SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-KSB

              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                 For the fiscal year ended December 31, 2002, 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:

                                                          Name of each exchange
     Title of each Class                                   on which registered
     -------------------                                 ---------------------
            None                                               None


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

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

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

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

Registrant's  revenues  for  the  fiscal  year  ended  December  31,  2002  were
$5,368,000.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant  as of March  31,  2003  was  approximately  $3,741,000  based on the
closing price on that date on the Nasdaq SmallCap Market.

As of March 31, 2003,  Registrant had  outstanding  23,378,378  shares of Common
Stock,  5,757  shares  of Series A  Preferred  Stock,  8,986  shares of Series B
Preferred  Stock,  no shares of Series C  Preferred  Stock and 10,000  shares of
Series D Preferred  Stock,  13,050 shares of Series E Preferred Stock and 39,866
shares of Series F 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]


<PAGE>
                                     PART I

Item 1. Description of Business

General
-------

         The  Company  develops,   manufactures,   sources,  markets  and  sells
ophthalmic  surgical and  diagnostic  instrumentation  and related  accessories,
including disposable products.  The Company's surgical equipment is designed for
minimally  invasive  cataract  treatment.  The Company  markets  three  cataract
surgery systems with related accessories and disposable products.  The Company's
flagship  cataract  removal  system,  the  Photon(TM)  laser system,  is a laser
cataract surgery system marketed as the next generation of cataract removal. The
Photon(TM) product is currently under review by the Food Drug and Administration
("FDA").  The  Photon(TM) is available  for sale in many 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 plans to market
the Ocular  Surgery  Workstation(TM)  as a plug-in module for the Photon(TM) and
other lasers for use in eye care and other medical specialties. The Company also
offers the SIStem(TM),  a mid-range priced ultrasonic phaco, and competes in the
market segment that only desires an ultrasonic phaco.

         The Company's  diagnostic products include a pachymeter,  an A-Scan, an
A/B Scan, an UBM biomicroscope, a perimeter, a corneal topographer and the Blood
flow Analyzer(TM).  The diagnostic ultrasonic products including the pachymeter,
the A-Scan,  the A/B Scan and the UBM biomicroscope  were acquired from Humphrey
Systems, a division of Carl Zeiss in 1998. The Company developed and offered for
sale in the fall of 2000 the P45, which combines the A/B Scan and the UBM 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.  ("OBF") 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  treatment  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 OBF, 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 CPT
code for procedures  performed with the Blood Flow Analyzer(TM),  which provides
for a  reimbursement  to  doctors  using the  device.  In the fall of 2001,  the
manufacturing  of the Blood Flow  Analyzer(TM)  was moved to the  Company's  San
Diego facility from an outsourced facility in England.

         On July 23, 1998,  the Company  entered into an Agreement  for Purchase
and Sale of Assets with the  Humphrey  Systems  Division of Carl Zeiss,  Inc. to
acquire the ownership  and  manufacturing  rights to certain  assets of Humphrey
Systems  that are  used in the  manufacturing  and  marketing  of an  ultrasonic
microprocessor-based  line of ophthalmic diagnostic  instruments,  including the
Ultrasonic  Biometer  Model 820, the A/B Scan System  Model 837, the  Ultrasound
Pachymeter  Model 855,  and the  Ultrasound  Biomicroscope  Model  840,  and all
accessories, packaging and end-user collateral materials for each of the product
lines for the sum of  $500,000,  payable in the form of 78,947  shares of Common
Stock which were issued to Humphrey  Systems and 26,316  shares of Common  Stock
which were issued to business broker Douglas Adams. If the net proceeds received
by Humphrey Systems from the sale of the shares issued pursuant to the Agreement
was less than $375,000,  after payment of commissions,  transfer taxes and other
expenses  relating to the sale of such shares,  the Company would be required to
issue  additional  shares of Common Stock,  or pay additional  funds to Humphrey
Systems as would be necessary to increase the net proceeds  from the sale of the
assets to $375,000.  Since Humphrey Systems realized only $162,818 from the sale
of 78,947  shares of the  Company's  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.

                                       2
<PAGE>

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

         On June 5, 2000,  the Company  purchased  Vismed Inc.  d/b/a  Dicon(TM)
under a pooling of interest  accounting  treatment.  The  purchase  included the
Dicon(TM)  perimeter  product line  consisting of the LD 400, the TKS 4000,  the
SST(TM),  FieldLink(TM),  FieldView(TM)  and Advanced  FieldView and the corneal
topographer  product line, the CT 200(TM),  the CT 50 and an ongoing service and
software business.  Perimeters are used to determine retinal sensitivity testing
the visual  pathway.  Corneal  topographers  are used to determine the shape and
integrity of the 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 InnovatomeTM  microkeratome
of  Innovative  Optics,  Inc.  ("Innovative  Optics") by issuing an aggregate of
1,272,825 shares of its common stock, warrants to purchase 250,000 shares of the
Company's  common stock at $5.00 per share,  exercisable  over a period of three
years from the closing date, and $100,000 in cash. The transaction was accounted
for as a purchase in accordance with Statement of Financial Accounting Standards
No. 141 ("SFAS No. 141").

         The Company acquired from Innovative Optics, the raw materials, work in
process and finished goods inventories.  Additionally, it acquired the furniture
and  equipment of  Innovative  Optics used in the  manufacturing  process of the
microkeratome console and the inspection and packaging of the disposable blades.
The Company was  unsuccessful  in supplying the disposable  blades.  The Company
discontinued  the marketing  and sales efforts of this product  during the third
quarter of 2002.

Background
----------

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

Overview
--------

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

         Birth  defects,   trauma  from  accidents,   disease  and  age  related
deterioration  of  the  components  of  the  eye  could  all  contribute  to eye
disorders.  The most common eye disorders are either pathological or refractive.

                                       3
<PAGE>

Many  pathological  disorders  of the eye can be  corrected  by  surgery.  These
include cataracts  (clouded lenses),  glaucoma  (elevated  pressure in the eye),
corneal   disorders   such  as  scars,   defects  and  irregular   surfaces  and
vitro-retinal disorders such as the attachment of membrane growths to the retina
causing blood leakage within the eye. All of these  disorders can impair vision.
Many  refractive  disorders can be corrected  through the use of eyeglasses  and
contact  lenses.  Myopia  (nearsightedness),   hyperopia   (farsightedness)  and
presbyopia  (inability  to  focus)  are  three  of the  most  common  refractive
disorders.

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

         Surgical use of ultrasound in  ophthalmology is limited to treatment of
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
("IOL").  Phaco technology involves a process by which a cataract is broken into
small pieces using ultrasonic shock waves delivered through a hollow, open-ended
metal needle attached to a hand-held  probe.  The fragments of 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  the  Company's  proprietary  technology.  Such  new
applications,  however, must be tested in clinical trials and be approved by the
FDA.

Products
--------

         The Company's principal  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.

         The  SIStem(TM):  The  SIStem(TM)  is the  Company's  state-of-the-art,
entry-level  phacoemulsification  system.  The  SIStem(TM)  is  designed to be a
full-featured,  cost-effective,  reliable phaco machine. The competitive feature
package  includes  automated  priming  and  tuning,  error  detection,   audible
feedback,   patented   fluidics   system,   pneumatic   vitrectomy  and  bipolar
electrosurgical coagulation.  With both reusable and single-use consumables, the
SIStem(TM) is  positioned  for the world's  primary  ultrasonic  phaco  markets,
including the United States,  Europe and Asia.  Fiscal years 2001 and 2000 sales
of  the  SIStem(TM)  represented  approximately  3% and  9% of  total  revenues,
respectively.

                                       4
<PAGE>

         Precisionist  ThirtyThousand(TM):  The Precisionist  ThirtyThousand(TM)
(the  "Precisionist(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.  The system  features a graphic  color display and unique
proprietary  on-board  computer and graphic user interface  linked to a soft-key
membrane  panel  for  flexible  programmable  operation.   The  system  provides
real-time  "on-the-fly"  adjustment  capabilities  for each  surgical  parameter
during the surgical  procedure for high-volume  applications.  In addition,  the
Precisionist(TM)  provides one hundred  pre-programmable surgery set-ups, with a
second level of  sub-programmed  custom modes within each major surgical  screen
(i.e., ultrasound phaco and  irrigation/aspiration  modes). The Precisionist(TM)
features the  Company's  newly  developed  proprietary  fluidics  panel which is
completely  non-invasive  for  improved  sterility  and to  provide  a  surgical
environment  in the eye that  virtually  eliminates  fluidic  surge  and  solves
chamber  maintenance  problems normally  associated with phaco cataract surgery.
This new fluidics system provides greater control for the surgeon and allows the
safe operation at much higher vacuum settings by sampling  changes in aspiration
100  times  per  second.  Greater  vacuum  in phaco  surgery  means  less use of
ultrasound  or laser  energy  to  fragment  the  cataract  and less  chance  for
surrounding  tissue  damage.  In  addition  to the full  complement  of surgical
modalities  (e.g.,  irrigation,  aspiration,  bipolar  coagulation  and anterior
vitrectomy),  system automation includes  "dimensional" audio feedback of vacuum
levels and voice confirmation for major system functions, providing an intuitive
environment in which the advanced phaco surgeon can  concentrate on the surgical
technique  rather than the  equipment.  Sales of the  Precisionist(TM)  were not
significant in the fiscal years 2002 or 2001.

         Ocular Surgery Workstation(TM): The Ocular Surgery Workstation(TM) (the
Workstation(TM)   )   comprises   the  base   system  of  the   Precisionist(TM)
ThirtyThousand(TM)  and is the first  system to the  knowledge  of the  Company,
which uses the expansive capabilities of today's advanced computer technology to
offer  seamless  open  architecture  expandability  of the system  hardware  and
software  modules.  The  Workstation(TM)  utilizes an embedded 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 the  Company.  The main  elements  of the laser  system are the
Nd:YAG laser  module,  Photon(TM)  laser  software  package and  interchangeable
disposable  hand-held  fiber optic laser cataract  probe.  The Photon(TM)  laser
utilizes the on-board microprocessor computer of the Workstation(TM) to generate
short pulse laser  energy  developed  through the  patented  LCP(TM) to targeted
cataract  tissue inside the eye,  while  simultaneously  irrigating  the eye and
aspirating  the diseased  cataract  tissue from the eye. The probe is smaller in
diameter  than  conventional  ultrasound  phaco needles and presents no damaging
vibration or heat  build-up in the eye. The  Company's  Phase I clinical  trials
demonstrated that this probe can easily reduce the size of the cataract incision
from 3.0 mm to under 2.0 mm thereby reducing  surgical trauma and  complementing
current  foldable  intraocular  implant  technology.  The  laser  probe may also
eliminate any possibility for burns around the incision or at the cornea and may
therefore be used with cataract surgery techniques which utilize a more delicate
clear cornea incision which can eliminate  sutures and be conducted with topical
anesthesia.  However,  this  system  may not  effectively  remove  harder  grade
cataracts.  Harder grade  cataracts  can be removed  using the already  existing
ultrasound capability of the Precisionist(TM).

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

         The Company's  laser system is based upon the concept that pulsed laser
energy produced with the micro-processor controlled Nd:YAG laser system provides
ophthalmic  surgeons  with a more  precise  and less  traumatic  alternative  in
cataract surgery.  Although conventional ultrasonic surgical systems have proven
effective  and  reliable  in  clinical  use for many  years,  their  use of high
frequency  shock waves and  vibration  to  fragment  the  cataract  can make the
procedure  difficult and can present risk of complication  both during and after
surgery.  In  contrast,   the  Company's  laser  system,  which  utilizes  short
centralized  energy  bursts,  should  permit the delivery of the laser beam with
less trauma to adjacent tissue.  Therefore,  unlike  ultrasonic  systems,  whose
vibrations and shock waves affect (and can damage)  non-cataracts tissues within
the eye, the  Company's  Photon(TM)  laser  cataract  system  should only affect
tissues it comes into direct contact with.

                                       5
<PAGE>

         In  addition  to  cataract  surgery,  the  Company  believes  that  its
Photon(TM) laser system is capable of being configured with specialty probes for
use in other  ophthalmic  surgical and other medical  procedures.  In October of
2000, the Company received FDA approval for the Photon(TM) Workstation(TM) to be
used with a 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. See the Regulation section below ..

         Surgical Instruments,  Accessories and Disposables:  In addition to the
cataract  surgery  equipment,  the Company's  surgical  systems  utilize or will
utilize accessory instruments and disposables,  some of which are proprietary to
the Company. These include replacement ultrasound tips, sleeves, tubing sets and
fluidics packs, instrument drapes and laser cataract probes. The Company intends
to expand its  disposable  accessories  as it further  penetrates  the  cataract
surgery market and expands the treatment  applications for its  Workstation(TM).
These products  contributed  approximately 11% and 8% of total revenues for 2002
and 2001, 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 the  Company's  first  diagnostic  eye care
device.  The device is a portable desktop system that utilizes a proprietary and
patented pneumatic Air Membrane Applanation Probe(TM) (the "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., of Johns Hopkins  University  Applied Physics  Laboratory  calculates the
blood flow volume. The device presents a numerical  intraocular pressure reading
and blood flow analysis  rating in a concise  printout,  which is affixed to the
patient  history  file.  In  addition,  the data  generated by the device can be
downloaded to a personal computer system for advanced  database  development and
management.

         The Company markets the Blood Flow  Analyzer(TM) as a stand-alone model
packaged  with a custom  built  computer  system.  The Blood  Flow  Analyzer(TM)
utilizes a single-use  disposable  cover for its AMAP(TM) corneal probe which is
shipped in sterile  packages.  The AMAP (TM) probe tip cover  provides  accurate
readings and acts as a prophylactic barrier for the patient. The device has been
issued a patent in the European Economic Community and the United States and has
a patent  pending in Japan.  The FDA  cleared  the Blood Flow  Analyzer(TM)  for
marketing in June 1997 and the Company commenced selling the system in September
1997. In addition to the Humphrey products,  this diagnostic product 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  authorization  from the CPT Code
Research and Development  Division of the American Medical  Association to use a
common procedure  terminology (CPT) code for its Blood Flow  Analyzer(TM)  which
provides for a reimbursement to doctors.  In the fall of 2001, the manufacturing
activities for the Blood Flow  Analyzer(TM) were moved to the San Diego facility
from the  outsourced  plant  located in England.  The revenues from sales of the
Blood Flow Analyzer(TM)  represented  approximately 9% and 25% of total 2002 and
2001  revenues,  respectively.  On November 4, 2002,  the Company  received  FDA
approval  for expanded  indications  of use of the Blood Flow  Analyzer(TM)  for
pulsatile ocular blood flow, volume and pulsatility equivalence index. Also, the
Company is continuing  its  aggressive  campaign to educate the payers about the
Blood Flow Analyzer(TM), its purposes and the significance of its performance in

                                       6
<PAGE>

patient care in order to achieve reimbursements to the providers.  These efforts
should lead to a more positive effect on sales

         When the Company  completed a stock  purchase  transaction  on June 20,
2000, it acquired all of the outstanding  shares of common stock of Ocular Blood
Flow, Ltd., ("OBF"), from Malcolm Redman, the sole shareholder of OBF, including
the rights to the Blood Flow Analyzer(TM). The Company entered into a three-year
consulting agreement with Mr. Redman,  requiring the payment of 36 equal monthly
installments  of $6,000 through June 20, 2003, for  consulting  services.  As of
December  31, 2002,  the Company owed $12,000 to Mr.  Redman for payments due on
November 20, 2002 and December 20, 2002. The Company also entered into a Royalty
Agreement  with Mr.  Redman on June 20, 2000,  requiring a royalty of 10% of the
net sales of the  Blood  Flow  Analyzer(TM),  including  underlying  workstation
units, sold by the Company. As of December 31, 2002,  approximately  $169,016 in
royalties were due and owing to Mr. Redman under the Royalty Agreement.

         Dicon(TM)  perimeters consist of the LD 400, the TKS 4000, the SST(TM),
FieldLink(TM),  FieldView(TM)  and Advanced  FieldView.  Perimeters  are used to
determine retinal sensitivity testing the visual pathway. Perimeters have become
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  generated  approximately  20% and 15% of the  2002  and  2001  total
revenues, respectively.

         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  were  7%  and  12%  of  the  total  revenues  for  2002  and  2001,
respectively.

         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% and 1% to the total  revenues  for 2002 and 2001,
respectively.

         Ultrasonic  A-Scan:  The Ultrasonic A-Scan was and remains the industry
standard for axial length eye  measurement,  which is a  prerequisite  procedure
reimbursed  by Medicare and is performed  before every  cataract  surgery.  Over
5,000 A-Scan systems have been installed in the worldwide market, representing a
substantial  market  opportunity  for software  upgrades  and extended  warranty
contract sales.  A-Scan sales were  approximately  2% of the total 2002 and 2001
revenues.

         Ultrasonic A/B Scan: The A/B Scan is used by retinal sub-specialists to
identify foreign bodies in the posterior  chamber of the eye and to evaluate the
structural  integrity of the retina.  The A/B Scan is  attractive to the general
ophthalmic  community at large because of its lower price point. Sales from this
product  were  approximately  6% and 5% of the  total  2002 and  2001  revenues,
respectively.

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

         The UBM related surgical filtering procedures are fully reimbursable by
Medicare and insurance providers. This untapped new market positions the Company
with its  proprietary  UBM and to its knowledge,  the only  commercially  viable
product  of this  type on the  market,  as a  leader  in the  rapidly  expanding
glaucoma  imaging  and  treatment  segment.  In the  fall  of 2000  the  company
introduced  the P45 which  combines the UBM and the A/B Scan in one  instrument.
The  Company  believes  that by  combining  functions,  the P45 will appeal to a
broader market.  UBM sales were  approximately 13% and 11% of total revenues for
the years ended December 31, 2002 and 2001,  respectively.  The P45  contributed
approximately  12% of total revenues for 2002 and approximately 9% of total 2001
revenues.

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

                                       7
<PAGE>

Marketing and Sales
-------------------

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

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

         Current Market  Acceptance and Potential:  The principal  purchasers of
the Company's products have been  ophthalmologists,  optometrists and clinics in
many countries  throughout the world.  The Company  believes that the market for
its  products  is being  driven  by: (i) the aging of the  population,  which is
evidenced by the domestic and international cataract surgery volume growth trend
over the past ten years, (The National Eye Institute reported in March 2002 that
the number of blind or visually impaired  Americans is likely to double over the
next 30 years.) (ii) the entry by emerging countries  (including China,  Russia,
and other countries in Asia, Eastern Europe and Africa) into advanced technology
medical care for their populations,  (iii) increased  awareness worldwide of the
benefits  of the  minimally  invasive  phaco  cataract  procedure  and  (iv) the
introduction of technology  improvements such as the Company's laser system. The
Secretary of Health and Human  Services,  Tommy  Thompson,  stated in March 2002
that early  detection and treatment can reduce  blindness and visual  impairment
from most eye diseases and disorders.

         Marketing    Organization:    The   Company    markets   its   products
internationally  through a network of dealers and  domestically  through  direct
sales  representatives.  As of December  31,  2002,  the Company had five direct
domestic  sales  representatives  in the United  States and  sixty-five  foreign
dealers. These sales representatives are assigned exclusive territories and have
entered into contracts  with the Company that contain  performance  quotas.  The
Company also plans to continue to market its products by  identifying  customers
through internal market research, trade shows and direct marketing programs. The
Company also utilizes a Clinical Advisory Board comprised of leading  ophthalmic
surgeons  in the  United  States  and  Europe  who speak at  conventions,  train
ophthalmologists  and visit foreign doctors and dealers to promote the Company's
products.

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

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

         Manufacturing  and Raw Materials:  Currently,  the Company  maintains a
31,000 square foot facility in Salt Lake City and an 800 square foot facility in
Oceanside,  California. The Company transferred the manufacturing activities for
the Blood Flow Analyzer(TM) to San Diego from OBF 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  the
Company's  manufacturing,  marketing and engineering  capabilities.  The Company
manufactures  under systems of quality control and testing,  which complies with
the Quality System Requirements (QSR) 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
the Company's financial  purchasing  capabilities and pricing needs. The Company
manufactures  the LCP  (TM)  laser  cataract  probe  and  some  of its  surgical
instruments,  accessories  and fluidics  surgical tubing sets at its facility in
Salt Lake City.


                                       8
<PAGE>

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

Research and Development
------------------------

         The Company's  primary market for its surgical products is the cataract
surgery  market.  However,  the  Company  believes  that its laser  systems  may
potentially  have broader  ophthalmic  applications.  Consequently,  the Company
believes that a strong research and development  capability is important for the
Company's  future.  In addition to the Company's  expanded in-house research and
development  capabilities,  it has enlisted  several  recognized  and  respected
consultants  and other  technical  personnel  to act in  technical  and  medical
advisory  capacities.  Several  of  these  consultants  serve  on the  Company's
clinical  Advisory Board to provide expert and technical support for current and
proposed products, programs and services of the Company.

         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.

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.   Presently,   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,  the Company  anticipates that manufacturers of ultrasound  equipment
will continue to develop and enhance their present ultrasound  products in order
to protect their  investments  in system and cassette  technology and to protect
their  profits from sales of these  cassettes  and  accessories.  The  Company's
Precisionist Thirty Thousand(TM)  ultrasonic phaco system has the ability to use
either  reusable or  single-use  disposable  components.  The  Photon(TM)  laser
cataract  system will utilize  probes and cassette packs designed for single-use
and semi-disposable instruments priced at a level consistent with the demands of
health  care cost  containment.  This will allow the  health  care  providers  a
substantial  measure of cost  containment,  while providing the Company with the
quality control and income capability of cassette sales.

         The international market, with significantly lower medical budgets, has
not been able to justify the expense of using disposable  components.  Budgetary
constraints have limited current  manufacturers from gaining a significant share
of the international  ultrasound equipment market, and have provided a niche for
the emerging smaller companies discussed above.

         Ultrasound Equipment Manufacturers. As a relatively recent entrant into
the cataract surgical  equipment market with a newer equipment line, the Company

                                       9
<PAGE>

is  establishing  itself and, as yet, does not hold a  significant  share of the
market. The Company currently recognizes Bausch & Lomb, Alcon Laboratories,  and
Allergan  Medical  Optics as its primary  competitors  in the  ultrasound  phaco
cataract equipment market.

         Laser Equipment  Manufacturers.  To the Company's knowledge,  there are
several  other  companies  attempting  to develop  laser  equipment for cataract
surgery.  These companies can be differentiated by the laser wavelength employed
for the cataract surgery.  Based on the information  currently  available to the
Company,  Er:YAG  laser  wavelength  appears  to  offer a less  viable  means of
removing  cataracts  than the  Nd:Yag  wavelength  used by the  Photon(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  account 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.  The Company thus believes that it can compete in
the diagnostic  market place based upon the lower price and improved  diagnostic
functions of the analyzer.

Intellectual Property Protection
--------------------------------

         The Company's  cataract  surgical  products are  proprietary in design,
engineering and performance. The Company's 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  did  acquire  proprietary  intellectual  property  in the
transaction  with Humphrey  Systems when it 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 Photon(TM)  laser cataract probe is protected under a United States
patent issued in 1987 to Daniel M. Eichenbaum, M.D. and subsequently assigned to
Photomed  International,  Inc. ("Photomed") and a Japanese patent issued in 1997
to the Company for the utility  and methods of laser  ablation,  aspiration  and
irrigation of tissue through a hand-held  probe of a unique design.  The Company
secured the exclusive  worldwide  right to this patent  shortly after its issue,
and to the  international  patents pending,  from Photomed by means of a license
agreement  (the  "License  Agreement").  The  License  Agreement  was amended on
December 5, 1997 to allow  Photomed the right to conduct  research,  development
and marketing utilizing the patent in certain medical  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.  See
"Management" and "Certain Relationships and Related Transactions."

                                       10
<PAGE>

         The Blood Flow  Analyzer(TM)  has been granted a patent in the European
Economic  Community and the United States and has a patent pending in Japan. The
Dicon(TM)  Perimeter  and the  Dicon(TM)  Corneal  Topographer  each have a U.S.
patent with a wide scope of claims.

         The  Company's  trademarks  are  important to its  business.  It is the
Company's 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 the Company's key employees,  consultants and
advisors  are  required  to  enter  into a  confidentiality  agreement  with the
Company.  Most of the Company's  third-party  manufacturers  and formulators are
also bound by confidentiality agreements with the Company.

Regulation
----------

         The FDA  under  the FD&C  Act  regulates  the  Company's  surgical  and
diagnostic systems as medical devices.  As such, these devices require Premarket
clearance  or  approval  by the FDA  prior to their  marketing  and  sale.  Such
clearance or approval is premised on the  production of evidence  sufficient for
the Company to show reasonable  assurance of safety and effectiveness  regarding
its  products.  Pursuant to the FD&C 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 FD&C
Act in May  1976,  the FDA  began  classifying  medical  devices  in  commercial
distribution into one of three classes:  Class I, II or III. This classification
is based on the controls that are perceived to be necessary to reasonably ensure
the  safety and  effectiveness  of medical  devices.  Class I devices  are those
devices, the safety and effectiveness of which can reasonably be ensured through
general controls, such as adequate labeling, advertising, Premarket notification
and adherence to the FDA's Quality System  Requirements (QSR) regulations.  Some
Class I devices are exempt from some of the general  controls.  Class II devices
are those  devices  the  safety and  effectiveness  of which can  reasonably  be
assured  through the use of special  controls,  such as  performance  standards,
postmarket  surveillance,  patient  registries  and FDA  guidelines.  Class  III
devices are devices  that must receive  Premarket  approval by the FDA to ensure
their  safety and  effectiveness.  Generally,  Class III  devices are limited to
life-sustaining,  life-supporting or implantable devices, or to new devices that
have been found not to be substantially equivalent to legally marketed devices.

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

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

         The alternate method to seek approval is to obtain  Premarket  approval
from the FDA.  If a  manufacturer  or  distributor  of a medical  device  cannot
establish that a proposed device is substantially  equivalent to another legally
marketed device,  whether or not the FDA has made a determination in response to
a Section 510(k) notification, the manufacturer or distributor will have to seek
Premarket  approval for the proposed device. A PMA application  would have to be
submitted and be supported by extensive data, including preclinical and clinical

                                       11
<PAGE>

trial data to prove the safety and  efficacy  of the device.  If human  clinical
trials of a proposed  device are required and the device presents a "significant
risk," the  manufacturer  or the  distributor of the device will have to file an
IDE application with the FDA prior to commencing human clinical trials.  The IDE
application must be supported by data, typically including the results of animal
and  mechanical  testing.  If the IDE  application  is approved,  human clinical
trials may begin at a specific number of investigational sites, and the approval
letter could include the number of patients approved by the FDA. An IDE clinical
trial can be divided into  several  parts or Phases.  Sometimes,  a company will
conduct  a  feasibility  study  (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 PMA are derived  primarily  from this portion of
the  clinical  trial.  The  applicant  may  also,  upon  receipt  of  the  FDA's
permission,  consolidate one or more of such portions of the study.  Sponsors of
clinical trials are permitted to sell those devices distributed in the course of
the study,  provided such  compensation does not exceed recovery of the costs of
manufacture,  research, development and handling. Although both approval methods
may require  clinical  testing of the device in question  under an approved IDE,
the Premarket approval procedure is more complex and time consuming.

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

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

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

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

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


                                       12
<PAGE>

         Furthermore,  the  introduction  of the  Company's  products in foreign
countries may require the Company to obtain foreign regulatory  clearances.  The
Company believes that only a limited number of foreign  countries have extensive
regulatory requirements,  including France, Germany, Korea, 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 PMA, Section 510(k)
or approved IDE from the FDA is tantamount to approval in those countries. These
countries and most developing  countries have simply deferred direct  discretion
to licensed  practicing  surgeons to  determine  the nature of devices that they
will use in medical  procedures.  The  Company's  two  ultrasound  systems,  the
Photon(TM)  laser cataract system the Company is developing and the ocular blood
flow  analyzer  are all  devices,  which  require  FDA  approval.  Therefore,  a
significant  aspect  of the  acceptance  of the  devices  in the  market  is the
effectiveness  of the Company in obtaining  the necessary  approvals.  Having an
approved IDE allows the Company to export a product to qualified 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 the
Companies  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 IDE granted by the
FDA in September 1994. Although the Photon(TM) laser cataract system is uniquely
configured in an original and  proprietary  manner,  the laser system,  a Nd:YAG
laser, is not proprietary to the device or the Company and is widely used in the
medical industry and other industries as well. Of particular significance is the
fact that this particular  component has received previous market clearance from
the FDA for other ophthalmic and medical  applications.  Also of significance is
the Company's belief that the surgical treatment method used with the Photon(TM)
laser is  similar to the  current  ultrasound  cataract  treatment  employed  by
ophthalmologists.

         The Company submitted a Premarket  Notification  510(k)  application to
the FDA for the  Photon(TM)  laser  cataract  system in September  1993. The FDA
requested  clinical  support data for claims made in the 510(k),  and in October
1994 the Company  submitted an IDE application to provide for a "modest clinical
study" in order to collect  the data  required by the FDA for  clearance  of the
Photon(TM)  laser  cataract  system.  The FDA granted this IDE in May 1995 for a
Phase I Feasibility Study. The Company began human clinical trials in April 1996
and completed the Phase I study in November 1997.  The Company  started Phase II
trials in September  1998 and completed  numerous  cases of treatment  group and
control group  patients  which were included in the Company's  submission to the
FDA. The Company  received a warning  letter  dated  August 30,  2000,  from the
Office of Compliance, Center for Devices and Radiological Health of the Food and
Drug  Administration  ("FDA")  relating  to the human  clinical  trials  for its
Photon(TM)  Laser Cataract  System.  The warning letter  concerns the conditions
found by the FDA during  several  audits at the Company's  clinical  sites.  The
FDA's comments were isolated to the administrative  procedures of compiling data
from the  clinical  sites.  The Company  responded  to the  warning  letter in a
submission  dated  September  27,  2000.  In the  submission  the  Company  took
corrective action that included  submitting a revised clinical protocol and case
report  forms and  procedures  for the  collection  and  control  of data.  In a
subsequent  letter  dated  November 2, 2000 to the  Company,  the FDA  requested
clarification of two issues.

         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 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. The Company  believes all items in the
warning letter have been satisfied and the clinical trials and their data are in
good  standing.  On May 7, 2002,  the  Company  received  a letter  from the FDA
requesting  further  clinical  information.  The  Company  is in the  process of
generating the additional  clinical  information in response to the letter.  The
Company  expects to make a submission  to the FDA with the  additional  clinical
information  when  accumulated.  The Company believes the cost of generating the
additional  clinical  information will not be substantial and will not adversely
impact the results of its operations.

Employees
---------

         As of December 31, 2002, the Company had 39 full-time  employees.  This
number does not include the  Company's  manufacturer's  representatives  who are
independent  contractors rather than employees of the Company.  The Company also
utilizes  several  consultants and advisors.  There can be no assurance that the
Company will be successful in recruiting or retaining key personnel. None of the
Company's  employees  is a member  of a labor  union and the  Company  has never
experienced any business interruption as a result of any labor disputes.


                                       13
<PAGE>

Item 2. Description of Property

         The Company's  executive  offices are  currently  located at 2355 South
1070 West, Salt Lake City, Utah. This facility consists of approximately  29,088
square feet of leased office space under a three-year  lease that will expire on
March 1, 2003 with an additional three-year renewal option. These facilities are
leased  from Eden Roc,  a  California  partnership,  at a base  monthly  rate of
$21,163  plus a $3,342  monthly  common area  maintenance  fee.  Pursuant to the
lease,  the Company  pays all real estate and  personal  property  taxes and the
insurance costs on the premises.

         The  Company  renegotiated  a  three-year  lease in  January  2003 at a
monthly rate of $12,500 plus a $2,500 common area  maintenance  fee for the year
2003, with rate increases to $12,875 for 2004 and to $13,261 for 2005.

         The Company maintains a facility located at 3355 Mission Avenue,  Suite
222, Oceanside,  California.  This facility consists of approximately 800 square
feet of leased  office  space  under a two-year  lease that  expires on June 30,
2004.  These  facilities  are  leased  from San  Diego  Sunland  Partners  I., a
California limited partnership, at a monthly rate of $1,040.

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

Item 3. Legal Proceedings

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

         An action was brought against the Company in September 2000 by PhotoMed
International, Inc. and Daniel M. Eichenbaum in the Third District Court of Salt
Lake County,  State of Utah. The action involves an amount of royalties that are
allegedly due and owing to PhotoMed International,  Inc. and Dr. Eichenbaum with
respect to the sales of certain  equipment plus attorney's  fees.  Discovery has
taken place and the Company has paid  royalties of $14,736 to bring all payments
up to date through June 30, 2001.  The Company is in the process of working with
Photomed  International  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 action was brought against the Company on March 7, 2000 in the Third
District  Court of Salt Lake County,  State of Utah, by the Merrill  Corporation
that alleges that the Company owes the plaintiff  approximately $20,000 together
with  interest  thereon at the rate of 10% per annum from August 30, 1999,  plus
costs and attorney's fees. The complaint  alleges a breach of contract  relative
to printing services. The Company filed an answer to the complaint and discovery
is proceeding.  The Company  believes that the complaint  against the Company is
without merit and intends to vigorously defend against the action.

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

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

         The Company received a demand letter dated January 6, 2003 from counsel
for Westcore  STIPG,  LLC,  the landlord  with regard to the lease on our former
facilities in San Diego, California.  The letter demands payment of $10,567 plus
interest,  attorney's fees and costs for the repairs and restoration work on the
San  Diego  facilities,  after a  deduction  of the  Company's  $6,000  security
deposit. The Company rejects these claims,  contending that the security deposit
was adequate to pay for any repairs or restoration expenses on the premises.

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

         The  Company  received  demand  letters  dated  September  29, 2002 and
December  10, 2002 from  counsel for  CitiCorp,  Vendor  Finance,  Inc.  and its
successor-in-interest,  The Copy  Man,  dba TCM  Business.  The  letters  demand

                                       14
<PAGE>

payment of $49,627 plus  interest for the leasing of two copy machines that were
delivered  to the Salt  Lake  City  facilities  on or about  April of 2000.  The
majority of the amounts alleged to be owed by the Company are from the remaining
payments  on the leases.  The  Company  disputes  the  amounts  allegedly  owed,
asserting that the copy machines,  which it returned to the leasing company, did
not work properly.

         An action was brought by Dr. John Charles  Casebeer against the Company
in the Montana  Second  Judicial  District  Court,  Silver Bow County,  state of
Montana.  The  complaint  alleges  that Dr.  Casebeer  entered  into a  personal
services  contract  with the Company  memorialized  by a letter  dated April 20,
2002, with it being alleged that Dr.  Casebeer fully performed his  obligations.
Dr.  Casebeer  asserts that he is entitled to $43,750 per quarter for consultant
time and as an incentive to be granted each quarter  $5,000 in options issued at
the fair market value. An additional  purported  incentive was $50,000 in shares
of stock being issued at the time a formalized  contract was to be signed by the
parties. In the letter it is provided that at its election,  the Company may pay
the  consideration  in the form of stock or cash and that stock  would be issued
within 30 days of the close of the quarter. Prior to the litigation, the Company
issued  43,684  shares to Dr.  Casebeer.  The  referenced  letter  provides that
termination  may be made by either  party upon  giving 90 days  written  notice.
Notice was given by the Company in early  November  2002.  The Company  recently
filed its answer in defense of the  action.  Issues  include  whether or not Dr.
Casebeer fully performed as asserted.

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

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

         At the annual  shareholders  meeting  held on December  27,  2002,  the
sufficient  number of votes to constitute a quorum was not received;  therefore,
no items  were acted  upon.  The  meeting  was  adjourned  to allow time for the
shareholders  to  vote.  The  date of the  adjourned  meeting  has not yet  been
rescheduled.  The  following  matters  were  items  that were on the  ballot for
shareholder approval:  (i) the election of three directors consisting of Randall
A. Mackey,  Dr. David M. Silver and Keith D. Ignotz;  (ii) the  amendment to the
certificate  of  incorporation  to increase the number of  authorized  shares of
common stock from  40,000,000  to 80,000,000  shares;  (ii) the amendment to the
1995 Stock  Option Plan to authorize an  additional  1,000,000  shares of common
stock; (iv) the ratification of stock options granted to the outside  directors;
and (v) the  ratification  of  appointment  of  Tanner  & Co.  as the  Company's
independent accountants for the fiscal year ending December 31, 2002.


                                     PART II

Item 5. Market for Common Equity and related Stockholder Matters


         The  Authorized  capital  stock of the Company  consists of  40,000,000
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 six 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 and Series F Preferred Stock.

         The  Company's  Common  Stock and Class A Warrants  trade on The Nasdaq
SmallCap  Market under the  respective  symbols of "PMED" and "PMEDW."  Prior to
July 22, 1996,  there was no public market for the Common Stock. As of March 31,
2003 the closing sale prices of the Common Stock and Class A Warrants  were $.16
per share and $0.05 per warrant,  respectively.  The  following are the high and
low sales  prices  for the  Common  Stock and Class A  Warrants  by  quarter  as
reported by Nasdaq since January 1, 2001.

                                       15
<PAGE>

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

2001

First Quarter                $4.13      $1.50           $1.00            $.19
Second Quarter                3.54       1.61             .74             .19
Third Quarter                 2.75       1.86             .45             .16
Fourth Quarter                3.08       1.94             .39             .17

2002

First Quarter                 3.33       2.15             .38             .19
Second Quarter                3.10        .60             .32             .05
Third Quarter                 1.50        .21             .20             .08
Fourth Quarter                 .36        .12             .09             .01

2003

First Quarter                  .42        .14             .09             .01


         The  Company's  Series A Preferred  Stock,  Series B  Preferred  Stock,
Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock are not publicly  traded.  As of March 31, 2003,  there
were 765  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 and 52 record holders of
Series F 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 Stock and Series F Preferred Stock before it can pay any cash
dividend  to holders of its Common  Stock.  Dividends  paid in cash  pursuant to
outstanding  shares of the  Company's  Series A,  Series B,  Series C, Series D,
Series E and Series F Preferred Stock are only payable from surplus  earnings of
the Company and are  non-cumulative  and therefore,  no deficiencies in dividend
payments  from one  year  will be  carried  forward  to the  next.  The  Company
currently intends to retain future earnings, if any, to fund the development and
growth of the Company's  proposed  business and operations.  Any payment of cash
dividends in the future on the Common Stock will be dependent upon the Company's
financial  condition,  results  of  operations,  current  and  anticipated  cash
requirements,  plans  for  expansion,  restrictions,  if  any,  under  any  debt
obligations,  as well as other  factors  that the  Company's  Board of Directors
deems  relevant.  The Company  issued 6,764 shares of its Series A Preferred and
6,017 shares of its Series B Preferred on January 8, 1996 as a stock dividend to
Series A and Series B shareholders of record as of December 31, 1994.


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

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

General
-------

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

         The Company's ultrasound  diagnostic products include a pachymeter,  an
A-Scan,  an A/B Scan and a biomicroscope,  the technology for which was acquired
from Humphrey  Systems in 1998.  The Company  introduced  the P45 in the fall of
2000,  which combines the A/B Scan,  and the  biomicroscope  in one machine.  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

                                       16
<PAGE>

the Dicon (TM)  Perimeter  and the Dicon  (TM)  Corneal  Topographer  which were
acquired in the  acquisition  of Vismed  d/b/a  Dicon in June 2000.  The Company
purchased the inventory and design and production  rights of the SIStem(TM) 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 material and finished
goods  inventory  to bring  the  manufacturing  of this  product  in-house.  FDA
approval for the Company's  Photon(TM)  laser system for cataract  removal is in
process.

         Activities  for the twelve  months ended  December  31, 2002,  included
sales of the Company's products and related accessories and disposable products.
On May 7, 2002, the Company  received a letter from the FDA  requesting  further
clinical information. The Company is in the process of generating the additional
clinical  information  in response to the letter.  The Company  cannot market or
sell the  Photon(TM)  in the United  States  until FDA  approval is granted.  On
November 4, 2002, the Company received FDA approval for expanded  indications of
use of the Blood Flow  Analyzer(TM) for pulsatile ocular blood flow,  volume and
pulsatility  equivalence  index.  Also, the Company is continuing its aggressive
campaign to educate the payers 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  2002,  the  Company  announced  the  closure of its San Diego
facility in anticipation of the termination of the lease for that location.  The
operations were transferred to the Salt Lake City facility. The Company incurred
a reduction of force of 28 San Diego personnel.  The  consolidation was intended
to save costs and to eliminate  duplicities  in functions  and  facilities  that
occurred  with the  acquisition  of  Dicon.  The  costs of  downsizing  included
one-time  expenses of approximately  $43,000 for moving and travel costs,  which
were  charged to general  and  administrative  expenses.

         In  January  2002,  the  Company  purchased  certain  assets  and lease
obligations  of  Innovative  Optics,  Inc.  ("Innovative  Optics") by issuing an
aggregate of 1,272,825  shares of its common stock  (636,412  shares are held in
escrow  pending  the result of a project  to reduce  the cost of the  disposable
razor  blades  utilized  by  the  microkeratome,   which  was  acquired  in  the
transaction),  warrants to purchase 250,000 shares of the Company's 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 ("SFAS No.
141").

         The Company acquired from Innovative Optics, the raw materials, work in
process and finished goods  inventories.  Additionally,  it acquired the patents
and trade name  associated  with the product,  the  furniture  and  equipment of
Innovative Optics used in the manufacturing process of the microkeratome console
and  the  inspection  and  packaging  of  the  disposable  blades.  The  Company
subsequently issued 477,039 shares of common stock that were held in escrow at a
value of  $630,000,  based in the  market  price of such  shares  on the date of
issuance. This amount was charged to in-process research and development because
the issuance of such shares related to the continuing  research and  development
of the  microkeratome  blades.  . The Company was  unsuccessful  in reducing the
costs of the blade  production  process  and was unable to supply  blades to the
user base.  The  Company  terminated  its  marketing  and sales  efforts for the
microkeratome, but it continues to search for an alternative source of blades or
a purchaser of the product line.  Because the Company  determined  that it could
not manufacture  the blades to support its customer base at an economical  cost,
in accordance with SFAS No. 142, due to the lack of projected future cash flows,
during 2002 the Company  recorded an impairment  expense of  $2,082,000  for the
remaining book value of property and equipment and intangible  assets  purchased
from Innovative  Optics. In addition,  the Company recorded an inventory reserve
for the remaining  inventory  purchased from Innovative  Optics of approximately
$160,000.

         On  September  19,  2002,  the  Company  completed a  transaction  with
International Bio-Immune Systems, Inc., a Delaware corporation ("IBS"), in which
it acquired 2,663,254, or 19.9% of the outstanding shares of IBS and warrants to
purchase 1,200,000 shares of common stock of IBS at $2.50 per share for a period
of two years,  through  the  exchange  and  issuance  of  736,945  shares of the
Company's  common stock the lending of 300,000  shares of the  Company's  common
stock to IBS, and the payment of certain expenses of IBS through the issuance of
an  aggregate of 94,000  shares of our common stock to IBS and its counsel.  The
issuance  of  736,945  shares  were  valued  based  on the  market  price of the
Company's  common  stock  on the  date of the  transaction  and  resulted  in an
investment in IBS, when combined with a cash investment of $65,000 made in 2000,
of $879,000. The 300,000 shares were also valued at the market price on the date
of issuance and were  recorded as a stock  subscription  receivable  of $294,000
because such shares will either be paid for or returned in the future.  IBS is a
privately held biotechnology based, cancer diagnostic and immunotherapy  company
with potential  clinically  effective products for the diagnosis,  treatment and
imaging of patients with major tumor types (e.g. colon, lung,  cervix,  pancreas
and  breast).  IBS is  located in Great  Neck,  New York.  IBS does not  produce
significant revenues as its products have not received FDA approval.  Due to the
uncertainty  of future cash flows and the fact that the  products  have not been
approved  by the FDA,  The  Company  was  unable  to  support  the  value of the
investment  by  substantiated  methods and  determined  that the  likelihood  of

                                       17
<PAGE>

recovery of its investment was remote. . Therefore, in accordance with generally
accepted  accounting  principles  , the  investment  of $879,000  was charged to
impairment expense.

         The tragic events of September  11, 2001  combined with a  recessionary
trend  in the  economy  have  had a  negative  effect  on the  Company's  sales.
International  attendance at the largest trade show of the year in November 2001
was  down  markedly.   The  absence  of  these  professionals   eliminates  many
opportunities  for the  Company to  demonstrate  and sell its  products  to this
sector.  It is  difficult  to quantify how much an effect that these events have
had on the Company,  but management  believes that the Company has suffered some
negative  impact due to  September  11, 2001 and the  downturn in the economy in
general, which may continue for an indefinite period of time. .

Results of Operations
---------------------

Fiscal Year Ended December 31, 2002 Compared to Fiscal Year Ended December 31,
------------------------------------------------------------------------------
2001:
-----

         Consolidated  sales for the twelve months ended  December 31, 2002 were
$5,368,000 compared to $7,919,000 for the same period for 2001,  approximately a
32%  decrease  due  principally  to  a  decline  in  sales  of  the  Blood  Flow
Analyzer(TM).  The Company has  experienced  a general  decline in sales  during
2002. The reduction of its domestic sales force, competition and the downturn in
the economy are all factors contributing to the decline in sales.  Additionally,
certain  payers  have  elected  not to  reimburse  the  doctors  per the  common
procedure  terminology  ("CPT")  code  assigned to the  Company by the  American
Medical  Association,  which  has  caused  decreased  sales  of the  Blood  Flow
Analyzer(TM)  in 2002.  The  revenues  generated  from  sales of the Blood  Flow
Analyzer(TM)  were $459,000 and slightly less than $2,000,000,  or 9% and 25% of
total revenues for 2002 and 2001, respectively. On November 4, 2002, the Company
received  FDA  approval  for  expanded  indications  of use of  the  Blood  Flow
Analyzer(TM) for pulsatile ocular blood flow, volume and pulsatility equivalence
index.  Also, the Company is continuing  its 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
providers. This effort should have a positive effect on sales.

         Sales of the Ultrasonic  Biomicroscope  were  approximately  $1,361,000
during 2002, or 25% of total annual  revenues,  compared to sales of $1,584,000,
or 20% of  total  revenues  for the  same  period  of  2001.  Revenues  from the
ultrasonic  product line,  not including the Ultrasonic  Biomicroscope,  totaled
approximately $606,000 during 2002, or 11% of total annual revenues, compared to
$646,000, or 8% of total revenues for the same period last year. The Company has
seen a recent interest in certain of its ultrasound  products and is endeavoring
to take advantage of this interest to the best of its capabilities.

         Sales of the perimeter and corneal  topographer  decreased by $649,000,
from $2,128,000 in 2001, or 27% of total revenues to $1,479,000, or 27% of total
revenues. The perimeter and corneal topographer,  both mature products, declined
in sales in 2001 from those in 2000 by approximately  37%. One of the strategies
of the  Dicon/Paradigm  merger in June of 2000 was to piggyback  these  products
with the phaco surgical line to achieve  penetration into the ophthalmic market,
in addition to the optometric market,  resulting in a growth in the sales of the
Dicon  products.  This  anticipated  growth has not occurred and may continue to
decrease in the future or remain at a lower level than originally expected.

         The phaco surgical line and related  disposable  products accounted for
approximately  $596,000,  11% of total  revenues  for the  twelve  months  ended
December  31, 2002  compared to $641,000,  or 8% of total  revenues for the same
period in 2001.  The Company  concentrated  much of its  marketing  focus on its
diagnostic  products (Blood Flow  Analyzer(TM) and the Ultrasonic  Biomicroscope
Workstation   or  P45)  during  2002  and  2001.   The  Company  also  continued
aggressively  in its efforts to obtain FDA  approval  for its  Photon(TM)  laser
system.  The Company sold one Photon(TM)  laser system in 2002 and none in 2001.
The  Photon(TM)  cannot be sold within the United  States  until FDA approval is
received. International sales of the Photon(TM) have not occurred due in part to
the lack of FDA approval. Although not required in the international market, the
Company  believes many potential  customers rely on the FDA approval of products
before purchasing.

         The gross profit on sales for the fiscal year 2002 was approximately 22
% compared to 45% for the same period in 2001.  The profit margin decline can be
attributed principally to an increase of $1,755,000 in the reserved for obsolete
inventory. Due to the lack of significant sales volume of certain products, many
inventory  items were  reduced in cost to  reflect  obsolescence,  technological
advances  and  product  enhancements.  Of this  amount,  approximately  $160,000
related to inventory purchased from Innovative Optics in 2002, and the remainder
was mainly related to the Mentor  surgical line of products,  namely the SIStem,
Odyssey and the  Surg-E-trol,  which have not experienced  significant  sales in
2002 and 2001. In addition,  the Company reduced sales prices during the year in

                                       18
<PAGE>

an attempt to increase sales, which has reduced its margins. International sales
contributed  a greater  portion  in 2002,  compared  to 2001,  which  sales also
produce lower gross margins.

         Marketing  and  selling  expenses  decreased  $1,967,000,  or  41%,  to
$2,795,000 for the twelve months ended December 31, 2002 from $4,762,000 for the
comparable  period in 2001. The Company's sales force decreased to five domestic
sales people during 2002  resulting in a reduction of personnel and travel costs
of $1,356,000 from the prior year. Marketing efforts were reduced, including the
number of trade shows  attended,  which resulted in a cost reduction of $611,000
during the fiscal year ended  December 31, 2002,  compared to the same period in
2001.

         General and administrative expenses decreased by $1,423,000, or 28%, to
$3,702,000 for the 2002 fiscal year from $5,125,000 for the comparable period in
2001, due  principally to the cost reduction  program  implemented  during 2002.
During the twelve months ended  December 31, 2002 compared to the same period in
2001, payroll related costs decreased by $197,000, travel related costs declined
$139,000 and outside  consulting  costs  decreased  lower by  $932,000.  General
operating  costs were reduced by $169,000 due  principally to the closure of the
San Diego facility.

         Research,  development and service expenses (which includes  production
and  manufacturing  support and the service  department  expenses)  decreased by
$128,000,  or 4%, to $2,819,000  for the twelve  months ended  December 31, 2002
from $2,947,000 for the same period in 2001. The cost reduction  program and the
closure of the San Diego office  resulted in lower payroll  related  expenses of
$927,000 in 2002  compared  to the same period last year.  Pursuant to the asset
purchase  agreement  with  Innovative  Optics,  Inc., the Company issued 477,000
shares of common  stock,  which was valued at  $630,000  based upon the  current
market  value of the stock at the time of issue.  This  amount was  recorded  as
in-process  research and  development  costs related to the blade cost reduction
project.  No such  expense was  recorded  in 2001.  Consulting  fees  related to
software development and enhancements  increased by $71,000 during 2002 compared
to the year ended December 31, 2001.

         The Company  recognized  impairment  expenses of $2,961,000  during the
year ended December 31, 2002  principally  due to the  requirements  of SFAS No.
142,  which  requires  impairment of intangible  assets if the valuation  cannot
support the asset value recorded.  The Company acquired the assets of Innovative
Optics, Inc. in January 2002. The principal product was a microkeratome with the
corresponding  disposable  blades.  This  acquisition  resulted  in  goodwill of
$1,949,000.  The Company was  unsuccessful  in producing the blades for the user
base at a cost that was  economically  feasible.  The  original  process  proved
unworkable and unprofitable.  The Company decided not to continue supporting the
product,  thus creating an event that resulted in impairing the intangible asset
as  recorded at the time of purchase of  $1,949,000.  In  addition,  the Company
impaired the fixed assets acquired from Innovative Optics, Inc. in the amount of
$30,000.

         On  September  19,  2002,  the  Company  completed a  transaction  with
International Bio-Immune Systems, Inc., a Delaware corporation ("IBS"), in which
it acquired 2,663,254, or 19.9% of the outstanding shares of IBS and warrants to
purchase 1,200,000 shares of common stock of IBS at $2.50 per share for a period
of two years,  through  the  exchange  and  issuance  of  736,945  shares of the
Company's  common stock the lending of 300,000  shares of the  Company's  common
stock to IBS, and the payment of certain expenses of IBS through the issuance of
an  aggregate of 94,000  shares of our common stock to IBS and its counsel.  The
issuance  of  736,945  shares  were  valued  based  on the  market  price of the
Company's  common  stock  on the  date of the  transaction  and  resulted  in an
investment in IBS, when combined with a cash investment of $65,000 made in 2000,
of $879,000. The 300,000 shares were also valued at the market price on the date
of issuance and were  recorded as a stock  subscription  receivable  of $294,000
because such shares will either be paid for or returned in the future.  IBS is a
privately held biotechnology based, cancer diagnostic and immunotherapy  company
with potential  clinically  effective products for the diagnosis,  treatment and
imaging of patients with major tumor types (e.g. colon, lung,  cervix,  pancreas
and  breast).  IBS is  located in Great  Neck,  New York.  IBS does not  produce
significant revenues as its products have not received FDA approval.  Due to the
uncertainty  of future cash flows and the fact that the  products  have not been
approved  by the FDA,  the  Company  was  unable  to  support  the  value of the
investment  by  substantiated  methods and  determined  that the  likelihood  of
recovery of its investment was remote.  Therefore,  in accordance with generally
accepted  accounting  principles  the  investment  of  $879,000  was  charged to
impairment expense

         Net interest  expense was $36,000  during 2002 compared to net interest
income of $7,000 for the twelve  months ended  December 31, 2001 due to interest
expense  incurred  from capital  leases for the purchase of certain fixed assets
and due to  smaller  amounts  of cash on  deposit  during  2002.  Other  expense
included a charge to expense in 2001of  $812,000  representing  the value of the
350,000  shares of common stock issued to Mentor  Corporation in settlement of a
legal action brought against the Company during 2001.

         The  Company  incurred a net loss of  $11,155,000,  or ($.63) per share
based upon 17,736,0000  weighted  average shares  outstanding for the year ended
December 31, 2002. This compares to a net loss applicable to common shareholders
of $13,044,000, or ($.98) per share, based on 13,245,000 weighted average shares
outstanding  for the year ended  December 31, 2001.  For the year ended December
31, 2001, the net loss attributable to common shareholders  included a reduction
of $2,901,000 in connection with two private  placements  offered by the Company
in 2001  ($2,587,000  was  attributable  to the  beneficial  conversion  feature

                                       19
<PAGE>

included in the Series E and Series F Preferred  Stock  offerings  and  $314,000
represented  the  computed  value of the warrants  associated  with the Series E
Preferred Stock offering).  No such calculation was included in the net loss for
the fiscal year 2002.  The net loss for 2002  included  $2,961,000 of impairment
expense  due  principally  to the write down of  intangible  assets in excess of
current valuation.

Fiscal Year Ended December 31, 2001 Compared to Fiscal Year Ended December 31,
------------------------------------------------------------------------------
2000:
-----

         Consolidated  sales for the twelve months ended  December 31, 2001 were
$7,919,000 compared to $7,989,000 for the same period for 2000,  approximately a
1% decrease.  The Company  restructured  its outside  sales force during 2001 to
provide nationwide  coverage.  This resulted in a slowdown of sales activity due
to the time it took to hire and train the new  personnel.  The Company  believes
that sales activity was hampered for about a ninety day period. The Company also
launched in earnest the sales of the Blood Flow  Analyzer(TM)  during the second
quarter of 2001 after receiving  authorization  to use a CPT code which provides
for a  reimbursement  to doctors.  The Company  believes that the  investment in
time, training and resources in developing the sales force will provide positive
results in the future despite a loss of sales activity in 2001.

         Sales of the Blood Flow Analyzer(TM) was the single largest contributor
to total  2001  revenues  generating  slightly  less  than  $2,000,000  (25%) of
revenues.  Sales in 2000 were not significant as the major marketing efforts did
not take place until 2001. Sales of the P45 ultrasonic Biomicroscope workstation
accounted for approximately 9% of total 2001 revenues, or $686,000,  compared to
approximately a 3% contribution to total 2000 revenues, or $219,000. The Company
introduced  the P45 in the fall of 2000  resulting  in a full  year's of selling
activity  during 2001 as compared to a few months during 2000.  The remainder of
the ultrasonic product line (UBM,  A-Scan, A/B scan and Pachymeter)  contributed
$1,543,000 in revenues in 2001 (19%) compared to $2,027,000 in 2000 (25%).

         Sales of the perimeter and corneal topographer decreased by $1,283,000,
from  $3,411,000  in 2000 (43%) to $2,128,000  (27%).  The perimeter and corneal
topographer,  both mature products, declined in sales in 2000 from those in 1999
by approximately 20%. One of the strategies of the Dicon/Paradigm merger in June
of 2000 was to piggyback  these products with the phaco surgical line to achieve
penetration into the ophthalmic  market,  in addition to the optometric  market,
resulting  in a growth  in the  sales of the Dicon  products.  This  anticipated
growth has not  occurred and may continue to decrease in the future or remain at
a lower level than originally expected.

         The phaco surgical line and related  disposable  products accounted for
approximately  $641,000  (8%) of total  revenues  for the  twelve  months  ended
December 31, 2001 compared to  $1,144,000  (14%) in revenues for the same period
in 2000. The Company  concentrated much of its marketing focus on its diagnostic
products (Blood Flow Analyzer(TM) and the Ultrasonic  Biomicroscope  Workstation
or P45) during 2001. The Company also continued  aggressively  in its efforts to
obtain FDA  approval  for its  Photon(TM)  laser  system.  The  Company  did not
recognize  any sales of its  Photon(TM)  laser  system in 2001.  The  Photon(TM)
cannot be sold  within  the  United  States  until  FDA  approval  is  received.
International  sales of the  Photon(TM) did not occur due in part to the lack of
FDA approval.  Although not required in the  international  market,  the Company
believes many potential  customers  rely on the FDA approval of products  before
purchasing.

         The gross  profit on sales for the fiscal  year 2001 was  approximately
38% compared to 17% for the same period in 2000.  The sharp  difference  was due
principally  to an  inventory  write-down  of  $1,596,000  during  2000  to  net
realizable  value.  Gross profit on sales for the fiscal year ended December 31,
1999 was 38%, which indicates a more consistent trend, with the exception of the
inventory adjustment that was recognized in 2000.

         Marketing  and  selling  expenses  increased   $812,000,   or  21%,  to
$4,762,000 for the twelve months ended December 31, 2001 from $3,950,000 for the
comparable  period in 2000. The Company  increased costs for enhanced  tradeshow
participation  of $355,000  due mainly to  expenses  incurred in relation to the
annual meeting of the American  Academy of  Ophthalmology in November 2001. This
is the  largest  event in the country in which the  Company  participates.  This
increase was also partly due to the  addition of fifteen  direct sales people to
cover  the  United  States  rather  than  working  through  distributors  adding
approximately  $382,000 of  additional  expenses.  The hiring of the sales force
took place  during the second and third  quarters  of 2001 and will  result in a
higher  level of expenses in the form of salaries and travel  reimbursements  in
future operating periods.

         General and administrative  expenses  decreased by $307,000,  or 6%, to
$5,125,000 for the 2001 fiscal year from $5,432,000 for the comparable period in
2000. The Company had recognized  $1,883,000 in noncash transactions during 2000
by granting  warrants to  nonemployees  as payment for  services,  stock bonuses
granted to officers of the Company and stock granted to  nonemployees as payment
for services. During 2001, the Company recorded $558,000 of noncash transactions
from  granting  warrants  and stock to  nonemployees  for  consulting  services.
Consulting  expenses paid in cash for financial and investor  relations services
increased by  approximately  $165,000 over the  comparable  period in 2000.  The
Company  initiated  procedures  to  cancel  or not to renew  outside  consulting
agreements during the fourth quarter of 2001.

                                       20
<PAGE>

         Research,  development and service expenses  increased by $980,000,  or
69%, to $2,405,000 for the twelve months ended December 31, 2002 from $1,425,000
for the  same  period  in  2001.  This  increase  was due  principally  to added
personnel in engineering,  in service and in manufacturing support. As a result,
payroll and benefits expense increased by a total of $692,000 in anticipation of
sales  demands,  which  did not  occur  as  expected.  Personnel  in this  area,
therefore,  were  affected  by the  layoffs  at the  end of  December  2001 in a
strategic  decision  to retain and focus  resources  in the sales and  marketing
area.  Consulting  expense and purchases of sample parts and tooling  related to
new product development increased by $182,000, and $145,000,  respectively.  The
main development  project in 2001 was postponed to concentrate  sales efforts on
the Company's existing product line and to aggressively  pursue FDA approval for
its Photon(TM) laser.

         Net interest  income was  approximately  $6,000 during 2001 compared to
$130,000 for the twelve months ended December 31, 2000 due to increased interest
expense  incurred by entering  into  capital  leases for the purchase of certain
fixed assets and due to smaller  amounts of cash on deposit  during 2001.  Other
expense  included a charge to expense of $812,000  representing the value of the
350,000  shares of common stock issued to Mentor  Corporation in settlement of a
legal action brought against the Company.

         The Company incurred a net loss of $13,044,000, or $.98 per share based
upon 13,245,0000 weighted average shares outstanding for the year ended December
31, 2001. This compares to a net loss of $9,305,000, or $.81 per share, based on
11,547,000  weighted average shares  outstanding for the year ended December 31,
2000. The increase in the net loss  attributable to common  shareholders was due
principally  to  losses  recognized  in  accordance  with  Financial  Accounting
Standards Board Statement Number 123 ("SFAS 123") in connection with two private
placements  offered  by the  Company  in  2001  of  $2,901,000  ($2,587,000  was
attributable to the beneficial  conversion  feature included in the Series E and
Series F Preferred Stock  offerings and $314,000  represented the computed value
of the warrants associated with the Series E Preferred Stock offering).  No such
expense  calculation  was included in the net loss for the fiscal year 2002. The
Mentor  settlement  charge of $812,000  included in the net loss for 2001 was an
increase over the comparable period a year ago.

Liquidity and Capital Resources
-------------------------------

         The Company used cash in operating  activities of $2,872,000 for twelve
months ended  December 31, 2002,  compared to  $8,799,000  for the twelve months
ended December 31, 2001. The Company decreased its inventory balance by $952,000
during the year by  decreasing  purchases as compared to 2001 and  utilizing the
inventory on hand in its  production.  The Company in  anticipation  of building
product to meet sales demand, more specifically, for the Blood Flow Analyzer and
the P45 ultrasonic Biomicroscope  workstation plus purchased significant amounts
of inventory in 2001. Trade  receivables,  decreased by $1,473,000 mainly due to
the increased  collection of outstanding accounts and to lower sales during 2002
.. The company  used cash in  investing  activities  of  $299,000  for the twelve
months  ended  December  31,  2002,  compared to $246,000  for the year 2001 due
mainly to less fixed asset additions  during 2002 compared to the same period in
2001.  Net cash  provided by financing  activities  for the twelve  months ended
December  31,  2002 was  $503,000,  compared  to  $9,553,000  for the year ended
December 31, 2001.  The Company  received  $8,965,000  in net proceeds  from two
private  placements,  the Series E and Series F Preferred Stock offerings during
2001,  compared to net  proceeds  from one private  placement of common stock in
2002 of $562,000. The Company also sold 392,000 shares of its common stock under
the $20,000,000  equity line for $673,000 in 2001 reducing the amount  available
under the equity line to  approximately  $18,500,000.  No sales of common  stock
under the equity line  occurred  during 2002.  Debt  reduction  for the year was
$59,000.

         The Company had raised approximately $1,500,000 during the fiscal years
ended December 31, 2000 and 2001 through the $20,000,000  equity line of credit.
As of December 31,  2002,  approximately  $18,500,000  was  available  under the
equity line of credit subject to the NASDAQ trading  limitations.  Management is
uncertain  whether or not the  combination of existing  working  capital and the
private equity line of credit will be sufficient to assure  continuation  of the
Company's  operations  through  December  31,  2003.  The Company will also seek
funding to meet its working  capital  requirements  through other  collaborative
arrangements and strategic alliances, additional public offerings and/or private
placements of its securities or bank borrowings,  if necessary.  There can be no
assurance,  however, that additional funds, if required,  will be available from
any of the foregoing or other sources on favorable terms.

         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 13% of total  outstanding  receivables as of
December  31,  2001,  compared  to 27% of total  outstanding  receivables  as of
December  31,  2002.  Much  of the  increase  in the  allowance  relates  to the
Company's  outstanding   receivable  balance  pertaining  to  its  international
dealers.  The  downturn  in the economy  worldwide  has  resulted  in  increased
difficulty in collecting certain accounts.  Certain  international  dealers have
some aged unpaid invoices that have not been resolved. The Company has addressed
its credit  procedures  and  collection  efforts  during 2002 and has instituted
changes that require more payments at the time of sale via letters of credit and
not on a credit term basis.

                                       21
<PAGE>

         The Company  carries an allowance for obsolete  inventory of $2,126,000
as of December 31, 2002, or approximately 45% of total inventory. This inventory
reserve was increased by $1,755,000 during 2002 mainly due to sales declines and
the  discontinuance  of the  microkeratome  purchased from Innovative  Optics in
2002.  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 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 its Photon  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.

         At December 31, 2002, the Company had net operating loss  carryforwards
(NOLs) of  approximately  $41,000,000  and research and  development  tax credit
carryforwards of approximately  $34,000.  These  carryforwards  are available to
offset future taxable  income,  if any, and began to expire in the year 2001 and
extend for twenty years. The Company's  ability to use its NOLs to offset future
income  is  dependent  upon the tax laws in  effect  at the time 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 changes of
ownership.

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 the  Company  experienced
unfavorable profit reductions due to currency exchange fluctuations or inflation
with its foreign customers. All sales transactions to date have been denominated
in US Dollars.

Impact of New Accounting Pronouncements
---------------------------------------

         In June  2001,  the  FASB  issued  Statement  of  Financial  Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations". This Statement
addresses financial accounting and reporting for obligations associated with the
retirement of tangible  long-lived  assets and the associated  asset  retirement
costs.  This Statement is effective for financial  statements  issued for fiscal
years  beginning  after  June  15,  2002.  This  Statement  addresses  financial
accounting and reporting for the disposal of long-lived  assets.  The Company is
currently assessing the impact of this statement.

         In April  2002,  the FASB  issued  Statement  of  Financial  Accounting
Standards  (SFAS) No. 145,  "Rescission  of FASB  Statements  No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical  Corrections."  This statement
requires the classification of gains or losses from the  extinguishments of debt
to meet the criteria of Accounting  Principles  Board Opinion No. 30 before they
can be  classified  as  extraordinary  in the  income  statement.  As a  result,
companies that use debt  extinguishment  as part of their risk management cannot
classify  the  gain or loss  from  that  extinguishment  as  extraordinary.  The
statement   also   requires   sale-leaseback   accounting   for  certain   lease
modifications that have economic effects similar to sale-leaseback transactions.
The Company does not expect  Adoption of SFAS No. 145 did have a material impact
on financial position or future operations.

         In June 2002,  the FASB  issued  SFAS No.  146,  "Accounting  for Costs
Associated with Exit or Disposal Activities." This standard,  which is effective
for exit or disposal activities  initiated after December 31, 2002, provides new
guidance on the recognition,  measurement and reporting of costs associated with
these activities.  The standard requires companies to recognize costs associated
with exit or disposal  activities when they are incurred rather than at the date
the company commits to an exit or disposal plan. The adoption of SFAS No. 146 by
the Company is not expected to have a material impact on the Company's financial
position or future operations.

         In  December  2002,  the FASB  issued  SFAS  No.  148  "Accounting  for
Stock-Based   Compensation--Transition  and  Disclosure--an  amendment  of  FASB
Statement  No.  123,"  which is  effective  for all fiscal  years  ending  after
December 15, 2002. SFAS No. 148 provides alternative methods of transition for a
voluntary  change to the fair value based method of accounting  for  stock-based
employee  compensation  under SFAS No. 123 from the intrinsic value based method
of accounting prescribed by Accounting Principles Board Opinion No. 25. SFAS 128
also changes the disclosure requirements of SFAS 123, requiring a more prominent
disclosure of the pro-forma  effect of the fair value based method of accounting
for  stock-based  compensation.  The adoption of SFAS No. 148 by the Company did
not have a  material  impact  on the  Company's  financial  position  or  future
operations.

         In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation  No. 46,  Consolidation of Variable Interest Ethics (FIN No. 46),
which  addresses  consolidation  by business  enterprises  of variable  interest
entities.  FIN No. 46 clarifies the application of Accounting  Research Bulletin
No. 51, Consolidated  Financial Statements,  to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have  sufficient  equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN No. 46
applies  immediately  to variable  interest  entities  created after January 31,
2003,  and to  variable  interest  entities  in which an  enterprise  obtains an
interest  after that date. It applies in the first fiscal year or interim period
beginning  after  June 15,  2003,  to  variable  interest  entities  in which an
enterprise  holds a variable  interest that it acquired before February 1, 2003.
The Company does not expect to identify any variable interest entities that must

                                       22
<PAGE>

be  consolidated.  In the event a variable  interest  entity is identified,  the
Company does not expect the requirements of FIN No. 46 to have a material impact
on its financial condition or results of operations.

         In November 2002, the FASB issued  Interpretation  No. 45,  Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of Indebtedness  of Others (FIN No. 45). FIN No. 45 requires  certain
guarantees  to be  recorded  at fair  value,  which is  different  from  current
practice  to record a  liability  only when a loss is  probable  and  reasonably
estimable,  as those terms are defined in FASB  Statement No. 5,  Accounting for
Contingencies.  FIN No. 45 also  requires  the Company to make  significant  new
disclosures  about  guarantees.  The disclosure  requirements  of FIN No. 45 are
effective for the Company in the first quarter of fiscal year 2003. FIN No. 45's
initial  recognition  and initial  measurement  provisions  are  applicable on a
prospective  basis to guarantees issued or modified after December 31, 2002. The
Company's  previous  accounting for  guarantees  issued prior to the date of the
initial application of FIN No. 45 will not be revised or restated to reflect the
provisions  of FIN No 45. The Company does not expect the adoption of FIN No. 45
to have a material impact on its  consolidated  financial  position,  results of
operations or cash flows.


Item 7. Financial Statements

                                       23
<PAGE>


PARADIGM MEDICAL INDUSTRIES, INC.
Financial Statements
December 31, 2002 and 2001
<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Index to Financial Statements

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




                                                                          Page
                                                                          ----


Report of Tanner + Co.                                                    F-2


Balance Sheet                                                             F-3


Statement of Operations                                                   F-4


Statement of Stockholders' Equity                                         F-5


Statement of Cash Flows                                                   F-6


Notes to Financial Statements                                             F-7


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


<PAGE>
                                                    INDEPENDENT AUDITORS' REPORT



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


We have audited the balance  sheet of Paradigm  Medical  Industries,  Inc.  (the
Company) as of December  31, 2002,  and the related  statements  of  operations,
stockholders'  equity,  and cash flows for the years ended December 31, 2002 and
2001.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of Paradigm Medical  Industries,
Inc. as of December 31,  2002,  and the results of its  operations  and its cash
flows  for the years  ended  December  31,  2002 and 2001,  in  conformity  with
accounting principles generally accepted in the United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will  continue as a going  concern.  As discussed in note 2, the Company
has incurred  significant  losses, and has been unable to generate positive 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 + CO.
Salt Lake City, Utah
March 11, 2003

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

                                                      PARADIGM MEDICAL INDUSTRIES, INC.
                                                                          Balance Sheet

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


        Assets
        ------
<S>                                                                   <C>
Current assets:
  Cash                                                                $         194,000
  Receivables, net                                                              944,000
  Inventories, net                                                            2,649,000
  Prepaid and other current assets                                               81,000
                                                                      -----------------

        Total current assets                                                  3,868,000

Intangibles, net                                                                910,000
Property and equipment, net                                                     495,000
Other assets                                                                     16,000
                                                                      -----------------

        Total                                                         $       5,289,000
                                                                      -----------------

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

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

Current liabilities:
  Accounts payable                                                    $         904,000
  Accrued liabilities                                                         1,414,000
  Current portion of capital lease obligations                                   44,000
                                                                      -----------------

        Total current liabilities                                             2,362,000
                                                                      -----------------

Capital lease obligations, net of current portion                                80,000
                                                                      -----------------

Commitments and contingencies                                                         -

Stockholders' equity:
  Preferred stock $.001 par value, 5,000,000 shares authorized,
   27,385 shares issued and outstanding (aggregate liquidation
   preference of $6,726,000)                                                          -
  Common stock, $.001 par value, 40,000,000 shares authorized,
   21,954,238 shares issued and outstanding                                      22,000
  Additional paid-in capital                                                 56,775,000
  Stock subscription receivable                                                (294,000)
  Accumulated deficit                                                       (53,656,000)
                                                                      -----------------

        Total stockholders' equity                                            2,847,000
                                                                      -----------------

        Total liabilities and stockholders' equity                    $       5,289,000
                                                                      -----------------



---------------------------------------------------------------------------------------
See accompanying notes to financial statements.                                     F-3

</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                                            PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                      Statement of Operations

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

                                                                             2002                2001
                                                                      ---------------------------------------
<S>                                                                   <C>                  <C>
Sales                                                                 $       5,368,000    $        7,919,000

Cost of sales                                                                 4,210,000             4,370,000
                                                                      ---------------------------------------

        Gross profit                                                          1,158,000             3,549,000
                                                                      ---------------------------------------

Operating expenses:
  General and administrative                                                  3,702,000             5,125,000
  Marketing and selling                                                       2,795,000             4,762,000
  Research, development and service                                           2,819,000             2,947,000
  Impairment of assets                                                        2,961,000                     -
                                                                      ---------------------------------------

        Operating loss                                                      (11,119,000)           (9,285,000)

Other income (expense):
  Interest income                                                                10,000                48,000
  Interest expense                                                              (46,000)              (41,000)
  Other income (expense)                                                              -              (865,000)
                                                                      ---------------------------------------

        Total other income (expense)                                            (36,000)             (858,000)
                                                                      ---------------------------------------

        Loss before provision for income taxes                              (11,155,000)          (10,143,000)

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

        Net loss                                                      $     (11,155,000)   $      (10,143,000)
                                                                      ---------------------------------------

Beneficial conversion feature on
   Series E preferred stock                                                           -            (2,587,000)
Deemed dividend from Series E
   preferred detachable warrants                                                      -              (314,000)
                                                                      ---------------------------------------

Net loss applicable to common shareholders                            $     (11,155,000)   $      (13,044,000)
                                                                      ---------------------------------------

Loss per common share - basic and diluted                             $           (0.63)   $            (0.98)
                                                                      ---------------------------------------

Weighted average common shares - basic and diluted                           17,736,000            13,245,000
                                                                      ---------------------------------------

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

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

                                                                                              Years Ended December 31, 2002 and 2001
------------------------------------------------------------------------------------------------------------------------------------




                                          Preferred       Common Stock     Additional   Treasury Stock     Stock
                                            Stock      -------------------   Paid-in   ----------------  Subscription  Accumulated
                                        (see note 10)  Shares      Amount    Capital     Shares  Amount  Receivable       Deficit
                                         -------------------------------------------------------------------------------------------

<S>                                      <C>          <C>         <C>       <C>            <C>    <C>    <C>          <C>
Balance, January 1, 2001                 $        -   12,611,189  $ 13,000  $ 41,157,000    -     $ -    $   (8,000)  $ (32,358,000)

Issuance of Series E preferred stock
  for cash                                        -            -         -     4,607,000    -       -             -               -

Issuance of Series F preferred stock
  for cash                                        -            -         -     4,358,000    -       -             -               -

Conversion of preferred stock                     -    1,758,617     2,000        (2,000)   -       -             -               -

Issuance of common stock for:
  Cash                                            -      328,725         -       673,000    -       -             -               -
  Settlement of litigation                        -      350,000         -       812,000    -       -             -               -
  Services                                        -       24,000         -        48,000    -       -             -               -
  Compensation                                    -            -         -             -    -       -         8,000               -

Issuance of stock options and warrants
  for services                                    -            -         -       503,000    -       -             -               -

Net loss                                          -            -         -             -    -       -             -     (10,143,000)
                                         -------------------------------------------------------------------------------------------

Balance, December 31, 2001                        -   15,072,531    15,000    52,156,000    -       -             -     (42,501,000)

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

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

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

Balance, December 31, 2002               $        -   21,954,238  $ 22,000  $ 56,775,000    -     $ -    $ (294,000)  $ (53,656,000)
                                         -------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.                                                                                  F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                              PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                        Statement of Cash Flows

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

                                                                                    2002             2001
                                                                            -----------------------------------
<S>                                                                              <C>              <C>
Cash flows from operating activities:
  Net loss                                                                       $ (11,155,000)   $ (10,143,000)
  Adjustments to reconcile net loss to net cash
   used in operating activities:
     Depreciation and amortization                                                     624,000          671,000
     Issuance of common stock for compensation                                               -            8,000
     Issuance of common stock for services                                             183,000           48,000
     Issuance of common stock for in process research and development                  630,000
     Issuance of stock option/warrant for services                                           -          503,000
     Common stock issued for litigation settlement                                      34,000          812,000
     Recovery of bad debt expense                                                      (23,000)               -
     Provision for losses on inventory                                               1,755,000                -
     Impairment of intangibles and other assets                                      2,961,000                -
     (Gain) loss on disposal of assets                                                       -           23,000
     (Increase) decrease in:
       Receivables                                                                   1,473,000         (787,000)
       Inventories                                                                     952,000         (684,000)
       Prepaid and other assets                                                        255,000         (152,000)
     Increase (decrease) in:
       Accounts payable                                                               (313,000)         530,000
       Accrued liabilities                                                            (158,000)         372,000
                                                                            -----------------------------------

        Net cash used in operating activities                                       (2,782,000)      (8,799,000)
                                                                            -----------------------------------

Cash flows from investing activities:
  Purchase of property and equipment                                                   (28,000)        (220,000)
  Increase in intangibles                                                             (103,000)         (26,000)
  Proceeds from the disposal of assets                                                   2,000                -
  Net cash paid in acquisition                                                        (100,000)               -
                                                                            -----------------------------------

        Net cash used in investing activities                                         (229,000)        (246,000)
                                                                            -----------------------------------

Cash flows from financing activities:
  Proceeds from issuance of Series E preferred stock                                         -        4,607,000
  Proceeds from issuance of Series F preferred stock                                         -        4,358,000
  Principal payments on capital lease obligations                                      (59,000)         (85,000)
  Proceeds from the issuance of common stock, including
    exercise of common stock warrants and options                                      562,000          673,000
                                                                            -----------------------------------

        Net cash provided by financing activities                                      503,000        9,553,000
                                                                            -----------------------------------

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

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

Cash, end of year                                                                $     194,000    $   2,702,000
                                                                            -----------------------------------

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

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements

                                                      December 31, 2002 and 2001
--------------------------------------------------------------------------------

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 pachymeter,
                        an A-Scan, an A/B Scan, a biomicroscope,  a perimeter, a
                        corneal topographer, and a blood flow analyzer.

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

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

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

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


--------------------------------------------------------------------------------
                                                                             F-7

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

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


1.   Organization       Intangible Assets
     and Significant    As of December 31, 2002,  intangible assets consisted of
     Accounting         goodwill  related to the  purchase of Ocular Blood Flow,
     Policies           Ltd.,   product   rights,    capitalized   payments   to
     Continued          manufacturers  for  engineering  and design services and
                        patent costs.

                        Effective  January 1, 2002, the Company adopted SFAS No.
                        142,   "Goodwill  and  Other  Intangible   Assets."  The
                        adoption of SFAS No. 142 required an initial  impairment
                        assessment  involving a comparison  of the fair value of
                        goodwill and other intangible assets to current carrying
                        values.  As of January 1, 2002,  the initial  impairment
                        assessment  did not  result  in any  impairment  charge.
                        Intangible  assets  determined to have indefinite useful
                        lives  are  not   amortized.   The  Company  tests  such
                        intangible  assets  with  indefinite  useful  lives  for
                        impairment  annually  or more  frequently  if  events or
                        circumstances  indicate that an asset might be impaired.
                        Intangible  assets determined to have definite lives are
                        amortized  on a  straight-line  basis over their  useful
                        lives.  Product  rights  are being  amortized  over five
                        years,  capitalized  engineering  and  design  costs are
                        fully amortized as of December 31, 2002, and patents are
                        being  amortized  over the life of the patents  which is
                        ten  years.  We  review  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. We perform
                        tests  for  impairment  of  goodwill  annually  or  more
                        frequently if events or circumstances  indicate it might
                        be impaired. Such tests include comparing the fair value
                        of a reporting unit with its carrying  value,  including
                        goodwill.

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


--------------------------------------------------------------------------------
                                                                             F-8

<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
                        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.

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

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

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


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

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

                                                   Years Ended December 31,
                                           ---------------------------------
                                                 2002            2001
                                           ---------------------------------

 Net loss - as reported                     $ (11,155,000) $   (10,143,000)

 Deduct:  total stock-based employee
 compensation determined under fair value
 based method for all awards, net of
 related tax effects                             (618,000)      (1,432,000)
                                           ---------------------------------

 Net loss - pro forma                       $ (11,773,000) $   (11,575,000)
                                           ---------------------------------

 Earnings per share:
      Basic and diluted - as reported       $        (.63) $          (.77)
      Basic and diluted - pro forma         $        (.66) $          (.87)

                        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,
                                     ----------------------------------------
                                             2002                2001
                                     ----------------------------------------

    Expected dividend yield            $                 - $               -
    Expected stock price
      volatility                                 102%-103%         106%-107%
    Risk-free interest rate                             4%              4-5%
    Expected life of options                     2-7 years         3-5 years


                            The weighted average fair value of options granted
                            during 2002 and 2001 are $1.25 and $1.71,
                            respectively.

--------------------------------------------------------------------------------
                                                                            F-10

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

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


1.   Organization       Earnings Per Share
     and Significant    The  computation  of basic  earnings per common share is
     Accounting         based  on  the   weighted   average   number  of  shares
     Policies           outstanding during each year.
     Continued
                        The computation of diluted  earnings per common share is
                        based  on  the   weighted   average   number  of  shares
                        outstanding  during  the  year  plus  the  common  stock
                        equivalents,  which  would  arise from the  exercise  of
                        stock  options  and  warrants   outstanding   using  the
                        treasury  stock method and the average  market price per
                        share during the year.  Options and warrants to purchase
                        5,151,557 and 6,221,798 shares of common stock at prices
                        ranging from $2.00 to $12.98 per share were  outstanding
                        at December  31, 2002 and 2001,  respectively,  but were
                        not   included  in  the  diluted   earnings   per  share
                        calculation   because   the   effect   would  have  been
                        antidilutive.

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

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

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

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

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

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


1.   Organization       Concentration of Risk - Continued
     and Significant    The Company's high technology  product line requires the
     Accounting         Company  to  deal  with  suppliers  and   subcontractors
     Policies           supplying  highly  specialized  parts,  operating highly
     Continued          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 $2
                        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, 2002 and 2001,  no
                        single  customer  represented  more than 10  percent  of
                        total net sales.

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


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

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

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


1.   Organization       Warranty
     and Significant    The Company provides  product  warranties on the sale of
     Accounting         certain products that generally extend for one year from
     Policies           the date of sale.  The  Company  maintains a reserve for
     Continued          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 2001 financial  statements  have
                        been  reclassified to conform to the presentation of the
                        current year financial statements.

2.   Going              The accompanying financial statements have been prepared
     Concern            on  a  going  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  their  liabilities  and  sustain
                        operations  and the  Company  has  incurred  significant
                        losses.  These factors raise substantial doubt about the
                        Company's ability to continue as a going concern.



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

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

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


2.   Going              The  Company's   continuation  as  a  going  concern  is
     Concern            dependent on its ability to generate  sufficient  income
     Continued          and cash flow to meet its  obligations on a timely basis
                        and/or obtain  additional  financing as may be required.
                        The  Company  is  actively  seeking  options  to  obtain
                        additional capital and financing.  The Company currently
                        has a  private  equity  line of  credit  agreement  with
                        Triton  West Group,  Inc.,  (Triton),  which  allows the
                        Company to sell $20 million of common stock over a three
                        year   period  beginning  December  2000  to  Triton  by
                        tendering  put  notices to  purchase  shares  subject to
                        certain  NASDAQ trading  restrictions.  The company sold
                        approximately   329,000   shares  of  common  stock  for
                        approximately  $673,000  during  2001  (see  note 7). No
                        shares of common stock were sold under the Triton equity
                        line of credit during 2002. Management is uncertain that
                        the  combination  of  existing  working  capital and the
                        private  equity  line of credit  will be  sufficient  to
                        assure continuation of the Company's  operations through
                        December 31, 2003.  In the past,  the Company has relied
                        heavily upon sales of its common and preferred  stock to
                        fund  operations.  There can be no  assurance  that such
                        equity  financing will be available on terms  acceptable
                        to the Company in the  future.  If the Company is unable
                        to obtain such  financing or secure debt  financing,  it
                        may be unable to continue  development  of its  products
                        and may be required to substantially curtail operations.


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


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

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

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


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

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


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

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

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


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

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

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


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

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

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

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

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

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


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

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

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

                        Due to the uncertainty of future cash flows and the fact
                        that the products have not been approved by the FDA, the
                        Company  determined  that the  likelihood of recovery of
                        its  investment  was remote and  recorded an  impairment
                        expense for the investment of $879,000.



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

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

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


4.   Detail of
     Certain
     Balance
     Sheet
     Accounts

Receivables:
      Trade receivables                                   $       1,286,000
      Other                                                           5,000
      Allowance for doubtful accounts                              (347,000)
                                                          -----------------

                                                          $         944,000
                                                          -----------------
Inventories:
      Finished goods                                      $       1,937,000
      Raw materials                                               2,838,000
      Reserve for obsolescence                                   (2,126,000)
                                                          -----------------

                                                          $       2,649,000
                                                          -----------------
 Accrued liabilities:
      Warranty and return allowance                       $         586,000
      Customer deposits                                              88,000
      Payroll and employee benefits                                 175,000
      Royalties                                                     182,000
      Consulting and other                                          155,000
      Deferred revenue                                              228,000
                                                          -----------------

                                                          $       1,414,000
                                                          -----------------


 5.   Intangible        Intangible  assets  consist of the following at December
      Assets            31, 2002:

                          Goodwill                            $         799,000
                          Product and technology rights                 769,000
                          Engineering and design costs                  482,000
                          Patents                                       173,000
                                                              ------------------

                                                                      2,223,000

                          Accumulated amortization                   (1,313,000)
                                                              ------------------

                          Net intangible assets               $         910,000
                                                              ------------------

                        Amortization  expense for the years ended  December  31,
                        2002 and 2001 was $248,000 and $341,000, respectively.

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

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

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


5.   Intangible         The  following  table  reflects a comparison of net loss
     Assets             and net loss per share  for each of the two years  ended
     Continued          December 31,  adjusted to give effect to the adoption of
                        SFAS 142:

                                                2002            2001
                                         ----------------------------------

 Reported net loss applicable to common
   shareholders                           $  (11,155,000)   $   (13,044,000)
 Add-back goodwill amortization,
   net of taxes                                        -             80,000
                                         ----------------------------------

 Adjusted net loss applicable to common
   Shareholders                           $  (11,155,000)   $   (12,964,000)
                                         ----------------------------------

 Reported loss per share-basic and
 diluted                                  $         (.63)   $          (.98)
 Add-back goodwill amortization                        -                  -
                                         ----------------------------------

 Adjusted loss per share-basic and
 diluted                                  $         (.63)   $          (.98)
                                         ----------------------------------

                        The changes in the  carrying  amount of goodwill  during
                        the year ended December 31, 2002 are as follows:


                        Balance as of December 31, 2001      $      803,000
                        Goodwill acquired during the year         2,047,000
                        Adjustments to goodwill                  (2,051,000)
                                                             --------------

                        Balance as of December 31, 2002      $      799,000
                                                             --------------

6.   Property and      Property and equipment consists of the following:
     Equipment
                       Office equipment                      $      750,000
                       Computer equipment                           657,000
                       Automobile                                    52,000
                       Furniture and fixtures                       264,000
                       Leasehold improvements                       166,000
                                                             --------------

                                                                  1,889,000

                       Accumulated depreciation
                         and amortization                        (1,394,000)
                                                            ---------------

                                                            $       495,000
                                                            ---------------

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

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

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

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

                        The Company sold approximately  329,000 shares of common
                        stock for  approximately  $673,000 during 2001 under the
                        equity line of credit  with  Triton West Group,  Inc. in
                        five  different  transactions  dating from  February 16,
                        2001 to June 21,  2001.  There  were no sales of  common
                        stock through this agreement during 2002.

8.   Lease              During the years ended  December 31, 2002 and 2001,  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               (121,000)
                                                           ------------------

                                                           $         170,000
                                                           ------------------

                        Amortization  expense  on assets  under  capital  leases
                        during the years  ended  December  31, 2002 and 2001 was
                        $46,000 and $54,000, respectively.

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

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

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


8.   Lease              Capital lease obligations have imputed interest rates of
     Obligations        approximately  15% to 22%.  The  leases  are  secured by
     Continued          equipment.  Future minimum payments on the capital lease
                        obligations are as follows:

          2003                                              $         61,000
          2004                                                        45,000
          2005                                                        38,000
          2006                                                        14,000
                                                            -----------------

                                                                     158,000

 Less amount representing interest                                   (34,000)
                                                            -----------------

 Present value of future minimum lease payments                      124,000

 Less current portion                                                (44,000)
                                                            -----------------

 Long-term portion                                          $         80,000
                                                            -----------------

                        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, 2002 are approximately as follows:

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

                                2003                        $          42,000
                                2004                                    6,000
                                                            ------------------


          Total future minimum rental payments              $          48,000
                                                            ------------------

                        In January 2003, the lease for the Company's  office and
                        warehouse space was renewed. This renewal will result in
                        additional  minimum lease  payments of $121,000 in 2003,
                        $155,000 in 2004, and $159,000 in 2005.

                        Rent expense related to  noncancelable  operating leases
                        was  approximately  $437,000  and $435,000 for the years
                        ended December 31, 2002 and 2001, respectively.

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

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

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


9.   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,
                                         -----------------------------------
                                              2002             2001
                                         -----------------------------------

 Federal income tax benefit at
   statutory rate                        $      4,127,000 $       3,753,000
 Expiration of research and
   development tax credit
   carryforwards                                  (25,000)         (181,000)
 Amortization of goodwill                               -           (30,000)
 Other                                            (32,000)          (28,000)
 Change in valuation allowance                 (4,070,000)       (3,514,000)
                                         -----------------------------------

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

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

 Net operating loss carryforward                           $     15,282,000
 Depreciation, amortization, and impairment                         783,000
 Allowance and reserves                                           1,159,000
 Impairment of investment in IBS                                    325,000
 Research and development tax credit
   carryforwards                                                     34,000
                                                           -----------------

                                                                 17,583,000

 Valuation allowance                                           (17,583,000)
                                                           -----------------

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

                        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-22

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

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


9.   Income             At December 31, 2002, the Company had net operating loss
     Taxes              carryforwards of approximately  $41,000,000 and research
     Continued          and    development   tax   credit    carryforwards    of
                        approximately $34,000. These carryforwards are available
                        to  offset  future  taxable  income  and  expire in 2003
                        through 2020. The  utilization of the net operating loss
                        carryforwards  is dependent  upon the tax laws in effect
                        at the time the net operating loss  carryforwards can be
                        utilized.  The  Tax  Reform  Act of  1986  significantly
                        limits  the  annual  amount  that  can be  utilized  for
                        certain of these carryforwards as a result of the change
                        in ownership.


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

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

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

                        2.    Upon the  liquidation of the Company,  the holders
                              of the Series A  Preferred  Stock are  entitled to
                              receive,  prior to any  distribution of any assets
                              or  surplus  funds to the  holders  of  shares  of
                              common stock or any other  stock,  an amount equal
                              to $1.00 per share,  plus any  accrued  and unpaid
                              dividends related to the fiscal year in which such
                              liquidation occurs.  Total liquidation  preference
                              at December 31, 2002 was $6,000.


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

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

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


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

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

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

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

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

                        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, 2002
                              was $36,000.


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

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

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

10.  Capital            Series B Preferred Stock - Continued
     Stock              3.    The  shares are  convertible  at the option of the
     Continued                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.

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

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

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

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

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

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

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

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


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

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

                        2.    Upon the  liquidation of the Company,  the holders
                              of the Series D  Preferred  Stock are  entitled to
                              receive an amount per share  equal to the  greater
                              of (a) the amount  they would  have  received  had
                              they   converted  the  shares  into  Common  Stock
                              immediately  prior  to such  liquidation  plus all
                              declared but unpaid  dividends;  or (b) the stated
                              value,  subject to adjustment.  Total  liquidation
                              preference at December 31, 2002 was $3,000.

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

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


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

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

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


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

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

                        2.    Upon the  liquidation of the Company,  the holders
                              of the Series E  Preferred  Stock are  entitled to
                              receive an amount per share  equal to the  greater
                              of (a) the amount  they would  have  received  had
                              they   converted  the  shares  into  Common  Stock
                              immediately  prior  to such  liquidation  plus all
                              declared but unpaid  dividends;  or (b) the stated
                              value,  subject to adjustment.  Total  liquidation
                              preference at December 31, 2002 was $150,000.

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


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

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

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


10.  Capital            Series E Preferred Stock - Continued
     Stock              4.   The holders of the shares have no voting rights.
     Continued
                        5.    The   holders  of  the  shares  also  were  issued
                              warrants to purchase  shares of common stock equal
                              to 1,000  warrants for every 200 shares  purchased
                              at an  exercise  price of $4.00  per  share.  Each
                              warrant is exercisable until May 23, 2006.

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

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

                        2.    Upon the  liquidation of the Company,  the holders
                              of the Series F  Preferred  Stock are  entitled to
                              receive an amount per share  equal to the  greater
                              of (a) the amount  they would  have  received  had
                              they   converted  the  shares  into  Common  Stock
                              immediately  prior  to such  liquidation  plus all
                              declared but unpaid  dividends;  or (b) the stated
                              value,  subject to adjustment.  Total  liquidation
                              preference at December 31, 2002 was $627,000.


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

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

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


10.  Capital            Series F Preferred Stock - Continued
     Stock              3.    Each  share is  convertible,  at the option of the
     Continued                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.

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

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

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

10.  Capital            The following table summarizes  preferred stock activity
     Stock              during the years ended December 31, 2002 and 2001:
     Continued
<TABLE>
<CAPTION>
                             Series A          Series B          Series C         Series D           Series E           Series F
                          Shares    Amount   Shares   Amount   Shares  Amount  Shares   Amount  Shares     Amount    Shares   Amount
                          ----------------------------------------------------------------------------------------------------------
<C>                        <C>      <C>      <C>     <C>      <C>      <C>     <C>       <C>     <C>      <C>       <C>     <C>
Balance at January 1,
2001                         5,957  $    -    8,986  $     -       -   $  -     52,500   $    -        -  $      -       -  $     -

Issuance of Series E
preferred stock for cash         -       -        -        -       -      -          -        -   46,219         -       -        -

Issuance of Series F
preferred stock for cash         -       -        -        -       -      -          -        -        -         -  52,472        -

Conversion of preferred
stock                         (210)      -   (6,250)       -       -      -    (42,500)       -  (26,919)        -  (5,113)       -
                          ----------------------------------------------------------------------------------------------------------

Balance at December 31,
2001                         5,747       -    8,986        -       -      -     10,000        -   19,300         -  47,359        -

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

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

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

Liquidation preference           -  $6,000            36,000           $  -              $9,000           $150,000          $627,200
                          ----------------------------------------------------------------------------------------------------------

</TABLE>

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

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

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


11.  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 2,700,000 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.

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

                        In addition,  the Company granted the following  options
                        and  warrants  to  non-employees  during  the year ended
                        December 31, 2001:

                        o     Warrants  to  purchase  100,000  shares  of common
                              stock at an  exercise  price of $4.00  per  share,
                              warrants to purchase 35,000 shares of common stock
                              at an  exercise  price of  $2.00  per  share,  and
                              warrants  to  purchase  100,000  shares  of common
                              stock at $3.00 per share in return for  consulting
                              services.  As a result of these  warrants  granted
                              the  Company  recorded  approximately  $342,000 of
                              general  and  administrative  expense  based  on a
                              Black-Scholes valuation.

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

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

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

11.  Stock Option       o     Warrants to purchase 50,000 shares of common stock
     Plan and                 at an  exercise  price of  $4.00  that  vested  in
     Warrants                 November  2001 were issued to a  consultant  as an
     Continued                extension of the consulting agreement. The Company
                              recognized  $133,000 of general and administrative
                              expense in connection with these warrants based on
                              a Black-Scholes valuation.

                        o     In  connection  with the Series E Preferred  Stock
                              offering,  the Company issued warrants to purchase
                              in aggregate  231,095 shares of common stock at an
                              exercise price of $4.00 per share.

                        A schedule of the options and warrants is as follows:

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

 Outstanding at
    January 1, 2001                1,613,254     1,798,927  $   2.30 -  12.98
      Granted                      2,820,000       516,095      2.00 -   4.00
      Exercised                            -             -                  -
      Expired                       (236,626)            -      4.87 -   5.00
      Forfeited                     (289,852)            -      2.75 -   5.00
                               -----------------------------------------------
 Outstanding at
   December 31, 2001               3,906,776     2,315,022      2.00 -  12.98
      Granted                         70,000       250,000      2.00 -   5.00
      Exercised                            -             -                  -
      Expired                       (115,479)            -               5.00
      Forfeited                   (1,374,762)            -      2.31 -   6.00
                               -----------------------------------------------
 Outstanding at
   December 31, 2002               2,486,535     2,565,022  $    2.00 - 12.98
                               -----------------------------------------------

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

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

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



11.  Stock Option       The following table summarizes  information  about stock
     Plan and           options and warrants outstanding at December 31, 2002:
     Warrants
     Continued
                            Outstanding                      Exercisable
               -------------------------------------   -----------------------
                              Weighted
                              Average
                             Remaining    Weighted                  Weighted
    Range of                 Contractual   Average                    Average
    Exercise       Number        Life      Exercise        Number    Exercise
     Prices     Outstanding    (Years)      Price       Exercisable    Price
 ----------------------------------------------------   -----------------------

 $  2.00 - 5.00    3,438,649         4.12 $     3.16       3,091,098 $    3.68
    6.00 - 8.13    1,587,025          .73       6.07       1,512,025      7.27
          12.98       25,883          N/A      12.98          25,883     12.98
 ----------------------------------------------------   -----------------------

 $  2.30 -12.98    5,051,557         3.05 $     4.34       4,629,006 $    4.90
 ----------------------------------------------------   -----------------------


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

                        The Company  entered into a consulting  agreement with a
                        former executive  officer of the Company for a period of
                        six months  commencing in September  2002. The agreement
                        was  renewable  for  additional   six-month  terms.  The
                        Company did not renew the contract upon its  expiration.
                        The Company paid  $15,000  under this  agreement  during
                        2002 and had an  accrual  of $5,000 as of  December  31,
                        2002.

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

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

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


12.  Related Party      A law  firm,  of  which  the  chairman  of the  board of
     Transactions       directors of the Company is a shareholder,  has rendered
     Continued          legal  services to the  Company.  The Company  paid this
                        firm $175,000 and $159,000, for the years ended December
                        31,  2002 and 2001,  respectively.  As of  December  31,
                        2002,  the  Company  owed  this firm  $50,000,  which is
                        included in accounts payable.


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



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

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

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

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

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


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

                        o     During  the year  ended  December  31,  2001,  the
                              Company   acquired   $235,000  of   property   and
                              equipment   in   exchange   for   capital    lease
                              agreements.

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

                                                    Years Ended
                                                    December 31,
                                         -----------------------------------
                                               2002             2001
                                         -----------------------------------

                        Interest         $         46,000 $          41,000
                                         -----------------------------------

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

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

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

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



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

                                                    Years Ended
                                                    December 31,
                                         -----------------------------------
                         Geographic Area       2002              2001
                                         -----------------------------------

                         Far East        $       1,171,000 $      1,416,000
                         South America             308,000          301,000
                         Middle East               337,000          287,000
                         Europe                    505,000        1,323,000
                         Canada                    121,000          200,000
                         Mexico                     61,000           31,000
                                         -----------------------------------

                                         $       2,503,000 $      3,558,000
                                         -----------------------------------


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 100% matching  contribution  by the Company up to 3%
                        of a participant's compensation.  During the years ended
                        December  31,  2002 and 2001,  the  Company  contributed
                        approximately   $59,000   and   $68,000   to  the  Plan,
                        respectively.


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

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

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

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

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


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

                        An action was brought  against the Company in  September
                        2000 by  PhotoMed  International,  Inc.  and  Daniel  M.
                        Eichenbaum  in the  Third  District  Court of Salt  Lake
                        County,  State of Utah. The action involves an amount of
                        royalties  that are  allegedly due and owing to PhotoMed
                        International,  Inc. and Dr.  Eichenbaum with respect to
                        the sales of certain  equipment  plus  attorney's  fees.
                        Discovery  has  taken  place  and the  Company  has paid
                        royalties of $15,000 to bring all  required  payments up
                        to date through June 30, 2001. However, the legal action
                        has not been dismissed as a result of the payments.  The
                        Company  is in the  process  of  working  with  Photomed
                        International  and Dr.  Eichenbaum  to  ensure  that the
                        calculations  have been  correctly made on the royalties
                        paid as well as the proper method of calculation for the
                        future.  It is  anticipated  that once the  parties  can
                        agree on the correct calculations on the royalties,  the
                        legal  action will be  dismissed.  The Company  believes
                        that any additional royalty payment that may be required
                        as  settlement  of the  action  will not have a material
                        impact on the financial statements.

                        An  Action  has been  brought  against  the  Company  by
                        Merrill  Corporation  that alleges that the Company owes
                        the  plaintiff   approximately   $20,000  together  with
                        interest  thereon  at the  rate  of 10% per  annum  from
                        August 30,  1999,  plus costs and  attorney's  fee.  The
                        complaint  alleges  a breach  of  contract  relative  to
                        printing  services.  The  Company has filed an answer to
                        the complaint and discovery is  proceeding.  The Company
                        believes  that the  complaint  against  the  Company  is
                        without merit and intends to vigorously  defend  against
                        the action.

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

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

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


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

                        On July 2, 2001,  the Company  entered into a settlement
                        agreement  with Mentor  Corporation in which the Company
                        agreed to pay  350,000  shares  of  common  stock to the
                        Mentor Corporation in exchange for release of all claims
                        against the Company in connection with the  registration
                        of  certain   shares  of  the  Company's   common  stock
                        previously  issued.   This  settlement   resulted  in  a
                        litigation  settlement  expense of $812,000 based on the
                        market price of the  Company's  common stock on the date
                        of settlement.

                        The Company  received a demand letter dated  December 9,
                        2002 from  counsel for Dan  Blacklock,  dba Danlin Corp.
                        The letter demands  payment in the amount of $65,000 for
                        manufacturing  and supplying parts for our microkeratome
                        blades.  The  Company's  records  show that it  received
                        approximately  $35,000 in parts  from the Danlin  Corp.,
                        but that the  additional  amounts  that the Danlin  Corp
                        claims are owed,  were from parts that were received but
                        rejected because they had never been ordered.

                        The Company  received demand letters dated September 29,
                        2002 and December  10, 2002 from  counsel for  CitiCorp,
                        Vendor Finance, Inc. and its successor-in-interest,  The
                        Copy Man dba TCM Business. The letters demand payment of
                        $50,000  plus  interest  for  the  leasing  of two  copy
                        machines  that  were  delivered  to the Salt  Lake  City
                        facilities  on or about April of 2000.  The  majority of
                        the  amounts  alleged to be owed are from the  remaining
                        payments on the leases. The Company disputes the amounts
                        allegedly owed, asserting that the copy machines,  which
                        were  returned  to the  leasing  company,  did not  work
                        properly.


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

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

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


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

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

                        The Company  received a demand  letter dated  January 6,
                        2003 from counsel for Westcore STIPG,  LLC, the landlord
                        with regard to the lease on the former facilities in San
                        Diego, California. The letter demands payment of $11,000
                        plus interest, attorney's fees and costs for the repairs
                        and restoration work on the San Diego facilities,  after
                        a deduction of a $6,000  security  deposit.  The Company
                        rejects  these  claims,  contending  that  the  security
                        deposit   was   adequate  to  pay  for  any  repairs  or
                        restoration expenses on the premises.

                        An action  was  brought  by Dr.  John  Charles  Casebeer
                        against  the  Company  in the  Montana  Second  Judicial
                        District Court, Silver Bow County, state of Montana. The
                        complaint  alleges  that  Dr.  Casebeer  entered  into a
                        personal services contract with the Company memorialized
                        by a letter dated April 20, 2002,  with it being alleged
                        that Dr. Casebeer fully performed his  obligations.  Dr.
                        Casebeer  asserts  that he is  entitled  to $43,750  per
                        quarter for  consultant  time and as an  incentive to be
                        granted  each  quarter  $5,000 in options  issued at the
                        fair market value. An additional purported incentive was
                        $50,000  in shares of stock  being  issued at the time a
                        formalized  contract was to be signed by the parties. In
                        the  letter it is  provided  that at its  election,  the
                        Company may pay the  consideration  in the form of stock
                        or cash and that stock would be issued within 30 days of
                        the close of the quarter.  Prior to the litigation,  the
                        Company  issued  43,684  shares  to  Dr.  Casebeer.  The
                        referenced  letter provides that termination may be made
                        by either  party  upon  giving 90 days  written  notice.
                        Notice was given by the Company in early  November 2002.
                        The Company  recently filed its answer in defense of the
                        action. Issues include whether or not Dr. Casebeer fully
                        performed as asserted.

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

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

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

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


16.  Commitments        Royalty Agreements
     and                The Company has a royalty  agreement  with the president
     Contingencies      of OBF.  The  agreement  provides for the payment of 10%
     Continued          royalty  of the net  sales  related  to the  Blood  Flow
                        Analyzer.  The agreement terminates in 2020. The Company
                        did not make any royalty payments during 2002 under this
                        agreement  and  $147,000  were accrued at the end of the
                        year.

                        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  terminates  on July  7,  2003.
                        Through December 31, 2002, no significant royalties have
                        been paid under this agreement.

                        The Company has an agreement with a Canadian corporation
                        that  provides for the payment of  royalties  related to
                        the  sales  of  UBM  (Ultrasonic  Bio-Microscopy).   The
                        agreement  outlines payments of 150 Canadian Dollars for
                        each licensed product sold for a period of 12 years that
                        ends in  September of 2002.  At December  31, 2002,  the
                        Company had accrued approximately $7,000 in royalties.

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

--------------------------------------------------------------------------------
                                                                            F-40

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

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


18.  Recent             Recent Accounting Pronouncements
     Accounting         In June 2001,  the FASB issued  Statement  of  Financial
     Pronounce-         Accounting  Standards  No.  143,  "Accounting  for Asset
     ments              Retirement   Obligations".   This  Statement   addresses
                        financial   accounting  and  reporting  for  obligations
                        associated  with the  retirement of tangible  long-lived
                        assets and the associated asset retirement  costs.  This
                        Statement is effective for financial  statements  issued
                        for fiscal years  beginning  after June 15,  2002.  This
                        Statement addresses  financial  accounting and reporting
                        for the disposal of  long-lived  assets.  The Company is
                        currently assessing the impact of this statement.

                        In April 2002,  the FASB issued  Statement  of Financial
                        Accounting Standards (SFAS) No. 145, "Rescission of FASB
                        Statements  No.  4,  44,  and  64,   Amendment  of  FASB
                        Statement  No.  13,  and  Technical  Corrections."  This
                        statement requires the classification of gains or losses
                        from the extinguishments of debt to meet the criteria of
                        Accounting  Principles  Board Opinion No. 30 before they
                        can  be  classified  as   extraordinary  in  the  income
                        statement.   As  a  result,   companies  that  use  debt
                        extinguishment  as part of their risk management  cannot
                        classify  the gain or loss from that  extinguishment  as
                        extraordinary.     The    statement     also    requires
                        sale-leaseback     accounting    for    certain    lease
                        modifications  that have  economic  effects  similar  to
                        sale-leaseback transactions. The Company does not expect
                        Adoption  of SFAS No. 145 did have a material  impact on
                        financial position or future operations.

                        In June 2002, the FASB issued SFAS No. 146,  "Accounting
                        for Costs Associated with Exit or Disposal  Activities."
                        This  standard,  which is effective for exit or disposal
                        activities  initiated after December 31, 2002,  provides
                        new  guidance  on  the   recognition,   measurement  and
                        reporting of costs associated with these activities. The
                        standard   requires   companies   to   recognize   costs
                        associated  with exit or disposal  activities  when they
                        are incurred rather than at the date the company commits
                        to an exit or disposal  plan.  The  adoption of SFAS No.
                        146 by the  Company is not  expected  to have a material
                        impact on the  Company's  financial  position  or future
                        operations.


--------------------------------------------------------------------------------
                                                                            F-41

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

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



18.  Recent             Recent Accounting Pronouncements - Continued
     Accounting         In  December   2002,   the  FASB  issued  SFAS  No.  148
     Pronounce-         "Accounting for Stock-Based Compensation--Transition and
     ments              Disclosure--an  amendment  of FASB  Statement  No. 123,"
     Continued          which is  effective  for all fiscal  years  ending after
                        December  15, 2002.  SFAS No. 148  provides  alternative
                        methods of transition for a voluntary change to the fair
                        value  based  method  of  accounting   for   stock-based
                        employee  compensation  under  SFAS  No.  123  from  the
                        intrinsic value based method of accounting prescribed by
                        Accounting  Principles  Board  Opinion  No. 25. SFAS 148
                        also changes the  disclosure  requirements  of SFAS 123,
                        requiring a more  prominent  disclosure of the pro-forma
                        effect of the fair value based method of accounting  for
                        stock-based  compensation.  The adoption of SFAS No. 148
                        by the  Company  did not have a  material  impact on the
                        Company's financial position or future operations.

                        In January  2003,  the  Financial  Accounting  Standards
                        Board (FASB) issued Interpretation No. 46, Consolidation
                        of  Variable  Interest  Entities  (FIN  No.  46),  which
                        addresses   consolidation  by  business  enterprises  of
                        variable  interest  entities.  FIN No. 46 clarifies  the
                        application  of  Accounting  Research  Bulletin  No. 51,
                        Consolidated  Financial Statements,  to certain entities
                        in   which   equity    investors   do   not   have   the
                        characteristics  of a controlling  financial interest or
                        do not have sufficient  equity at risk for the entity to
                        finance its activities without  additional  subordinated
                        financial support from other parties. FIN No. 46 applies
                        immediately to variable  interest entities created after
                        January 31, 2003, and to variable  interest  entities in
                        which an enterprise obtains an interest after that date.
                        It applies in the first  fiscal  year or interim  period
                        beginning  after June 15,  2003,  to  variable  interest
                        entities  in  which  an  enterprise   holds  a  variable
                        interest that it acquired  before  February 1, 2003. The
                        Company   does  not  expect  to  identify  any  variable
                        interest  entities  that  must be  consolidated.  In the
                        event a  variable  interest  entity is  identified,  the
                        Company does not expect the  requirements  of FIN No. 46
                        to have a material impact on its financial  condition or
                        results of operations.

--------------------------------------------------------------------------------
                                                                            F-42

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

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


18.  Recent             Recent Accounting Pronouncements - Continued
     Accounting         In November 2002, the FASB issued Interpretation No. 45,
     Pronounce-         Guarantor's  Accounting and Disclosure  Requirements for
     ments              Guarantees,    Including    Indirect    Guarantees    of
     Continued          Indebtedness of Others (FIN No. 45). FIN No. 45 requires
                        certain  guarantees to be recorded at fair value,  which
                        is different from current practice to record a liability
                        only when a loss is probable and  reasonably  estimable,
                        as those  terms are  defined  in FASB  Statement  No. 5,
                        Accounting for  Contingencies.  FIN No. 45 also requires
                        the Company to make  significant new  disclosures  about
                        guarantees.  The disclosure  requirements  of FIN No. 45
                        are  effective  for the Company in the first  quarter of
                        fiscal year 2003. FIN No. 45's initial  recognition  and
                        initial  measurement  provisions  are  applicable  on  a
                        prospective basis to guarantees issued or modified after
                        December 31, 2002. The Company's previous accounting for
                        guarantees  issued  prior  to the  date  of the  initial
                        application  of  FIN  No.  45  will  not be  revised  or
                        restated  to reflect  the  provisions  of FIN No 45. The
                        Company  does not expect the  adoption  of FIN No. 45 to
                        have a  material  impact on its  consolidated  financial
                        position, results of operations or cash flows.



--------------------------------------------------------------------------------
                                                                            F-43


<PAGE>

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

     None.

                                    PART III


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

         As of March 31,  2003,  the  executive  officers  and  directors of the
Company, their ages and their positions are set forth below:


Name                      Age          Position
----                      ---          --------

Jeffrey F. Poore          54           President and Chief Executive Officer
Heber C. Maughan          51           Vice President of Finance, Treasurer, and
                                         Chief Financial Officer
Randall A. Mackey, Esq.   56           Chairman of the Board, Secretary and
                                         Director
David M. Silver, PhD.     61           Director
Keith D. Ignotz           54           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.

         Jeffrey F. Poore,  D.D.S.  has served as President and Chief  Executive
Officer since March 24, 2003. Dr. Poore more recently  served as Chief Executive
Officer for Outsource  Group.  He served as a director of Interwest Home Medical
from 1995 until its  acquisition by Praxair in June 2001. From 1994 to 1996, Dr.
Poore served as President and Chief Executive Officer of Comphealth,  one of the
nation's largest health care professional staffing organizations.  He received a
B.A. degree in Economics from Brigham Young  University,  and earned a degree in
Dentistry from Loyola Medical Center, Maywood, Illinois.

         Heber C. Maughan has served as Vice President of Finance, Treasurer and
Chief Financial  Officer since October 2001. From July 1997 to October 2001, Mr.
Maughan  served as Controller  for  Peterbilt of Utah,  which sells and services
heavy  duty  trucks.  From  1989  to  1997,  he was  employed  by  First  Health
Strategies, Inc, where he served as Vice President of Finance from 1995 to 1997.
From 1987 to 1989,  Mr.  Maughan  was the Chief  Financial  Officer at  Standard
Optical  Company,  a regional retail eye care chain. Mr. Maughan received a B.S.
degree in Accounting  from Oklahoma State  University in 1976 and an M.A. degree
in Accounting from Brigham Young University in 1977.

         Randall A.  Mackey,  Esq.  has been a  director  of the  Company  since
January  2000.  He had served as a director of the Company from November 1995 to
September  1998. Mr. Mackey has been president of the Salt Lake City law firm of

                                       24
<PAGE>

Mackey Price & Williams 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 Harvard
University in 1970, a J.D. degree from Columbia  University in 1975 and a B.C.L.
degree from Oxford  University in 1977. Mr. Mackey has served as Chairman of the
Board  since June 2001 and a director  since 1998 of  Cimetrix  Incorporated,  a
software  development  company.  Mr.  Mackey has also  served as Chairman of the
Board  since  July  2000 and as a  trustee  since  1993 of Salt  Lake  Community
College.

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

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

         Thomas F. Motter  served as  Chairman of the Board of the Company  from
April 1993 to August 30, 2002, and as its Chief Executive  Officer from May 1994
to August  1997 and from  December  1997 to August 30,  2002.  He also served as
President of the Company from May 1994 to August 1997 and from  December 1997 to
June 2000.  On August 30, 2002,  Mr.  Motter  resigned as Chairman of the Board,
Chief Executive Officer and as a Director of the Company.

         Mark R. Miehle served as President and Chief  Operating  Officer of the
Company  from June 2000  until  August  30,  2002,  when the board of  directors
removed him from office and entered into a six month  consulting  agreement with
him at the rate of  $5,000  per  month.  The  consulting  agreement  expired  on
February 28, 2003.

Technical and Medical Advisory Personnel
----------------------------------------

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

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

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

         Richard G. Bowe,  M.D. - Dr. Bowe is an  ophthalmologist  practicing in
Tacoma,  Washington.  He  received  his  medical  degree  at the  University  of
Washington in 1964 and performed his residency at Brooke Army Medical Center.

         Jonathan Cress,  M.D. - Dr. Cress is an  ophthalmologist  practicing in
Santa Cruz, California.

         Roger F. Husted, M.D. - Dr. Husted is an ophthalmologist  practicing in
Monterey,  California.  He  received  his  medical  degree at George  Washington
University in1970 and performed his residency at Letterman Army Medical Center.

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

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

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

                                       25
<PAGE>

         Sheldon  Rabin,  M.D. - Dr. Rabin is an  ophthalmologist  practicing in
Flushing, New York. He received his medical degree at Northwestern University in
1969 and performed his residency at New York University.

         David Silver,  Ph.D. -- 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.  He received a Ph.D. degree from
Iowa State University.

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

         Elliot  Kirstein,  O.D. - Dr. Kirstein is an Optometrist  practicing in
Ohio.

         William Fishkind, M.D. - Dr. Fishkind is an Ophthalmologist  practicing
in Arizona.

         David Mittleman, M.D. - Dr. Mittleman is an Ophthalmologist  practicing
in Florida.

         Sonia Yoo, M.D. - - Dr. Yoo is an Ophthalmologist  practicing at Bascom
Palmer Eye Institute in Miami, Florida.

Board Meetings and Committees
-----------------------------

         The Board of Directors held a total of seven meetings during the fiscal
year ended  December  31,  2002.  The Audit  Committee of the Board of Directors
consists  of  directors  Dr.  David M.  Silver,  Randall A.  Mackey and Keith D.
Ignotz. The Audit Committee met twice during the fiscal year.

The Audit Committee
-------------------

         The Audit Committee is primarily responsible for reviewing the services
performed by the Company's  independent  public  accountants  and internal audit
department and evaluating the Company's accounting  principles and its system of
internal  accounting  controls.  The  Compensation  Committee  of the  Board  of
Directors consists of directors Dr. David M. Silver, Randall A. Mackey and Keith
D. Ignotz. The Compensation  Committee met two times during the fiscal year. The
Compensation  Committee is primarily  responsible for reviewing  compensation of
executive  officers and overseeing  the granting of stock  options.  No director
attended  fewer than 75% of all  meetings of the Board of  Directors  during the
2002 fiscal year.

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

         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 of the Company and other executive  officers
(collectively,  the "Named  Executive  Officers") whose salary and bonus for all
services in all capacities  exceed  $100,000 for the fiscal years ended December
31, 2002, 2001 and 2000.

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


                                                                                                 Long-Term Compensation
                         Annual Compensation                                              Awards                        Payouts
                                                              Other                                    Securities
                                                              Annual       Restricted                  Underlying      Long-term
Name and                                                     Compensa-       Stock        Options/     Incentive       Compensa-
Principal Position     Period     Salary($)     Bonus($)      tion($)      Awards($)      SARs(#)      Payout($)      tion ($)(4)
------------------     ------     ---------     --------     ----------    -----------   ---------     ------------   -----------

<S>                    <C>        <C>          <C>                  <C>           <C>     <C>                 <C>      <C>
Thomas F. Motter       2002(1)    $ 187,453    $       0            0             0             0             0        $19,750(5)
Former Chairman        2001(2)    $ 200,000    $  22,380(6)         0             0       925,000(8)          0        $ 6,000(4)
of the Board  and      2000(3)    $ 178,357    $ 486,113(7)         0             0             0             0        $28,792(5)
Chief Executive
Officer

                                       26
<PAGE>

Mark R. Miehle        2002(1)     $ 134,202            0            0             0        55,000(13)         0        $ 3,000(4)
Former President      2001(2)     $ 150,000            0            0             0       110,000(8)          0        $ 6,000(4)
and Chief Operating   2000(3)     $ 235,201    $ 194,000(9)         0             0       150,000(9)          0        $ 6,000(4)
Officer

Aziz Mohabbat         2002(1)     $ 126,878            0            0             0             0             0              0
Former
Vice President of
Operations(10)

Heber C. Maughan      2002(1)     $ 114,416            0            0             0             0             0              0
Chief Financial       2001(2)     $  27,500            0            0             0        30,000(12)         0              0
Officer(11)

</TABLE>

--------------------
(1)      For the fiscal year ended December 31, 2002
(2)      For the fiscal year ended December 31, 2001
(3)      For the fiscal year ended December 31, 2000
(4)      The amounts under "All Other Annual  Compensation"  for 2002,  2001 and
         2000 consist of payments related to the operation of automobiles and/or
         automobiles and insurance by the named executives.
(5)      The amounts under "Other Annual Compensation" for the years represented
         consist of payments related to the residential  housing  accommodations
         for the  Company's  employees,  living  outside  of Utah while they are
         working  at the  Company's  corporate  headquarters  in Salt Lake City,
         leased from Mr. Motter at $2,500 per month.
(6)      The Company awarded Mr. Motter a cash bonus in June 2001.
(7)      On January 21,  2000,  the Board of  Directors  approved a bonus to Mr.
         Motter in the form of 38,889 shares of the Company's  Common Stock. The
         bonus was valued at  $486,113  on the basis of the closing bid price of
         the Company's Common Stock of $12.50 per share on January 21, 2000, the
         date the board approved the bonus.
(8)      On September  11,  2001,  the Company  granted  options to purchase the
         respective  number  of  shares  of the  Company's  Common  Stock  at an
         exercise price of $2.75 per share.
(9)      On June 5, 2000, the Board of Directors issued Mr. Miehle 28,500 shares
         of the  Company's  Common  Stock  as a  initial  bonus  as  part of his
         employment agreement. The market price on the date of grant was $6.8125
         per share,  and  compensation  expense in the  amount of  $194,000  was
         recognized.  Mr.  Miehle was also granted  options to purchase  150,000
         shares of the Company's  Common Stock at an exercise price of $6.00 per
         share.
(10)     Mr. Mohabbat was named as interim chief operating officer on August 30,
         2002. He was not an officer in prior years.
(11)     Mr. Maughan was named as interim chief executive  officer on August 30,
         2002.
(12)     On October 1, 2001, the Board of Directors  granted options to purchase
         the  respective  number of shares of the  Company's  Common Stock at an
         exercise price of $2.75 per share.
(13)     On January 28, 2002, the Board of Directors granted options to purchase
         the  respective  number of shares of the  Company's  Common Stock at an
         exercise price of $2.75 per share.

         The following table sets forth  information  concerning the exercise of
options to acquire shares of the Company's  Common Stock by the Named  Executive
Officers during the fiscal year ended December 31, 2002 as well as the aggregate
number and value of unexercised  options held by the Named Executive Officers on
December 31, 2002.
<TABLE>
<CAPTION>


                                                    Number of Securities Underlying        Value of Unexercised
                                                       Unexercised Options/SARs                 In-the-Money

                                                       At December 31, 2002 (#)         At December 31, 2002 ($)
                  Shares Acquired      Value
Name              On Exercise (#)     Realized ($)   Exercisable    Unexercisable     Exercisable   Unexercisable
----------------------------------------------------------------------------------------------------------------------

<S>                     <C>              <C>            <C>             <C>               <C>            <C>
Mark R. Miehle          0                0              102,500         212,500           0              0
Aziz Mohabbat           0                0               17,500          42,500           0              0
Heber C. Maughan        0                0                7,500          22,500           0              0
</TABLE>

Director Compensation
---------------------

         On September 11, 2001,  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
$2.75 per share.  On  September  11, 2001,  Messrs.  Mackey and Silver were each
granted options to purchase  200,000 shares of the Company's  Common Stock at an
exercise  price of  $2.75  per  share in  consideration  for  past  services  as
directors of the Company from November 1995 to September  1998 and since January
2000. In addition,  outside  directors are also reimbursed for their expenses in

                                       27
<PAGE>

attending board and committee meetings. Directors are not precluded from serving
the Company in any other  capacity and  receiving  compensation  therefore.  The
options were not issued at a discount to the then market price.

Employee 401(k) Plan
--------------------

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

1995 Stock Option Plan
----------------------

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

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

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

Employment Agreements
---------------------

         The Company entered into an employment agreement with Thomas F. Motter,
which  commenced  on  January 1, 1998 and  expires on  December  31,  2002.  The
agreement requires Mr. Motter to devote substantially all of his working time to
the Company,  provided that he may be terminated for "cause" (as provided in the
agreements)  and  prohibits  him from  competing  with the Company for two years
following the termination of his employment  agreement.  The agreement  provides
for the payment of an initial base salary of  $135,000,  effective as of January
1, 1998. The agreement  also provides for salary  increases and bonuses as shall
be  determined  at the  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.  On August 30, 2002,
Mr. Motter resigned as Chairman of the Board,  Chief Executive  Officer and as a
Director of the Company.

                                       28
<PAGE>

         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
agreement required Mr. Miehle to devote substantially all of his working time to
the Company,  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 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  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 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.

Limitation of Liability and Indemnification
-------------------------------------------

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

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

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

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

         Section  16(a) of the  Securities  Exchange  Act of 1934  requires  the
Company's executive officers, directors and persons who own more than 10% of any
class of the  Company's  Common Stock to file initial  reports of ownership  and
reports of changes of ownership of the Company's Common Stock.  Such persons are
also  required to furnish the Company with all Section  16(a) reports they file.
Based  solely on its review of the copies of such  reports  received  by it with
respect  to fiscal  2002,  or written  representations  from  certain  reporting
persons,  the Company  believes that all filing  requirements  applicable to its
directors, officers and greater than 10% beneficial owners were complied with.

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

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

Douglas A. MacLeod, M.D. (2)             4,150,707                  17.8%
Innovative Optics, Inc.                  1,222,825                   5.2
Jeffrey F. Poore (3)                     1,000,000                   4.1
Dr. David M. Silver(4)                     491,166                   2.1
Randall A. Mackey(4)                       475,000                   2.0
Keith D. Ignotz(5)                         204,560                     *
Heber C. Maughan(6)                        180,000                     *
Executive officers and directors
as a group (five persons)                2,350,726                   9.6%
-----------------
*Less than 1%.

                                       29
<PAGE>

(1)      The address for Mr. Maughan is c/o Paradigm, 2355 South 1070 West, Salt
         Lake City,  UT,  84119.  The address for Dr. Silver is 17 Avalon Court,
         Bethesda,  MD 20816. The address for Mr. Mackey is 1172 East 100 South,
         Salt Lake City,  UT 84111.  The address for Mr.  Ignotz is 6025-A Unity
         Dr., Norcross, GA 30071.
(2)      Includes  the stock held by Douglas A.  MacLeod,  M.D.  Profit  Sharing
         Trust, St. Mark's Eye Institute and Milan Holdings, Ltd.
(3)      Includes  options to purchase  1,000,000 shares of Common Stock granted
         to Mr. Poore.
(4)      Includes  options to purchase 475,000 shares of Common Stock granted to
         each of Dr. Silver and Mr. Mackey.
(5)      Includes  options to purchase 203,851 shares of Common Stock granted to
         Mr. Ignotz.
(6)      Includes  options to purchase 180,000 shares of Common Stock granted to
         Mr. Maughan.

Item 12. Certain Relationships and Related Transactions

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

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

         The Company  entered into a consulting  agreement  with Mark R. Miehle,
the former president and chief operating  officer of the Company 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 $15,000 under this agreement during 2002 and had an
accrual of $5,000 as of December 31, 2002.

         Randall A. Mackey,  a director of the Company  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 to the Company in connection  with
various  corporate  matters.  Legal  fees and  expenses  paid to Mackey  Price &
Thompson for the fiscal years ended December 31, 2002 and 2001, totaled $167,000
and $159,000,  respectively. As of December 31, 2002, the Company owed this firm
$47,000, 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.

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

   2.1    Amended   Agreement  and  Plan  of  Merger  between  Paradigm  Medical
          Industries,  Inc.,  a  California  corporation  and  Paradigm  Medical
          Industries, Inc., a Delaware corporation(1)
   3.1    Certificate of Incorporation(1)
   3.2    Amended Certificate of Incorporation(16)
   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    Warrant to Purchase Common Stock with Mackey Price & Williams (1)
   4.8    Specimen Series C Convertible Preferred Stock Certificate(4)

                                       30
<PAGE>

   4.9    Certificate of the Designations, Powers, Preferences and Rights of the
          Series Convertible Preferred Stock(4)
   4.10   Specimen Series D Convertible Preferred Stock Certificate (7)
   4.11   Certificate of the Designations, Powers, Preferences and Rights of the
          Series D Convertible Preferred Stock (10)
   4.12   Warrant to Purchase Common Stock with Cyndel & Co. (7)
   4.13   Warrant Agreement with KSH Investment Group, Inc. (7)
   4.14   Warrant to Purchase Common Stock with R.F. Lafferty & Co., Inc.(7)
   4.15   Warrant to Purchase Common Stock with Dr. David B. Limberg (10)
   4.16   Warrant to Purchase Common Stock with John W. Hemmer (10)
   4.17   Stock Purchase Warrant with Triton West Group, Inc.(12)
   4.18   Warrant to Purchase Common Stock with KSH Investment Group, Inc.(12)
   4.19   Warrants  to  Purchase  Common  Stock with  Consulting  for  Strategic
          Growth, Ltd.(12)
   10.1   Exclusive Patent License Agreement with Photomed(1)
   10.2   Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
   10.3   Lease with Eden Roc (4)
   10.4   1995 Stock Option Plan and forms of Stock Option Grant Agreement(1)
   10.5   Form of Promissory Note with Note Holders re: bridge financing (1)
   10.6   Co-Distribution Agreement with Pharmacia & Upjohn Company and National
          Healthcare Manufacturing Corporation (5)
   10.7   Agreement  for  Purchase  and Sale of  Assets  with  Humphrey  Systems
          Division of Carl Zeiss, Inc. (5)
   10.8   Employment Agreement with Thomas F. Motter (6)
   10.9   Asset Purchase Agreement with Mentor Corp.,  Mentor  Opthalmics,  Inc.
          and Mentor or Medical, Inc. (8)
   10.10  Transition  Services  Agreement with Mentor Corp.,  Mentor Opthalmics,
          Inc., and Mentor Medical, Inc. (8)
   10.11  Severance Agreement and General Release with Michael W. Stelzer(8)
   10.12  Consulting Agreement with Dr. Michael B. Limberg (8)
   10.13  Renewed Consulting Agreement with Dr. Michael B. Limberg (10)
   10.14  Mutual Release and Settlement Agreement with Zevex International, Inc.
          (8)
   10.15  Consulting Agreement with Douglas Adams (8)
   10.16  Agreement and Plan of Reorganization with Paradigm  Subsidiary,  Inc.,
          and Vismed, Inc. d/b/a Dicon (9)
   10.17  Agreement and Plan of Merger with Paradigm Subsidiary, Inc. and Vismed
          Inc. d/b/a Dicon (9)
   10.18  Registration  Rights  Agreement  with  Paradigm  Subsidiary,  Inc. and
          certain shareholders of Vismed, Inc. d/b/a Dicon (9)
   10.19  Indemnification  Agreement with Paradigm Subsidiary,  Inc. and certain
          shareholders of Vismed, Inc. d/b/a Dicon (9)
   10.20  Consulting Agreement with Cyndel & Co., Inc. (10)
   10.21  Stock  Purchase  Agreement  with Ocular  Blood Flow,  Ltd. and Malcolm
          Redman (10)
   10.22  Consulting Agreement with Malcolm Redman (10)
   10.23  Royalty Agreement with Malcolm Redman (10)
   10.24  Registration Rights with Malcolm Redman (10)
   10.25  Agreements with Steven J. Bayern and Patrick M. Kolenik (11)
   10.26  Employment Agreement with Mark R. Miehle (12)
   10.27  Employment Agreement with John W. Hemmer (12)
   10.28  Private Equity Line of Credit  Agreement with Triton West Group,  Inc.
          (12)
   10.29  Renewed Consulting Agreement with Dr. Michael B. Limberg (12)
   10.30  Agreement with KSH Investment Group, Inc. (12)
   10.31  Renewed Consulting Agreement with Dr. Michael B. Limberg (13)
   10.32  Settlement Agreement with Mentor Corporation (13)
   10.33  Consulting Agreement with Rodman & Renshaw, Inc. (13)
   10.34  Consulting Agreement with Barry Kaplan Associates (14)
   10.35  Asset  Purchase  Agreement  with  Innovative  Optics,  Inc. and Barton
          Dietrich Investments, L.P. (15)
   10.36  Escrow  Agreement with  Innovative  Optics,  Inc. and Barton  Dietrich
          Investments, L.P. (15)
   10.37  Assignment and Assumption Agreement with Innovative Optics, Inc.(15)
   10.38  General Assignment and Bill of Sale with Innovative Optics, Inc.(15)
   10.39  Non-competition and Confidentiality Agreement with Mario F. Barton(15)
   10.40  Termination of employment with Mark R. Miehle (17)
   10.41  Consulting Agreement with Mark R. Miehle (17)
   99.01  Certification Pursuant to Section 906 of Sarbanes-Oxley Act 2002
   99.02  Certification Pursuant to Section 906 of Sarbanes-Oxley Act 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.

                                       31
<PAGE>

         (3)  Incorporated  by reference  from  Amendment No. 2 to  Registration
              Statement on Form SB-2, as filed on June 13, 1996.

         (4)  Incorporated  by reference  from Annual Report on Form 10-KSB,  as
              filed on April 16, 1998.

         (5)  Incorporated by reference from Quarterly Report on Form 10-QSB, as
              filed on August 1, 1998.

         (6)  Incorporated  by reference from Quarter Report on Form 10-QSB,  as
              filed on November 12, 1998.

         (7)  Incorporated  by  reference  from  Registration  Statement on Form
              SB-2, as filed on April 29, 1999.

         (8)  Incorporated  by reference  from Annual Report on Form 10-KSB,  as
              filed on March 30, 2000.

         (9)  Incorporated  by  reference  from  Form  8-K,  as field on June 5,
              2000.\

         (10) Incorporated by reference from Report on Form 10-QSB,  as filed on
              August 16, 2000.

         (11) Incorporated by reference from Report on Form 10-QSB,  as filed on
              November 1, 2000.

         (12) Incorporated by reference from Report on Form 10-KSB,  as filed on
              April 16, 2001.

         (13) Incorporated by reference from Report on Form 10-QSB,  as filed on
              August 14, 2001.

         (14) Incorporated by reference from Report on Form 10-QSB,  as filed on
              November 14, 2001.

         (15) Incorporated  by  reference  from  Current  Report on Form 8-K, as
              filed on March 5, 2002.

         (16) Incorporated  by reference  from  Amendment No. 1 to  Registration
              Statement on Form S-3, as filed on March 20, 2002.

         (17) Incorporated by reference from Report on Form 10-QSB,  as filed on
              November 18, 2002.

        (b)  Reports on Form 8-K

         No  reports on Form 8-K were filed by the  Company  during the  quarter
ended December 31, 2002.


Item 14. Controls and Procedures

         (a) Evaluation of disclosure controls and procedures

         Based on their  evaluations  as of a date  within 90 days of the filing
date of this report,  the principal  executive  officer and principal  financial
officer of the Company have concluded that the Company's disclosure controls and
procedures  (as defined in Rules  13a-14(c) and 15d-14(c)  under the  Securities
Exchange Act) are effective to ensure that information  required to be disclosed
by the Company in reports that the Company files or submits under the Securities
Exchange Act is recorded,  processed,  summarized  and reported  within the time
periods specified in the rules and forms of the SEC.

         (b) Changes in internal controls

         There were no significant changes in the Company's internal controls or
in other  factors  that  could  significantly  affect  these  internal  controls
subsequent to the date of their most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.


                                       32
<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:  April 14, 2003                     By:/s/Jeffrey F. Poore
                                           -------------------------------------
                                           Jeffrey F. Poore
                                           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.
<TABLE>
<CAPTION>

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

<S>                           <C>                                       <C>
/s/Randall A. Mackey          Chairman of the Board and                 April 14, 2003 March 31, 2003
------------------------
                              Secretary

/s/David M. Silver, Ph.D      Director                                  April 14, 2003 March 31, 2003
------------------------

/s/Keith D. Ignotz            Director                                  April 14, 2003 March 31, 2003
------------------------

/s/Jeffrey F. Poore           President and Chief Executive Officer
------------------------      (Principal Executive Officer)             April 14, 2003 March 31, 2003

/s/Heber C. Maughan           Vice President of Finance,                April 14, 2003 March 31, 2003
------------------------      Treasurer and Chief Financial
                              Officer (Principal Financial
                              and Accounting Officer)

</TABLE>


                                 CERTIFICATIONS

         I, Jeffrey F. Poore, certify that:

         1. I have  reviewed  this  annual  Report on Form  10-KSB  of  Paradigm
Medical Industries, Inc.;

         2. Based on my  knowledge,  this  annual  report  does not  contain any
untrue  statement of a material fact or omit to state a material fact  necessary
to make the  statements  made,  in light of the  circumstances  under which such
statements  were made, not misleading with respect to the period covered by this
quarterly report;

         3. Based on my knowledge, the financial statements, and other financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

         (a) Designed  such  disclosure  controls and  procedures to ensure that
material  information  relating to the  registrant,  including its  consolidated
subsidiaries, is made known to us by others within those entities,  particularly
during the period in which this annual report is being prepared;

         (b) Evaluated the effectiveness of the registrant's disclosure controls
and  procedures  as of a date  within 90 days prior to the  filing  date of this
annual report (the "Evaluation Date"); and

         (c)  Presented  in  this  annual  report  our  conclusions   about  the
effectiveness of the disclosure  controls and procedures based on our evaluation
as of the Evaluation Date;

         5. The  registrant's  other  certifying  officers and I have disclosed,
based on our most recent evaluation,  to the registrant's auditors and the audit
committee  of  registrant's  board  of  directors  (or  persons  performing  the
equivalent functions):

         (a) All significant deficiencies in the design or operation of internal
controls  which  could  adversely  affect  the  registrant's  ability to record,
process,  summarize  and  report  financial  data  and have  identified  for the
registrant's auditors any material weaknesses in internal controls; and

         (b) Any fraud,  whether or not material,  that  involves  management or
other  employees  who  have a  significant  role  in the  registrant's  internal
controls; and

         6. The registrant's  other certifying  officers and I have indicated in
this annual  report  whether or not there were  significant  changes in internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date:  April 14, 2003                        /s/ Jeffrey F. Poore
                                             -----------------------------------
                                             President and Chief Executive
                                             Officer (Principal Executive
                                             Officer) Vice President of Finance,
                                             Treasurer and Chief Financial
                                             Officer (Principal Financial and
                                             Accounting Officer)

                                       33
<PAGE>

                                 CERTIFICATIONS

         I, Heber C. Maughan, certify that:

         1. I have  reviewed  this  annual  report on Form  10-QSB  of  Paradigm
Medical Industries, Inc.;

         2. Based on my  knowledge,  this  annual  report  does not  contain any
untrue  statement of a material fact or omit to state a material fact  necessary
to make the  statements  made,  in light of the  circumstances  under which such
statements  were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

         (a) Designed  such  disclosure  controls and  procedures to ensure that
material  information  relating to the  registrant,  including its  consolidated
subsidiaries, is made known to us by others within those entities,  particularly
during the period in which this annual report is being prepared;

         (b) Evaluated the effectiveness of the registrant's disclosure controls
and  procedures  as of a date  within 90 days prior to the  filing  date of this
annual report (the "Evaluation Date"); and

         (c)  Presented  in  this  annual  report  our  conclusions   about  the
effectiveness of the disclosure  controls and procedures based on our evaluation
as of the Evaluation Date;

         5. The  registrant's  other  certifying  officers and I have disclosed,
based on our most recent evaluation,  to the registrant's auditors and the audit
committee  of  registrant's  board  of  directors  (or  persons  performing  the
equivalent functions):

         (a) All significant deficiencies in the design or operation of internal
controls  which  could  adversely  affect  the  registrant's  ability to record,
process,  summarize  and  report  financial  data  and have  identified  for the
registrant's auditors any material weaknesses in internal controls; and

         (b) Any fraud,  whether or not material,  that  involves  management or
other  employees  who  have a  significant  role  in the  registrant's  internal
controls; and

         6. The registrant's  other certifying  officers and I have indicated in
this annual  report  whether or not there were  significant  changes in internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date:  April 14, 2003                        /s/ Heber C. Maughan
                                             -----------------------------------
                                             Vice President of Finance,
                                             Treasurer and Chief Financial
                                             Officer (Principal Financial and
                                             Accounting Officer)


                                       34
<PAGE>