             -         -              -            -              (54,000)

Net income                                    -             -         -              -            -               64,000
                                        --------------------------------------------------------------------------------

Balance at December 31, 2004            $ 2,000    25,627,764  $ 25,000   $ 57,470,000   $        -        $ (56,807,000)
                                        --------------------------------------------------------------------------------

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

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

<TABLE>
<CAPTION>
                                                                          PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                   Statements of Cash Flows

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


                                                                              2004               2003
                                                                        -----------------------------------
<S>                                                                     <C>                 <C>
Cash flows from operating activities:
     Net income (loss)                                                  $         64,000    $    (3,161,000)
     Adjustments to reconcile net income (loss) to net
     cash used in operating activities:
         Depreciation and amortization                                           137,000            319,000

         Issuance of stock option/warrant for services                                 -             35,000
         Common stock issued for settlement of litigation                              -            259,000
         Provision for losses on receivables                                    (369,000)           123,000
         Provision for losses on inventory                                      (224,000)           403,000

               Gain on sale of investment                                       (505,000)                 -

Impairment of Intangibles and investments                                                           150,000
(Gain) loss on settlement of liabilities                                        (206,000)          (436,000)
         (Gain) loss on disposal of assets                                        13,000                  -
         (Increase) decrease in:
              Receivables                                                        420,000            113,000
              Inventories                                                        507,000          1,243,000

              Prepaid and other assets                                            76,000            (44,000)
         Increase (decrease) in:
              Accounts payable                                                    42,000             53,000
              Accrued liabilities                                               (432,000)           236,000
                                                                        -----------------------------------

                  Net cash used in
                  operating activities                                          (477,000)          (707,000)
                                                                        -----------------------------------

Cash flows from investing activities:
     Purchase of property and equipment                                                -             (2,000)
     Cash proceeds from sales of investment                                      532,000                  -
                                                                        -----------------------------------

                  Net cash provided by (used in)
                  investing activities                                           532,000             (2,000)
                                                                        -----------------------------------

Cash flows from financing activities:
     Proceeds from issuance of Series G preferred stock                                -            270,000
     Principal payments on notes payable and long-term debt                      (56,000)           (53,000)
     Proceeds from exercise of common stock warrants and options                       -            430,000
                                                                        -----------------------------------
                  Net cash (used in) provided by
                  financing activities                                           (56,000)           647,000

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

Net change in cash                                                                (1,000)           (62,000)

Cash, beginning of year                                                          132,000            194,000
                                                                        -----------------------------------

Cash, end of year                                                       $        131,000    $       132,000
                                                                        -----------------------------------


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

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

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements

                                                      December 31, 2004 and 2003
--------------------------------------------------------------------------------

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.

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

                        A trade  receivable  is considered to be past due if any
                        portion of the receivable  balance has not been received
                        by the contractual  pay date.  Interest is not charge on
                        trade receivables that are past due.

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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------


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

                        Intangible Assets
                        As of December 31, 2004,  intangible assets consisted of
                        goodwill  related to the  purchase of Ocular Blood Flow,
                        Ltd.,   product   rights,    capitalized   payments   to
                        manufacturers  for  engineering  and design services and
                        patent costs.  The company  performed an impairment test
                        on all  intangible  assets at December  31,  2004.  As a
                        result  it was not  necessary  to incur  any  impairment
                        expense of intangible assets.

                        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,  capitalized  engineering,  and
                        patents  were fully  amortized  as of December 31, 2004.
                        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.  Such conditions
                        may include an economic  downturn in a geographic market
                        or a change in the assessment of future operations.

                        Goodwill is not  amortized.  The Company  performs tests
                        for impairment of goodwill  annually or more  frequently
                        if  events  or   circumstances   indicate  it  might  be
                        impaired. Such tests include comparing the fair value of
                        a  reporting  unit with its  carrying  value,  including
                        goodwill.

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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------



1.   Organization       Evaluation of Other Long-Lived Assets
     and Significant    The  Company   evaluates  the  carrying   value  of  the
     Accounting         unamortized  balances  of  other  long-lived  assets  to
     Policies           determine  whether any  impairment  of these  assets has
     Continued          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.

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

                        Stock options and warrants granted to non-employees  for
                        services are accounted  for in accordance  with SFAS No.
                        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.

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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------



1.   Organization       Stock - Based Compensation - Continued
     and Significant    123,  "Accounting  for  Stock-Based   Compensation,"  to
     Accounting         stock-based employee compensation.
     Policies
     Continued
                                                    Years Ended December 31,
                                             --------------------------------
                                                   2004           2003
                                             --------------------------------

Net income (loss) applicable to common
shareholders- as reported                      $      10,000  $  (3,431,000)

Deduct:  total stock-based employee
compen-sation determined under fair value
based method for all awards, net of related         (362,000)      (595,000)
tax effects
                                             --------------------------------

Net loss applicable to common shareholders -
pro forma                                      $    (352,000) $  (4,026,000)
                                             --------------------------------

Earnings per share:
     Basic and diluted - as reported           $           -  $        (.14)
                                             --------------------------------
     Basic and diluted - pro forma             $        (.01) $        (.17)
                                             --------------------------------

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

                                                  December 31,
                                     ----------------------------------------
                                             2004                2003
                                     ----------------------------------------

    Expected dividend yield            $                 - $               -
    Expected stock price
      Volatility                               112% - 173%         110%-117%
    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 2004 and 2003 are $0.09 and $0.16, 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.


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------


1.   Organization       Earnings Per Share- Continued
     and                The computation of diluted  earnings per common share is
     Significant        based  on  the   weighted   average   number  of  shares
     Accounting         outstanding  during  the  year  plus  the  common  stock
     Policies           equivalents,  which would arise from the  conversion  of
     Continued          preferred stock to common stock and from the exercise of
                        stock  options  and  warrants   outstanding   using  the
                        treasury  stock method and the average  market price per
                        share during the year.  Options and warrants to purchase
                        6,036,469  shares of common stock at prices ranging from
                        $0.16 to $12.98 per share were  outstanding  at December
                        31, 2003, but were not included in the diluted  earnings
                        per share  calculation for 2003 because the effect would
                        have been antidilutive.

                        The  following  table is a  reconciliation  of basic and
                        diluted  weighted  average  shares  for the years  ended
                        December 31, 2004 and 2003.

                                                    Years Ended December 31,
                                             --------------------------------
                                                      2004           2003
                                             --------------------------------

Basic weighted average shares outstanding          25,405,000     24,058,000

Common stock equivalent-convertible
preferred stock                                     2,047,000        -


Diluted effect of stock options and warrants          217,000        -
                                             --------------------------------


Diluted weighted average shares outstanding        27,669,000     24,058,000
                                             --------------------------------

                        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-12
<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------



1.   Organization       Research and Development
     and                Costs   incurred  in   connection   with   research  and
     Significant        development  activities are expensed as incurred.  These
     Accounting         costs  consist of direct and indirect  costs  associated
     Policies           with  specific  projects as well as fees paid to various
     Continued          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, 2004 and 2003,  no
                        single  customer  represented  more than 10  percent  of
                        total net sales.

--------------------------------------------------------------------------------
                                                                            F-13
<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 2003 financial  statements  have
                        been  reclassified to conform to the presentation of the
                        current year financial statements.

                        Series G Preferred Stock Dividends

                        Under  the  terms of the  private  offering  of Series G
                        preferred  shares,  the  Company is  required  to file a
                        registration  statement with the Securities and Exchange
                        Commission to register the common shares issuable to the
                        Series G preferred stockholders upon conversion of their
                        Series  G  preferred   shares  and   exercise  of  their
                        warrants.  If the  registration  statement  has not been
                        declared  effective  within  120  days  of  the  initial
                        closing of such offering on August 29, 2003,  there is a
                        penalty  of  2%  per  month  payable  to  the  Series  G
                        preferred.  Stockholders  in common  shares  (or  39,631
                        common   shares  per  month)   until  the   registration
                        statement  is declared  effective.  As of  December  31,
                        2004,  the Company had  recorded a liability  of $54,000
                        related to the 356,682 common shares to be issued to the
                        Series G preferred  stockholders  because a registration


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------



1.  Organization        Series G Preferred Stock Dividends - Continued
    and                 statement  had not been  declared  effective  as of that
    Significant         date.
    Accounting
    Policies
    Continued

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

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

                        In addition,  the Company has taken significant steps to
                        reduce  costs  and  increase   operating   efficiencies,
                        including the  consolidation  of several  manufacturing,
                        accounting   and   management   responsibilities.   Such
                        consolidation    resulted   in   significant   headcount
                        reductions as well as savings in 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 from six 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.



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------


3.   Detail of          Receivables
     Certain              Trade receivables                       $     758,000
     Balance              Allowance for doubtful accounts              (101,000)
     Sheet                                                        -------------
     Accounts
                                                                  $     657,000
                                                                  -------------

                        Inventories
                          Finished goods                          $     648,000
                          Raw materials                               1,490,000
                          Reserve for obsolescence                   (1,418,000)
                                                                  -------------

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

                        Accrued liabilities:
                          Consulting and litigation reserve       $     492,000
                          Payroll and employment benefits                84,000
                          Sales tax payable                              42,000
                          Customer deposits                              10,000
                          Accrued royalties                              13,000
                          Deferred revenue                                7,000
                          Warranty and return allowance                 149,000
                          Other accrued expenses                         61,000
                                                                  -------------

                                                                  $     858,000
                                                                  -------------


4.   Intangible         Intangible  assets  consist of the following at December
     Assets             31, 2004:

                        Goodwill, net of accumulated
                        amortization of $120,000                  $     679,000
                                                                  -------------
                        Other intangible assets:
                           Product and technology rights                769,000
                           Engineering and design costs                 482,000
                           Patents                                       92,000
                                                                  -------------

                                                                      1,343,000
                        Accumulated amortization                     (1,343,000)
                                                                  -------------
                        Total other intangible asstes                         -
                                                                  -------------
                        Net intangible assets                     $     679,000
                                                                  -------------



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------



4.   Intangible         Amortization  expense for the years ended  December  31,
     Assets             2004 and 2003 was $3,000 and $79,000, respectively.
     Continued
                        During the year ended  December  31,  2003,  the Company
                        evaluated  the  carrying  value of its  unissued  patent
                        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  related to patents
                        and product and technology rights.

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


                        Office equipment                          $     750,000
                        Computer equipment                              658,000
                        Furniture and fixtures                          252,000
                        Leasehold improvements                          166,000
                                                                  -------------
                                                                      1,826,000

                        Accumulated depreciation
                           and amortization                          (1,717,000)
                                                                  -------------

                                                                  $     109,000
                                                                  -------------

6.   Lease              During the years ended  December 31, 2004 and 2003,  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                  (212,000)
                                                                  -------------

                                                                  $      79,000
                                                                  -------------

                        Amortization  expense  on assets  under  capital  leases
                        during the years  ended  December  31, 2004 and 2003 was
                        $39,000 and $56,000, respectively.


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------



6.   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:

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

                                                                         68,000

                        Less amount representing interest                (7,200)
                                                                  -------------

                        Present value of future minimum
                           lease payments                                61,000

                        Less current portion                            (47,000)
                                                                  -------------

                        Long-term portion                         $      14,000
                                                                  -------------

                        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, 2004 are approximately as follows:

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

                                   2005                           $     140,000
                                                                  -------------

                         Total future minimum rental payments     $     140,000
                                                                  -------------

                        Rent expense related to  noncancelable  operating leases
                        was  approximately  $137,000  and $159,000 for the years
                        ended December 31, 2004 and 2003, respectively.


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------


7.   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,
                                        ------------------------------------
                                              2004              2003
                                        ------------------------------------

Income tax (provision) benefit at
  statutory rate                        $        (24,000)  $      1,170,000
Expiration of research and
  development tax credit
  carryforwards                                        -                  -
Meals and entertainment                           (3,000)            (7,000)
Other                                                  -              2,000
Change in valuation allowance                     27,000         (1,165,000)
                                        ------------------------------------

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

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

Net operating loss carryforward                            $     16,984,000
Depreciation, amortization, and impairment                          853,000
Allowance and reserves                                              828,000
Research and development tax credit
  carryforwards                                                      56,000
                                                           -----------------

                                                                 18,721,000

Valuation allowance                                             (18,721,000)
                                                           -----------------

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

                        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-19
<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------


7.   Income             At December 31, 2004, the Company had net operating loss
     Taxes              carryforwards of approximately  $48 million and research
     Continued          and    development   tax   credit    carryforwards    of
                        approximately $56,000. These carryforwards are available
                        to  offset  future  taxable  income  and  expire in 2004
                        through 2021. The  utilization of the net operating loss
                        carryforwards  is dependent  upon the tax laws in effect
                        at the time the net operating loss  carryforwards can be
                        utilized.  The  Tax  Reform  Act of  1986  significantly
                        limits  the  annual  amount  that  can be  utilized  for
                        certain of these carryforwards as a result of the change
                        in ownership.

8.   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 80,000,000  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, 2004 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-20
<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------



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

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

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

                        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, 2004
                             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-21
<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------




8.   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,
                        2004 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.

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

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

                        2.  Upon the liquidation of the Company,  the holders of
                            the Series D Preferred Stock are entitled to receive


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------




8.   Capital            Series D Preferred Stock - Continued
     Stock              an amount  per  share  equal to the  greater  of (a) the
     Continued          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, 2004 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.

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

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

                        2.  Upon the liquidation of the Company,  the holders of
                            the Series E Preferred Stock are entitled to receive
                            an amount per share  equal to the greater of (a) the
                            amount they would have  received had they  converted
                            the shares into Common  Stock  immediately  prior to
                            such   liquidation  plus  all  declared  but  unpaid


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------



8.   Capital            Series E Preferred Stock - Continued
     Stock              dividends;   or  (b)  the  stated   value,   subject  to
     Continued          adjustment. Total liquidation preference at December 31,
                        2004 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.

                        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.

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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------



8.   Capital            Series F Preferred Stock - Continued
     Stock              2.  Upon the liquidation of the Company,  the holders of
     Continued              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, 2004 was $245,000.

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

                        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-25
<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------



8.   Capital
     Stock              Series G Preferred Stock - Continued
     Continued          2.  Upon the liquidation of the Company,  the holders of
                            the Series G Preferred Stock are entitled to receive
                            an amount per share  equal to the greater of (a) the
                            amount they would have  received had they  converted
                            the shares into Common  Stock  immediately  prior to
                            such   liquidation  plus  all  declared  but  unpaid
                            dividends; or (b) the stated value of $.25 per share
                            plus   declared   but   unpaid   dividends.    Total
                            liquidation  preference  at  December  31,  2004 was
                            $432,000.

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

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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------



8.   Capital            The following table summarizes  preferred stock activity
     Stock              during the years ended December 31, 2004 and 2003:
     Continued
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                 Series A         Series B         Series C        Series D        Series E        Series F             Series G
              Shares  Amount  Shares  Amount   Shares  Amount  Shares   Amount  Shares  Amount  Shares   Amount     Shares    Amount
<S>            <C>    <C>      <C>    <C>                <C>     <C>   <C>       <C>    <C>         <C>   <C>                <C>
Balance at
 January 1,
 2003          5,627  $     -  8,986  $      -       -   $ -     5,000 $     -   1,500  $     -     6,272 $      -         - $     -

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             -        -      -         -       -     -         -       -    (500)       -    (1,675)       -         -       -
             -----------------------------------------------------------------------------------------------------------------------
Balance at
 December
 31, 2003      5,627        -  8,986         -       -     -     5,000       -   1,000        -     4,597        - 1,981,560   2,000

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

Conversion
 of
 preferred
 stock             -        -      -         -       -     -         -       -       -        -         -        -  (255,000)      -
             -----------------------------------------------------------------------------------------------------------------------

Balance at
 December
 31, 2004      5,627  $     -  8,986  $      -       -   $ -     5,000 $     -   1,000 $      -     4,597 $      - 1,726,560 $ 2,000
             -----------------------------------------------------------------------------------------------------------------------

Authorized   500,000         500,000            30,000       1,140,000          50,000             50,000          2,000,000
             -----------------------------------------------------------------------------------------------------------------------

Liquidation
 preference           $ 6,000         $ 36,000           $ -           $ 9,000         $ 100,000          $245,000          $432,000
             -----------------------------------------------------------------------------------------------------------------------

</TABLE>


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------


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

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

                        The Company  granted the following  options and warrants
                        during the year ended December 31, 2004:

                            o     Options to officers and the board of directors
                                  to purchase  1,775,000  shares of common stock
                                  at an  exercise  price  ranging  from $0.10 to
                                  $0.14.

                        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-28
<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------



9.   Stock Option       A schedule of the options and warrants is as follows:
     Plan and
     Warrants
     Continued



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

Outstanding at
   January 1, 2003                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
     Granted                      1,775,000                 -       0.10 - 0.14

     Exercised                            -                 -                 -

     Expired                       (187,500)         (161,019)      2.38 - 4.00
     Forfeited                   (1,369,750)         (200,000)      0.16 - 5.00
                              --------------------------------------------------
Outstanding at
  December 31, 2004               3,846,206         2,446,964 $    0.10 - 12.98
                              --------------------------------------------------

                        The following table summarizes  information  about stock
                        options and warrants outstanding at December 31, 2004:

                             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    3,724,986        2.76 $     0.20      2,236,653  $    0.34
     2.00 - 5.00    2,267,301        2.27       3.62      2,350,676       3.73
     6.00 - 8.13      275,000        1.00       3.27        275,000       6.55
           12.98       25,883         N/A      12.98         25,883      12.98
-----------------------------------------------------   -----------------------

  $ 0.16 - 12.98    6,293,170        2.50 $     1.63      4,888,212  $    2.39
-----------------------------------------------------   -----------------------

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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------



10.  Sale of            In  July  2004,  the  Company  sold  its  investment  in
     Investment         International Bioimmune Systems, Inc. (IBS) for $532,000
                        cash.   Because,   for  book  purposes,   the  Company's
                        investment in IBS had previously been reduced to $0, the
                        net sales price was recorded as a gain as follows.

                               Sale of IBS stock                       $532,000
                               Less commissions                          27,000
                                                                       --------
                               Net gain                                $505,000
                                                                       --------

11.  Gain on            Due to the  Company's  ongoing  cash flow  difficulties,
     Settlement of      during  2003 and 2004 most  vendors and  suppliers  were
     Liabilities        contacted with attempts to negotiate reduce payments and
                        settlements  of  settlements  of  outstanding   accounts
                        payable and accrued expenses. While some vendors refused
                        to negotiate and demanded  payment in full, some vendors
                        were  willing  to  settle  for  a  reduced  amount.  The
                        accounts  payable  forgiven by vendors and suppliers and
                        accrued  expenses settled resulted in a gain of $206,000
                        and $436,000 in 2004 and 2003, respectively.

12.  Related Party      A law  firm,  of  which  the  chairman  of the  board of
     Transactions       directors of the Company is a shareholder,  has rendered
                        legal  services to the  Company.  The Company  paid this
                        firm $100,000 and $97,000,  for the years ended December
                        31,  2004 and 2003,  respectively.  As of  December  31,
                        2004,  the  Company  owed this firm  $197,000,  which is
                        included in accounts payable.

                        During the year ended  December  31,  2004,  the Company
                        increased accrued liabilities and increased  accumulated
                        deficit  for  $54,000   for  accrued   preferred   stock
                        dividends related to registration rights on the Series G
                        preferred stock.

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

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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------


13.  Supplemental           o      Incurred  an  obligation   of   approximately
     Cash Flow                     $46,000   for  the   settlement   of  accrued
     Information                   liabilities  of  approximately   $83,000  and
     Continued                     recorded a corresponding gain of $37,000.

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

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

                                                    Years Ended
                                                    December 31,
                                         -----------------------------------
                                               2004             2003
                                         -----------------------------------

Interest                                 $         22,000 $          24,000
                                         -----------------------------------

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


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

                                                    Years Ended
                                                    December 31,
                                         -----------------------------------
                         Geographic Area       2004              2003
                         --------------- -----------------------------------

                         Far East        $         529,000 $        272,000
                         South America              50,000            9,000
                         Middle East               233,000          228,000
                         Europe                    684,000          363,000
                         Canada                     68,000           62,000
                         Mexico                          -            9,000
                         Africa                      9,000                -
                                         -----------------------------------

                                         $       1,573,000 $        943,000
                                         -----------------------------------



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------



15.  Savings Plan       In  November  1996,  the  Company  established  a 401(k)
                        Retirement  Savings Plan for the Company's  officers and
                        employees. The Plan provisions include eligibility after
                        six months of service,  a three year  vesting  provision
                        and matching  contributions at the Company's discretion.
                        During the years ended  December 31, 2004 and 2003,  the
                        Company contributed approximately zero and $1,000 to the
                        Plan, respectively.

16.  Commitments and    Consulting Agreements
     Contingencies      On April 3, 2003, the Company  entered into a consulting
                        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.  The  Agreement
                        expired on April 3, 2004.

                        During  the year ended  December  31,  1999 the  Company
                        entered a consulting  agreement with a former officer of
                        the Company,  which expired 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 14).



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------


16.  Commitments and    Litigation
     Contingencies      An action was brought  against the Company in March 2000
     Continued          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  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.  Certain discovery has taken place and the Company
                        has  paid  royalties  of  $16,000,   which  the  Company
                        believes  brings all payments  current as of the date of
                        last  payment on January 7, 2005.  The  Company has been
                        working with PhotoMed and Dr.  Eichenbaum to ensure that
                        the  calculations   have  been  correctly  made  on  the
                        royalties   paid  as  well  as  the  proper   method  of
                        calculation for the future.

                        It is anticipated that once the parties can agree on the
                        correct calculations on the royalties,  the legal action
                        will be dismissed.  An issue in dispute  concerning  the
                        method of  calculating  royalties  is whether  royalties
                        should  be paid on  returned  equipment.  Since  July 1,
                        2001, only one Photon(TM) laser system has been sold and
                        no systems returned.  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.

                        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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------



16.  Commitments and    Litigation - Continued
     Contingencies      Securities Law and  Plaintiffs  Demand a Trial by Jury."
     Continued          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 16.  Commitments  and
                        Association for  reimbursement  to doctors in connection
                        with the Blood Flow Contingencies  Analyzer(TM),  adding
                        that  the  CPT  code  provides  for a  reimbursement  to
                        doctors  Continued  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 has 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.



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------



16.  Commitments and    Litigation - Continued
     Contingencies      The Company  disputes having issued false and misleading
     Continued          statements  concerning  the Blood Flow  AnalyzerTM 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
                        AnalyzerTM. 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 AnalyzerTM.

                        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 CPT Editorial  Research and Development
                        Department  of  the  American  Medical  Association  has
                        informed  the Company  that CPT code number 92120 is the
                        appropriate  code  for  doctors  to use  when  reporting
                        certain   procedures   performed  with  the  Blood  Flow
                        Analyzer(TM).

                        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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------


16.  Commitments and    Litigation - Continued
     Contingencies      Company's  equipment to be filled over a two-year period
     Continued          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 AnalyzerTM 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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------


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

                        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.



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------


16.  Commitments and    Litigation - Continued
     Contingencies      The  Company  has  paid  $30,000  to  U.S.  Fire  toward
     Continued          satisfaction   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.  The Company has made payments
                        to U.S. Fire in the aggregate amount of $30,000 of which
                        its last  payment  of $10,000  was made on  October  11,
                        2004.   These  payments  were  for  the  $5,000  monthly
                        payments due during the six month  period from  February
                        15 to July  15,  2004,  leaving  a  remaining  retention
                        obligation to U.S. Fire of $220,000.

                        In the event U.S.  Fire  determines  that 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.  Moreover,  if U.S.  Fire  denies
                        coverage  for the  consolidated  cases under the policy,
                        the  Company  would owe its  litigation  counsel  in the
                        class  action  lawsuits,  for any legal fees not paid by
                        U.S. Fire.  However,  U.S. Fire has currently  agreed to
                        pay  the  legal  fees   relating  to  the  class  action
                        lawsuits.

                        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



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------



16.  Commitments and    Litigation - Continued
     Contingencies      U.S.  Fire denies  coverage for the  consolidated  cases
     Continued          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.

                        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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------


16.  Commitments and    Litigation - Continued
     Contingencies      Innovative and Barton  suffered  damages in an amount to
     Continued          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.


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------



16.  Commitments and    Litigation - Continued
     Contingencies      The  Company  filed  an  answer  to the  complaint.  The
     Continued          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.

                        On January 26,  2005,  the  Company  completed a written
                        settlement   agreement   to  settle  the  lawsuit   that
                        Innovative Optics, Inc. and Barton Dietrich Investments,
                        L.P.   brought   against  the  Company  and  its  former
                        executive  officers.  Under the terms of the settlement,
                        U.S.  Fire agreed to pay  Innovative  Optics,  Inc.  and
                        Barton Dietrich Investments, L.P. the sum of $367,500 in
                        cash.  Payment of this  amount is  contingent,  however,
                        upon the courts in the federal  and state  class  action
                        lawsuits  granting  final  approval  of the  settlements
                        reached in those  respective  actions,  and such  orders
                        becoming final and non-appealable.

                        On  February  23,  2005,  the Company  executed  written
                        settlement  agreements  to settle the  federal and state
                        court class action  lawsuits that were filed against the
                        Company  and its former  executive  officers.  Under the
                        terms of  settlement  of the federal  court class action
                        lawsuit,  U.S.  Fire agreed to pay the sum of $1,507,500
                        in  cash  to  the  class  members  that   purchased  the
                        Company's securities during the period between April 17,
                        2002 and November 4, 2002. Under the terms of settlement
                        of the state  court  class  action  lawsuit,  U.S.  Fire
                        agreed to pay the sum of  $625,000  in cash to the class
                        members that  purchased  shares of Series E  Convertible
                        preferred stock on or about July 11, 2001.

                        As a condition to the  settlement  agreements  to settle
                        the federal and state court class action  lawsuits,  the
                        courts  in  such  lawsuits  must  have  entered   orders
                        granting  final approval of the  settlements  reached in
                        those  respective  actions,  and such  orders  must have
                        become final and  non-appealable.  On March 3, 2005, the
                        federal  court  entered  an order  granting  preliminary
                        approval of the  settlement  in the federal  court class
                        action  lawsuit and  providing  for notice to be sent to
                        potential  class  members.  On April 18, 2005, a hearing
                        was held in the  state  court  and the  court  entered a


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------


16.  Commitments and    Litigation - Continued
     Contingencies      minute  entry  granting  preliminary  approval  of   the
     Continued          settlement in the state court class action lawsuit.

                        As a further  condition to the settlement  agreements to
                        settle  the  federal   and  state  court  class   action
                        lawsuits,  both settlement  agreements provide that U.S.
                        Fire must not have exercised its option to terminate the
                        settlement  agreements.  U.S.  Fire  has the  option  to
                        terminate the  settlement  agreements if the  cumulative
                        dollar  value  of the  claims  held  by  individuals  or
                        entities  that "opt out" of the  federal and state class
                        action  lawsuits  exceeds  $250,000.  If such "opt outs"
                        exceed $250,000,  however, plaintiffs in the federal and
                        state court class action lawsuits will have five days to
                        cure by  reducing  the amount of "opt outs" to less than
                        $250,000.

                        If U.S.  Fire  exercises  its  option to  terminate  the
                        settlement   agreements,   then  all   parties   to  the
                        settlement   agreements   will  be   restored  to  their
                        respective  positions  in the various  actions as of the
                        date of the  settlement  agreements.  In  addition,  the
                        terms and provisions of the settlement  agreements  will
                        have no further force and effect on the various  parties
                        and will be deemed null and void in their entirety.

                        Under the terms of the settlement  agreements  regarding
                        the federal and state court class  action  lawsuits  and
                        the lawsuit  that  Innovative  Optics,  Inc.  and Barton
                        Dietrich Investors, L.P. brought against the Company and
                        its former executive  officers,  U.S. Fire has agreed to
                        pay a total of  $2,500,000 in cash to the classes in the
                        class action lawsuits and to Innovative Optics, Inc. and
                        Barton Dietrich Investments, L.P. in settlement of these
                        lawsuits.  Under  the  terms  of  settlement,   Paradigm
                        Medical  is  to  pay  U.S.  Fire  the  sum  of  $220,000
                        representing   the  remaining  amount  owing  under  the
                        $250,000  retention  obligation in the insurance policy,
                        and to execute a policy release in favor of U.S. Fire as
                        to coverage under the insurance policy.

                        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 $50,000 plus interest is due for the leasing
                        of  three  copy  machines  that  were  delivered  to the
                        Company's Salt Lake City facilities on or about April of



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------


16.  Commitments and    Litigation - Continued
     Contingencies      2000. The action also seeks an award of attorney's  fees
     Continued          and  costs  incurred  in  the  collection.  The  Company
                        disputes the amounts allegedly owed,  asserting that two
                        of the  machines  were  returned to the leasing  company
                        because  they  did  not  work  properly.   A  responsive
                        pleading  has been  filed.  The  Company  was engaged in
                        settlement  discussions  with CitiCorp until counsel for
                        CitiCorp   withdrew  from  the  case.  New  counsel  for
                        CitiCorp has been appointed and it is  anticipated  that
                        settlement discussions will resume.

                        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  $2,000  to
                        Franklin Funding,  with the first monthly payment due on
                        August 29, 2003.  As of March 31, 2005,  the Company has
                        made 19  monthly  payments  of $2,000  each to  Franklin
                        Funding.

                        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



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------


16.  Commitments and    Litigation - Continued
     Contingencies      intends to  vigorously  defend  against any legal action
     Continued          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  $2,000  for  business
                        expenses, $11,000 for accrued vacation days, $13,000 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. On
                        March 29, 2005, the Company agreed to a settlement  with
                        Ms. Powell of her claims for unpaid  business  expenses,
                        accrued   vacation  days,  and  unpaid   commissions  by
                        agreeing  to pay her  $13,000.  The  Company has not yet
                        made   payment  to  Ms.   Powell  for  the  agreed  upon
                        settlement amount.

                        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 has filed an
                        answer in which it denies any  liability  to Mr.  Hicks.
                        Formal  discovery  in  the  matter  has  commenced.  The
                        Company  disputes the amount  allegedly owed and intends
                        to vigorously defend against such action.

                        On November 7, 2003, a complaint  was filed  against the
                        Company by Todd Smith, a former  employee,  in the Third
                        Judicial District Court, Salt Lake County, State of Utah
                        (Civil  No.  030924951  CN).  Defendants  consist of the
                        Company and Randall  Mackey,  a director of the Company.
                        The  complaint  alleges  that while an  employee  of the
                        Company, Mr. Smith was granted stock options to purchase
                        16,800 shares of common stock  exercisable  at $5.00 per
                        share.  Mr. Smith  claims  unpaid wages in the amount of


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------


16.  Commitments and    Litigation - Continued
     Contingencies      the fair market value of the stock  options he claims he
     Continued          was prevented from  exercising,  attorney's  fees, and a
                        continuing  wage  penalty  under Utah law.  The  Company
                        believes  the claims are  without  merit and  intends to
                        vigorously defend against such action.

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

                        On August 9, 2004, a third party  complaint  was brought
                        against  the  Company  by  Wakefield  Eye Center and Dr.
                        Kenneth C.  Westfield  (collectively  "Westfield").  The
                        original action was brought by American Express Business
                        Finance Corporation against Westfield on May 27, 2004 in
                        the District Court, Clark County, State of Nevada (Civil
                        No. A486307,  Dept. No. XXI) concerning the financing of
                        the  purchase  of a Blood  Flow  Analyzer(TM)  involving
                        Westfield Eye Center.  The transaction took place during
                        the latter half of 2001.  Westfield  takes the  position
                        that if there is  liability  of  Westfield  to  American
                        Express this liability is ultimately  ours and the other
                        third-party defendants.  The amount being sought against
                        Westfield  by American  Express in the  original  action
                        includes the sum of $30,000,  together with interest and
                        attorney's fees.  Westfield's alleged claims against the
                        Company  include fraud,  breach of contract,  promissory
                        estoppel,  declaratory  relief,  negligence,   negligent
                        supervision, damages for injuries resulting from actions


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------


16.  Commitments and    Litigation - Continued
     Contingencies      of  employee/contractor,  wilful and wanton  misconduct,
     Continued          conspiracy,  and  breach  of  fiduciary  duty as well as
                        costs and attorney's fees. Westfield also seeks punitive
                        damages.  The  Company  has filed an answer to the third
                        party  complaint in which the Company denies  liability.
                        Formal   discovery  in  the  matter   involving  us  has
                        commenced.  The case has been  referred to  arbitration.
                        The Company intends to vigorously defend the action.

                        On March 31,  2005,  an action  was  filed  against  the
                        Company  by Joseph W.  Spadafora  in the  United  States
                        District Court,  District of Utah (Civil No. 2:05CV00278
                        TS).  The  complaint  alleges that Dr.  Spadafora  was a
                        clinical investigator in the study for the FDA involving
                        the Company's Photon(TM) laser system where he performed
                        numerous  surgeries using the Photon(TM).  Dr. Spadafora
                        contends  that in meetings  with  Company  personnel  he
                        suggested  ways in which the handpiece on the Photon(TM)
                        could be improved.  Dr. Spadafora  further contends that
                        on  August  5,  1999,   the   Company   filed  a  patent
                        application  for an improved  handpiece  with the United
                        States Patent and Trademark  Office but he was not named
                        as one of the inventors or a  co-inventor  on the patent
                        application.

                        On September  24, 2004,  the Company was issued a patent
                        entitled,  "Laser Surgival  Handpiece with Photon Trap."
                        Because the Company did not list Dr. Spadafora as one of
                        the  inventors  or a  co-inventor  on  the  patent,  Dr.
                        Spadafora is requesting  in his  complaint  that a court
                        order be entered  declaring  that he is the  inventor or
                        co-inventor of the patent and, as a result,  is entitled
                        to all or part of the  royalties  and  profits  that the
                        Company earned or will earn from the sale of any product
                        incorporating  or using  the  improved  handpiece,  plus
                        interest and attorney's  fees. The Company  disputes the
                        claims made by Dr.  Spadafora  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.

                        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.


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------


16.  Commitments and    Royalty Agreements - Continued
     Contingencies      During 2003, a settlement was reached with the president
     Continued          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.

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

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

18.  Recent             In December 2003, the FASB issued  Interpretation No. 46
     Accounting         ("FIN 46R") (revised  December 2003),  Consolidation  of
     Pronounce-         Variable   Interest   Entities,   an  Interpretation  of
     ments              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


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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------


18.  Recent             evaluate  its  involvement  with all  entities  or legal
     Accounting         structures created before February 1, 2003, to determine
     Pronounce-         whether  consolidation  requirements of FIN 46R apply to
     ments              those entities.  There is no  grandfathering of existing
                        entities.  Public  companies must apply either FIN 46 or
                        FIN 46R immediately to entities  Continued 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 December  2004,  FASB issued SFAS 153  "Exchanges  of
                        Nonmonetary Assets--an amendment of APB Opinion No. 29".
                        The  guidance  in APB  Opinion  No. 29,  Accounting  for
                        Nonmonetary Transactions, is based on the principle that
                        exchanges of nonmonetary assets should be measured based
                        on the fair value of the assets exchanged.  The guidance
                        in that Opinion, however, included certain exceptions to
                        that  principle.  This  Statement  amends  Opinion 29 to
                        eliminate  the exception  for  nonmonetary  exchanges of
                        similar productive assets and replaces it with a general
                        exception  for exchanges of  nonmonetary  assets that do
                        not have commercial  substance.  A nonmonetary  exchange
                        has commercial substance if the future cash flows of the
                        entity are expected to change  significantly as a result
                        of the exchange.  The Company does not believe  adoption
                        of SFAS  153  will  have  any  impact  on the  Company's
                        consolidated financial statements.

                        In November  2004,  the FASB issued SFAS 151  "Inventory
                        Costs--an  amendment  of ARB  No.  43".  This  Statement
                        amends the guidance in ARB No. 43, Chapter 4, "Inventory
                        Pricing," to clarify the accounting for abnormal amounts
                        of idle facility expense,  freight,  handling costs, and
                        wasted  material  (spoilage).  Paragraph  5 of  ARB  43,
                        Chapter  4,  previously  stated  that ". . . under  some
                        circumstances,  items  such  as idle  facility  expense,
                        excessive  spoilage,  double  freight,  and  re-handling
                        costs may be so  abnormal  as to  require  treatment  as
                        current period charges.  . . ." This Statement  requires
                        that those items be recognized as current-period charges
                        regardless  of whether  they meet the  criterion  of "so
                        abnormal."  In addition,  this  Statement  requires that
                        allocation of fixed production overheads to the costs of
                        conversion  be  based  on  the  normal  capacity  of the
                        production facilities.  The provisions of this Statement
                        shall be effective for inventory  costs incurred  during
                        fiscal years  beginning after June 15, 2005. The Company
                        does not  believe  adoption  of SFAS  151 will  have any
                        impact   on   the   Company's   consolidated   financial
                        statements.



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


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued
--------------------------------------------------------------------------------



18.  Recent             In December 2004, the FASB issued FASB Statement No. 123
     Accounting         (revised 2004), "Shared-Based Payment." Statement 123(R)
     Pronounce-         addresses  the   accounting  for   share-based   payment
     ments              transactions  in which an enterprise  receives  employee
     Continued          services in exchange for (a) equity  instruments  of the
                        enterprise or (b) liabilities that are based on the fair
                        value of the enterprise's equity instruments or that may
                        be settled by the  issuance of such equity  instruments.
                        Statement  123(R)  requires an entity to  recognize  the
                        grant-date   fair-value   of  stock  options  and  other
                        equity-based  compensation  issued to  employees  in the
                        income  statement.   The  revised  Statement   generally
                        requires that an entity  account for those  transactions
                        using the  fair-value-based  method,  and eliminates the
                        intrinsic  value method of accounting in APB Opinion No.
                        25,  "Accounting  for Stock Issued to Employees",  which
                        was permitted under Statement 123, as originally issued.
                        The  revised  Statement  requires  entities  to disclose
                        information about the nature of the share-based  payment
                        transactions  and the effects of those  transactions  on
                        the financial statements.  Statement 123(R) is effective
                        for public  companies that do not file as small business
                        issuers  as of the  beginning  of the first  interim  or
                        annual reporting period that begins after June 15, 2005.
                        For  public   companies  that  file  as  small  business
                        issuers,   Statement  123(R)  is  effective  as  of  the
                        beginning  of the  first  interim  or  annual  reporting
                        period that begins after December 15, 2005 (i.e.,  first
                        quarter 2006 for the Company). All public companies must
                        use  either the  modified  prospective  or the  modified
                        retrospective  transition method. Early adoption of this
                        Statement  for  interim  or  annual  periods  for  which
                        financial  statements  or interim  reports have not been
                        issued is  encouraged.  The  Company  believes  that the
                        adoption  of  this  pronouncement  may  have a  material
                        impact on the Company's financial statements.







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

<PAGE>

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

         None.

Item 8A.  Controls and Procedures

         Under  the  supervision  and with the  participation  of the  Company's
management,  including its principal  executive officer and principal  financial
officer,  the Company evaluated the effectiveness of the design and operation of
its  disclosure  controls  and  procedures  (as  defined  in Rule  13a-15(e)  or
15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based
upon that evaluation,  the principal  executive officer and principal  financial
officer concluded that, as of the end of the period covered by this report,  the
Company's  disclosure  controls and  procedures  were  effective and  adequately
designed to ensure that  information  required to be disclosed by the Company in
the reports it files or submits  under the Exchange Act is recorded,  processed,
summarized and reported  within the time periods  specified in applicable  rules
and forms.

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


                                    PART III

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

         As of March 31, 2005, the Company's  executive  officers and directors,
their ages and their positions are set forth below:

     Name                       Age     Position
     John Y. Yoon               41      President and Chief Executive Officer
     Aziz A. Mohabbat           45      Vice President of Operations and Chief
                                        Operating Officer
     Randall A. Mackey, Esq.    59      Chairman of the Board and Director
     David M. Silver, PhD.      63      Director
     Keith D. Ignotz            57      Director
     John C. Pingree            64      Director

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

         John Y. Yoon has served as 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.

                                       36
<PAGE>

         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.

         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.

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

Appointment of New President and Chief Executive Officer

         On  March  18,  2004,  John Y.  Yoon  was  appointed  as 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.

                                       37
<PAGE>

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,  2004.  No  director  attended  fewer than 75% of all
meetings  of the Board of  Directors  during  the 2004  fiscal  year.  The Audit
Committee of the Board of Directors  consists of directors  Dr. David M. Silver,
Randall A. Mackey,  Keith D. Ignotz and John C. Pingree. The Audit Committee met
one time during the fiscal year.  The Audit  Committee is primarily  responsible
for reviewing the services  performed by its independent  public accountants and
internal audit  department  and  evaluating  its  accounting  principles and its
system of internal accounting controls.  The Compensation Committee of the Board
of Directors consists of directors Dr. David M. Silver, Randall A. Mackey, Keith
D. Ignotz and John C. Pingree.  The  Compensation  Committee met 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
and John C. Pingree,  who currently serve as directors of the Company as well as
a member of the Company's  audit  committee,  are  independent  audit  committee
financial experts.

Item 10.  Executive Compensation

         The  following  table sets  forth,  for each of the last  three  fiscal
years,  the  compensation  received by 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, 2004, 2003 and 2002.

                                       38
<PAGE>
<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($)       sation($)    Awards($)       SARs(#)      Payouts($)   tion($)
------------------      ----       -------          --------       ---------    ---------       -------      ----------   -------

<S>                     <C>        <C>                    <C>        <C>             <C>     <C>                  <C> <C>
John Y. Yoon            2004(1)    $110,961(4)            0          $18,494(4)      0       1,000,000(5)         0        0
President and Chief
Executive Officer

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

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

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

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

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

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

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

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

(1)      For the fiscal year ended December 31, 2004
(2)      For the fiscal year ended December 31, 2003
(3)      For the fiscal year ended December 31, 2002
(4)      Of the salary payable to Mr. Yoon pursuant to his employment agreement,
         $110,961  was paid to him  during  2004  and the  remaining  amount  of
         $18,494  payable  in 2004 was  deferred  until the  Company's  board of
         directors has determined that its financial condition is improved.
(5)      On March 18, 2004,  the Company's  board of directors  granted Mr. Yoon
         options to purchase  1,000,000  shares of the Company's common stock at
         an exercise price of $.13 per share.
(6)      Mr.  Mohabbat  has  served a Vice  President  of  Operations  and Chief
         Operating  Officer since March 22, 2004 and as Chief Operating  Officer
         from  August  30,  2002 to March  2003.  He was not an officer in prior
         years.
(7)      The amounts under "All Other Compensation" for 2004 consist of payments
         to Mr. Mohabbat for accrued vacation days prior to his resignation from
         the Company in March 2003.
(8)      On March 19, 2003, the Company's  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.  These  options were  terminated  on March 18,
         2003 when the  Company's  board of  directors  terminated  Mr.  Poore's
         employment for cause as defined in the employment agreement.
(9)      the  Company  paid  A-Mech  Engineering,  Inc. a total of  $16,616  and
         $18,059 for  consulting  services  during 2003 and 2004,  respectively.
         From 1982 to March 2004,  Mr.  Cullumber  served as President of A-Mech
         Engineering, Inc.
(10)     On November  6, 2003,  the  Company's  board of  directors  granted Mr.
         Cullumber  options to purchase  150,000 shares of the Company's  common
         stock at an  exercise  price  of $.21 per  share.  These  options  were
         terminated  on June 20, 2003, 90 days after Mr.  Cullumber  resigned as
         the Company's Chief Operating Officer and Chief Technical Officer.
(11)     Although Mr. Motter resigned as Chairman and Chief Executive Officer on
         August 30, 2002,  he continued to receive his salary under the terms of
         his employment agreement through December 16, 2002.
(12)     The  amounts  under "All Other  Compensation"  for 2004,  2003 and 2002
         include  payments  related  to  the  operation  of  automobiles  and/or
         automobiles and insurance by the named executives.

                                       39
<PAGE>

(13)     The amounts under "All Other  Compensation"  for 2002 include  payments
         related to the  residential  housing  accommodations  for the Company's
         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.
(14)     On January 29,  2002,  the  Company's  Board of  Directors  granted Mr.
         Miehle  options to purchase the 55,000  shares of the  Companys  common
         stock at an  exercise  price of $2.75 per  share.  These  options  were
         terminated  on  February  28,  2004,  one year  after  expiration  of a
         six-month  consulting  agreement  with the  Company,  which  expired on
         February 28, 2003.
(15)     On September 3, 2002, 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.
(16)     Mr. Maughan served as Interim Chief  Executive  Officer from August 30,
         2002 to March  19,  2003.  He  served  as Vice  President  of  Finance,
         Treasurer  and Chief  Financial  Officer from October 1, 2001 until his
         resignation on May 31, 2003.
(17)     On May 13, 2003, 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.  These  options were  terminated on August 29,
         2003, 90 days after Mr.  Maughan  resigned as Vice President of Finance
         and Chief Financial Officer.

Options

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

                        Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>

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

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

         The following table sets forth information regarding unexercised
options to acquire shares of the Company's common stock held as of December 31,
2004, by each named executive officer.
<TABLE>
<CAPTION>

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

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


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

                                       40
<PAGE>

Director Compensation

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

Employee 401(k) Plan

         In October 1996, 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.

                                       41
<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.


                                       42
<PAGE>

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

         In the event of a change of control of the Company, then all
outstanding stock options granted to Mr. Mohabbat shall be immediately vested. A
change of control shall be deemed to have occurred if (i) a tender offer shall
be made and consummated for the ownership of more than 25% of the Company's
outstanding shares; (ii) the Company is 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 sells 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 Company's Board of Directors, or any
tender or exchange offer, merger of business combination or sale of assets, the
persons who were the directors before such a transaction shall cease to
constitute a majority of the Company's 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 the Company's common stock.

Severance Agreement

         On August 30, 2002, the Board of Directors terminated the employment
agreement with Mark R. Miehle who had been serving as 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.

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. The Agreement expired on April 3, 2004.

                                       43
<PAGE>

Item 11. Security Ownership of Certain Beneficial Owners and Management

         The following table sets forth certain information with respect to
beneficial ownership of the Company's common stock as of March 31, 2005 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)              3,068,451                11.1%
      502 South M Street
      Tacoma Washington 98405
  Dr. David M. Silver (3)                     761,166                 2.7%
  Randall A. Mackey (3)                       725,000                 2.6%
  Keith D. Ignotz (3)                         454,560                 1.6%
  John Y. Yoon (3)                            222,224                    *
  John C. Pingree (3)                         231,500                    *
  Aziz A. Mohabbat (3)                         44,448                    *
                                               ------
  Executive officers and directors
     as a group (six persons)               2,438,898                 8.8%
   -----------------
   *Less than 1%.

(1)   Unless otherwise indicated, the address of each listed stockholder is c/o
      Paradigm Medical Industries, Inc., 2355 South 1070 West, Salt Lake City,
      Utah, 84119.
(2)   Based on the Company's shareholder records, Dr. McLeod owns 1,218,451
      shares and is the Company's largest sole shareholder. Dr. McLeod's
      beneficial ownership is believed to also include 400,000 shares held by
      the Douglas A. MacLeod, M.D. Profit Sharing Trust, 200,000 shares held by
      St. Mark's Eye Institute and 720,000 shares held by Milan Holdings, Ltd.,
      which the Company believes Dr. MacLeod to have sole or shared voting and
      dispositive powers with regard to such shares. Dr. McLeod's beneficial
      ownership further includes shares that may be acquired currently or within
      60 days after March 31, 2005 through the exercise of warrants as follows:
      Dr. MacLeod, 200,000 shares; Douglas A. MacLeod, M.D. Profit Sharing
      Trust; 100,000 shares; St. Mark's Eye Institute, 50,000 shares; and Milan
      Holdings, Ltd., 180,000 shares.
(3)   The amounts shown include shares that may be acquired currently, or within
      60 days after March 31, 2005 through the exercise of stock options are
      follows: Dr. Silver, 725,000 shares; Mr. Mackey, 725,000 shares; Mr.
      Ignotz, 453,851 shares; Mr. Yoon, 222,224; Mr. Pingree, 125,000 shares;
      and Mr. Mohabbat, 44,448 shares.

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

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

         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.

         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.

                                       44
<PAGE>

Legal fees and expenses paid to Mackey Price & Thompson for the fiscal years
ended December 31, 2004 and 2003, totaled $100,000 and $97,000, respectively. As
of December 31, 2004, the Company owed this firm $197,727, which is included in
accounts payable.


                                     PART IV

Item 13. Exhibits and Reports on Form 8-K

         (a)  Exhibits
         -------------

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

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

2.1      Amended Agreement and Plan of Merger between Paradigm Medical
         Industries, Inc., a California corporation and Paradigm Medical
         Industries, Inc., a Delaware corporation(1)
3.1      Certificate of Incorporation(1)
3.2      Amended Certificate of Incorporation(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)


                                       45
<PAGE>

10.1     Exclusive Patent License Agreement with PhotoMed(1)
10.2     Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3     1995 Stock Option Plan (1)
10.4     Employment Agreement with Thomas F. Motter (5)
10.5     Stock Purchase Agreement with Ocular Blood Flow, Ltd. and Malcolm
         Redman (7)
10.6     Consulting Agreement with Malcolm Redman (7)
10.7     Royalty Agreement with Malcolm Redman (7)
10.8     Registration Rights with Malcolm Redman (7)
10.9     Employment Agreement with Mark R. Miehle (8)
10.10    Agreements with Steven J. Bayern and Patrick M. Kolenik (8)
10.11    Private Equity Line of Credit Agreement with Triton West Group, Inc.
         (9)
10.12    Asset Purchase Agreement with Innovative Optics, Inc. and Barton
         Dietrich Investments, L.P.(10)
10.13    Escrow Agreement with Innovative Optics, Inc., Barton Dietrich
         Investments, L.P. (10)
10.14    Assignment and Assumption Agreement with Innovative Optics, Inc.(10)
10.15    General Assignment and Bill of Sale with Innovative Optics, Inc.(10)
10.16    Non-Competition and Confidentiality Agreement with Mario F. Barton(10)
10.17    Termination of Employment Agreement with Mark R. Miehle(12)
10.18    Consulting Agreement with Mark R. Miehle(12)
10.19    Employment Agreement with Jeffrey F. Poore (13)
10.20    License Agreement with Sunnybrook Health Science Center(15)
10.21    Major Account Facilitator Contract(15)
10.22    Mutual Release with Douglas A. MacLeod, M.D. and Others(15)
10.23    Purchase Agreement with American Optisurgical, Inc.(15)
10.24    Purchase Order with Westland Financial Corporation(16)
10.25    Non-Waiver Agreement with United States Fire Insurance Company(16)
10.26    Employment Agreement with John Y. Yoon(17)
10.27    Consulting Agreement with Dr. John Charles Casebeer(18)
10.28    Consulting Agreement with Kinexsys Corporation(18)
10.29    Stock Purchase and Sale Agreement with William Ungar (19)
10.30    Employment Agreement with Aziz A. Mohabbat (20)
10.31    Investment Banking Agreement with Alpha Advisory Services, Inc. (21)
10.32    Manufacturing and Distribution Agreement with E-Technologies, Inc. (21)
10.33    Settlement Agreement with Innovative Optics, Inc., Barton Dietrich
         Investments, L.P. and United States Fire Insurance Company (22)
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.



                                       46
<PAGE>

(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 in Form 10-KSB, as filed on April
         14, 2004.
(19)     Incorporated by reference from Quarterly Report on Form 10-QSB, as
         filed on August 16, 2004.
(20)     Incorporated by reference from Amendment No. 6 to Registration
         Statement on Form SB-2, as filed on October 20, 2004.
(21)     Incorporated by reference from Report on Form 10-QSB, as filed on
         November 15, 2004.
(22)     Incorporated by reference from Current Report on Form 8-K, as filed on
         January 26, 2005.

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

         No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 2004.

Item 14. Principal Accountant- Fees and Services

         Fees for the 2004 annual audit of the financial statements and related
quarterly review services were approximately $35,000. Fees in 2004 related to
the review of registration statements and assistance in responding to SEC
comments were approximately $16,000. Fees in 2004 for edgarization of filings
were approximately $10,000. Fees in 2004 for tax return preparation were
approximately $7,000. Other fees in 2004 for meetings and other consultation
were approximately $1,000.

         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.



                                       47
<PAGE>

                                   SIGNATURES

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


                                           PARADIGM MEDICAL INDUSTRIES, INC.




Dated: May 12, 2005                        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/ John Y. Yoon            President and Chief Executive           May 12, 2005
---------------------       Officer (Principal Executive
John Y. Yoon                Officer)




/s/ Randall A. Mackey       Chairman of the Board and               May 12, 2005
---------------------       Director
Randall A. Mackey



/s/ David M. Silver         Director                                May 12, 2005
---------------------
David M. Silver, Ph.D.



/s/ Keith D. Ignotz         Director                                May 12, 2005
---------------------
Keith D. Ignotz



/s/ John C. Pingree         Director                                May 12, 2005
---------------------
John C. Pingree



/s/ Luis A. Mostacero       Controller (Principal Financial         May 12, 2005
---------------------       and Accounting Officer)
Luis A. Mostacero


                                       48