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                       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, 2006, or

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

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

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

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

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

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

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


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

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

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

       Registrant's  revenues  for the fiscal year ended  December 31, 2006 were
$2,195,000.

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

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

       The aggregate market value of the voting stock held by  non-affiliates of
the registrant as of June 30, 2006 was  approximately  $1,200,000 based upon the
closing sale price of such stock as reported on the OTC  Bulletin  Board on that
date.

       As of March 31, 2007,  registrant had outstanding  203,975,958  shares of
common stock, 5,627 shares of Series A preferred stock, 8,986 shares of Series B
preferred stock, no shares of Series C preferred stock, 5,000 shares of Series D
preferred  stock,  250 shares of Series E preferred  stock,  4,598.75  shares of
Series F preferred stock, and 588,235 shares of Series G preferred stock.

                      DOCUMENTS INCORPORATED BY REFERENCE:

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

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



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                                     PART I

Item 1. Description of Business

General

       The Company develops, manufactures, sources, markets and sells ophthalmic
surgical  and  diagnostic  instrumentation  and related  accessories,  including
disposable products.  The Company's surgical equipment is designed for minimally
invasive cataract treatment. The Company's cataract removal system, the PhotonTM
laser system,  is a laser cataract surgery system designed to be marketed as the
next  generation of cataract  removal.  Because of the "going concern" status of
the Company,  management  has focused  efforts on those  products and activities
that will, in its opinion,  achieve the most resource efficient  short-term cash
flow to the  Company.  As  reflected  in the  results  for the fiscal year ended
December 31, 2005,  diagnostic  products are currently the Company's major focus
and the Photon(TM) and other extensive  research and  development  projects have
been put on hold pending future  evaluation  when the financial  position of the
Company  improves.  Due to the  lack of FDA  approval  and the  lack of  current
evidence  to support  recoverability,  the Company  has  recorded  an  inventory
reserve to offset the majority of the inventory  associated with the Photon(TM).
In addition, most inventory associated with the Precisionist Thirty Thousand(TM)
has been reserved for due to the estimated lack of recoverability. The Company's
focus is not on any specific  diagnostic product or products,  but rather on its
entire group of diagnostic products. The PhotonTM can be sold in markets outside
of the United States.  Both the PhotonTM and the Precisionist  ThirtyThousand TM
are manufactured as an Ocular Surgery WorkstationTM.  The Company is considering
marketing the PhotonTM and other lasers for use in eye care.

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

       In June 1997, the Company received FDA clearance to market the Blood Flow
AnalyzerTM 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  AnalyzerTM  is a portable  automated
in-office  system  that  presents  an  affordable  method for ocular  blood flow
testing  for the  ophthalmic  and  optometric  practitioner.  In June 2000,  the
Company  purchased  Occular Blood Flow, Ltd., the manufacturer of the Blood Flow
AnalyzerTM.  The terms and  conditions  of the sale  were  $100,000  in cash and
100,000  shares  of  common  stock.   In  April  2001,   the  Company   received
authorization  to use a  common  procedure  terminology  or CPT  code  from  the
American  Medical  Association  for  procedures  performed  with the Blood  Flow
AnalyzerTM , for reimbursement  purposes for doctors using the device.  However,
certain  payers  have  elected  not to  reimburse  doctors  using the Blood Flow
Analyzer(TM).

       On July 23, 1998, the Company  entered into an Agreement for Purchase and
Sale of Assets with the Humphrey Systems Division of Carl Zeiss, Inc. to acquire
the ownership and  manufacturing  rights to certain  assets of Humphrey  Systems
that  are  used  in  the   manufacturing   and   marketing   of  an   ultrasonic
microprocessor-based  line of ophthalmic diagnostic  instruments,  including the
Ultrasonic  Biometer  Model 820, the A/B Scan System  Model 837, the  Ultrasound
Pachymeter  Model 855,  and the  Ultrasound  Biomicroscope  Model  840,  and all
accessories, packaging and end-user collateral materials for each of the product
lines for the sum of  $500,000,  payable in the form of 78,947  shares of common
stock which were issued to Humphrey  Systems and 26,316  shares of common  stock
which were issued to business broker Douglas Adams. If the net proceeds received
by Humphrey Systems from the sale of the shares issued pursuant to the Agreement
was less than $375,000,  after payment of commissions,  transfer taxes and other
expenses  relating to the sale of such shares,  the Company would be required to
issue  additional  shares of common stock,  or pay additional  funds to Humphrey
Systems as would be necessary to increase the net proceeds  from the sale of the
assets to $375,000.  Since Humphrey Systems realized only $162,818 from the sale
of 78,947  shares of its common  stock,  the Company  issued  80,000  additional
shares in January  1999 to enable  Humphrey  Systems to receive  its  guaranteed
amount.  The amount of $21,431 was paid to the Company as excess  proceeds  from
the sale of this additional stock.

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

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

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

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

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

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

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

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

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

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

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

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

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

       The software and hardware  modifications  designed jointly by the Company
and MEDA will be considered the joint  intellectual  property of the Company and
MEDA and may be used, without  restriction,  unless otherwise  previously agreed
to, by either  party.  MEDA also  agrees to provide a 12 month  warranty  on all
products that it manufactures for the Company. If defects cannot be corrected at
our  facilities,  the  products  may be  returned  to MEDA for the  purposes  of
carrying out such  repairs as  required,  and MEDA agrees to return the repaired
products  to the  Company  or its  designated  agent or  distributor  within ten
working  days  from  the  date of  receiving  such  products,  at no cost to the
Company, and MEDA will pay return freight costs.

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

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

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

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deemed terminated.  However,  if within the 120 day period, the Company and MEDA
mutually agree to extend the term of the agreement, then thereafter either party
may terminate  the agreement by providing 12 months prior written  notice to the
other party. All outstanding orders at the time of notification will be supplied
under the terms of the  agreement,  and MEDA will continue to fulfill all orders
from the Company until the 12 month notice period has expired.

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

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

Background

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

Overview

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

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

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

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distance value that is presented as a visual image, or cross section of the eye,
with  precise  measurements  displayed  and  printed for  diagnostic  use by the
surgeon.

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

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

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


Products

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

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

       The   PrecisionistTM   also  features  the  Company's   newly   developed
proprietary  fluidics  panel  which  is  completely   noninvasive  for  improved
sterility  and to  provide  a  surgical  environment  in the eye that  virtually
eliminates  fluidic  surge and  solves  chamber  maintenance  problems  normally
associated  with phaco  cataract  surgery.  This new  fluidics  system  provides

                                       6
<PAGE>

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 PrecisionistTM and related accessories were 0% of total revenues in
both the fiscal years 2006 and 2005, respectively.

       Ocular Surgery WorkstationTM:  The Ocular Surgery WorkstationTM comprises
the base system of the Precisionist ThirtyThousandTM and is the first system, to
the  Company's  knowledge,  which  uses the  expansive  capabilities  of today's
advanced computer  technology to offer seamless open architecture  expandability
of the system  hardware  and software  modules.  The  WorkstationTM  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  WorkstationTM  with the  ability to add other  hardware  and
software  features.  Expansion  such as the Company's  PhotonTM laser system and
hardware for additional surgical applications are easily implemented by means of
a preexisting  expansion rack,  which resides in the base of the  WorkstationTM.
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  WorkstationTM  will be
accepted in the marketplace.  If the FDA approves the PhotonTM, the Company will
refer to the  WorkstationTM  as the PhotonTM  Ocular Surgery  WorkstationTM.  To
date, the Company has not  commercially  developed or offered for sale any other
added hardware or software features to its Workstation TM.

       PhotonTM Laser System: The PhotonTM 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  PrecisionistTM Ocular Surgery WorkstationTM.
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,
PhotonTM laser software package and  interchangeable  disposable hand held fiber
optic  laser  cataract   probe.   The  PhotonTM  laser  utilizes  the  on  board
microprocessor  computer  of the  WorkstationTM  to  generate  short pulse laser
energy developed  through the patented LCPTM to targeted  cataract tissue inside
the eye,  while  simultaneously  irrigating  the eye and aspirating the diseased
cataract tissue from the eye. The probe is smaller in diameter than conventional
ultrasound phaco needles and presents no damaging  vibration or heat build up in
the eye. The  Company's  Phase I clinical  trials  demonstrated  that this probe
could easily  reduce the size of the cataract  incision from 3.0 mm to under 2.0
mm  thereby  reducing  surgical  trauma  and   complementing   current  foldable
intraocular implant technology.

       The laser probe may also eliminate any  possibility  for burns around the
incision  or at the  cornea  and may  therefore  be used with  cataract  surgery
techniques  that  utilize  a more  delicate  clear  cornea  incision  which  can
eliminate sutures and be conducted with topical anesthesia. However, this system
may not effectively remove harder grade cataracts. Harder grade cataracts can be
removed using the already existing ultrasound  capability of the PrecisionistTM.
Because of the "going  concern"  status of the Company,  management  has focused
efforts on those products and activities that will, in its opinion,  achieve the
most resource efficient short-term cash flow to the Company. As reflected in the
results for the fiscal year ended  December  31, 2005,  diagnostic  products are
currently  the  Company's  major focus and the  Photon(TM)  and other  extensive
research  and  development  projects  have  been  put  on  hold  pending  future
evaluation  when  the  Company's   financial  position  improves.   Due  to  the
uncertainty surrounding the timetable for obtaining FDA approval and the lack of
significant  revenue from the other surgical products,  the Company has recorded
an inventory  reserve against the majority of the inventory  associated with the
Photon(TM) and Precisionist  Thirty Thousand (TM). The Company's focus is not on
any specific  diagnostic product or products,  but rather on its entire group of
diagnostic products.

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

       The  Company's  laser  system is based upon the concept that pulsed laser
energy produced with the microprocessor  controlled Nd:YAG laser system provides
ophthalmic  surgeons  with a more  precise  and less  traumatic  alternative  in
cataract surgery.  Although conventional ultrasonic surgical systems have proven
effective  and  reliable  in  clinical  use for many  years,  their  use of high
frequency  shock waves and  vibration  to  fragment  the  cataract  can make the
procedure  difficult and can present risk of complication  both during and after

                                       7
<PAGE>

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 PhotonTM laser cataract system should only affect tissues
with which it comes into direct contact.

       In October of 2000,  the Company  received  FDA approval for the PhotonTM
WorkstationTM 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  PhotonTM  Ocular  Surgery  WorkstationTM  has not been  commercially
developed  with any other  added  hardware  or  software  features.  There is no
guarantee  that the  ophthalmic  surgery  market  will  accept the laser in this
capacity or that the FDA will grant approval.  Regulatory approval would require
completion of pending  Photon(TM)  clinical trials and  resubmission of a 510(k)
predicate  device  application to the FDA. Because of the "going concern" status
of the Company,  management has focused efforts on those products and activities
that will, in its opinion,  achieve the most resource efficient  short-term cash
flow to the  Company.  As  reflected  in the  results  for the fiscal year ended
December 31, 2005, diagnostic products consisting mainly of the P40, P45 and P60
UBM  Ultrasound  Biomicroscopes,   P37  A/B  Scan,  perimeters,  CT  50  Corneal
Topographer, and Blood Flow Analyzer(TM) are currently the Company's major focus
and the Photon(TM) and other extensive  research and  development  projects have
been put on hold pending future  evaluation  when the financial  position of the
company improves.  The Company's focus is not on any specific diagnostic product
or products, but rather on the entire group of diagnostic products.

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

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

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

       Surgical Instruments and Disposables: In addition to the cataract surgery
equipment,  the Company's  surgical  systems  utilize or will utilize  accessory
instruments and disposables,  some of which are proprietary to us. These include
replacement ultrasound tips, sleeves, tubing sets and fluidics packs, instrument

                                       8
<PAGE>

drapes and laser cataract  probes.  The Company intends to expand its disposable
accessories  as it  penetrates  the  cataract  surgery  market and  expands  the
treatment  applications for its WorkstationTM.  These products contributed 0% of
total revenues for both 2005 and 2004.

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

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

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

       The  manufacturing  activities  for the Blood Flow  AnalyzerTM  have been
moved to the Salt  Lake City  facility  from the  outsourced  plant  located  in
England.  On October 21, 2002,  the Company  received FDA approval on its 510(k)
application for additional  indications of use for the Blood Flow  Analyzer(TM).
The additional  indications  include  pulsatile  ocular blood flow and pulsatile
ocular  blood  volume.  These  are  diagnostic   measurements  that  assess  the
hemodynamic  and vascular health of the eye. Also, the Company is continuing its
aggressive  campaign  to  educate  the  insurance  payers  about the Blood  Flow
Analyzer(TM),  its purposes and the  significance  of its performance in patient
care in order to  achieve  reimbursements  to the  doctors  using its Blood Flow
Analyzer(TM).  Sales of the Blood  Flow  Analyzer(TM)  and  related  accessories
accounted for 10% and 4% of total sales for the fiscal years ended  December 31,
2006 and 2005, respectively.

       Dicon(TM)  Perimeters:  DiconTM perimeters consist of the LD 400, the TKS
5000,  and  software   consisting  of  FieldLinkTM,   FieldViewTM  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

                                       9
<PAGE>

monitoring  of glaucoma  worldwide.  Perimetry is  reimbursable  worldwide.  The
DiconTM  perimeters feature patented kinetic fixation and voice synthesis now in
27 different languages.  Software programs are sold to assist in the analysis of
the test results.  Sales of the perimeters and related accessories generated 35%
and 28% of the total revenues for 2006 and 2005, respectively.

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

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

       Dicon(TM) Corneal Topographers:  DiconTM corneal topographers include the
CT 200TM and the CT 50. Corneal topographers are used to determine the shape and
integrity of the cornea, the anterior surface of the eye. Clinical  applications
for corneal topographers include refractive surgery that eliminates the need for
eyeglasses and optometric applications including contact lens fitting.  Revenues
from the topographer and related  accessories  were 3% of the total revenues for
both 2006 and 2005. An enhanced version of the CT 200(TM) was introduced  during
the fourth  quarter of 2003.  The Company has  completed  the upgrades to the CT
200(TM) and the CT 50 Corneal Topographers, which are now operating with Windows
XP software rather than the former Windows 95 operating systems.

       P55  Pachymetric   Analyzer:   The  ultrasonic  pachymeter  is  used  for
measurement  of corneal  thickness.  The Model P55 is  positioned  as a standard
office pachymeter.  This device is targeted to the refractive surgery market and
contributed 1% and 2% of the total revenues for 2006 and 2005, respectively.

       P20 A-Scan Biometric Ultrasound Analyzer: The A-Scan was removed from the
Company's line of diagnostic  products in 2002 but added back as a result of its
Worldwide OEM Agreement  with MEDA Co., Ltd. in which MEDA has agreed to jointly
develop and  collaborate  in the  improvement  and  enhancement of the Company's
products.  The A-Scan is a prerequisite  procedure reimbursed by Medicare and is
performed  before every  cataract  surgery.  Over 5,000 A-Scan systems have been
installed in the worldwide market, representing a substantial market opportunity
for software upgrades and extended warranty contract sales. A-Scan sales were 0%
and 1%of the total revenues for 2006 and 2005, respectively.

       P37 A/B  Scan  Ocular  Ultrasound  Diagnostic:  The  A/B  Scan is used by
retinal  subspecialists  to identify foreign bodies in the posterior  chamber of
the eye and to evaluate the structural  integrity of the retina. The A/B Scan is
attractive  to the general  ophthalmic  community at large  because of its lower
price point and its image resolution qualities.  Sales from this product were 8%
of the total revenues for both 2006 and 2005.

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

       The P40  biomicroscope  related surgical  filtering  procedures are fully
reimbursable  by Medicare  and  insurance  providers.  This  untapped new market
positions  the  Company  with its  proprietary  P40  biomicroscope  and,  to its
knowledge, the only commercially viable product of this type on the market, as a
leader in the rapidly expanding glaucoma imaging and treatment  segment.  In the
fall of 2000, the Company introduced the P45 UBM Ultrasonic Biomicroscope, which
combines the P40 biomicroscope and the P37 A/B Scan Ocular Ultrasound Diagnostic
into one instrument.  The Company believes that by combining functions,  the P45
will appeal to a broader market.  The P40 biomicroscope and related  accessories
sales were 4% and 9% of the total revenues for 2006 and 2005, respectively.  The
P45  biomicroscope  and related  accessories sales contributed 6% and 13% of the
total revenues for 2006 and 2005, respectively.

                                       10
<PAGE>

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

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

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

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

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

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

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

       Parts and  Services:  The parts and service  revenue  from the repair and
service of equipment  sold  accounted for 12% of total revenues in both 2006 and
2005.

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

                                       11
<PAGE>

<TABLE>
<CAPTION>

                                                    Commercial      Reimbursement    % 2005        %2006         Regulatory
  Product (1)                Product Class          Development         Status        Sales        Sales          Approvals
-----------------------------------------------------------------------------------------------------------------------------------
<S>                     <C>                         <C>             <C>              <C>           <C>       <C>
P55, P2200 and          System, Imaging, Pulsed       Complete            Yes           2%           3%      FDA 510(K) K844299*
P2500 Pachymetric           Echo Diagnostic                                                                  ISO 9001: 1994, EN ISO
Analyzer                                                                                                     9001**

P20 and P2000           System Imaging, Pulsed        Complete            Yes           0%           1%      FDA 510(K) I844299*
A-Scan Biometric            Echo Diagnostic                                                                  ISO 9001: 1994,
Ultrasound Analyzer                                                                                          EN ISO 9001**

P37, P37-II and         Transducer, Ultrasound        Complete            Yes           8%           10%     FDA 510(K) K844299*
P2700 A/B Scan                Diagnostic                                                                     ISO 9001: 1994,
Ocular Ultrasound                                                                                            EN ISO 9001**
Diagnostic
P40 UBM Ultrasound      System, Imaging, Pulsed       Complete            Yes           9%           5%      FDA 510(K) K844299*
BioMicroscope               Echo Ultrasound                                                                  ISO 9001: 1994,
                              Diagnostic                                                                     EN ISO 9001**

P45 UBM Ultrasound      System, Imaging, Pulsed       Complete            Yes           13%          6%      FDA 510(K) K844299*
Biomicroscope,              Echo Ultrasound                                                                  ISO 9001: 1994,
Workstation Plus              Diagnostic                                                                     EN ISO 9001**

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

BFA Ocular Blood           Tonometer, Manual          Complete            Yes****       4%           10%     FDA 510(K) K844299*
Flow Analyzer(TM) and         Diagnostic                                                                     ISO 9001: 1994,
Disposables                                                                                                  EN ISO 9001**

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

LD 400                   Perimeter, Automatic         Complete            Yes           23%          25%     FDA 510(K) K844299*
Autoperimetry                 AC-Powered                                                                     ISO 9001: 1994,
System                        Diagnostic                                                                     EN ISO 9001**

TKS 5000                 Perimeter, Automatic         Complete            Yes           5%           11%     FDA 510(K) K844299*
Autoperimetry           AC-Powered, Diagnostic                                                               ISO 9001: 1994,
System                                                                                                       EN ISO 9001**

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

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

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

                                       12
<PAGE>

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

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

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

Marketing and Sales

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

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

       Current Market Acceptance and Potential:  The principal purchasers of the
Company's products have been  ophthalmologists,  optometrists,  universities and
clinics in many countries  throughout the world.  The Company  believes that the
market for its  products  is being  driven by: (i) the aging of the  population,
which is evidenced by the domestic and  international  cataract  surgery  volume

                                       13
<PAGE>

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

       Marketing Organization:  The Company markets its products internationally
through  a  network  of  dealers   and   domestically   through   direct   sales
representatives,  independent  sales  representatives,  and  ophthalmic  product
distributors.  As of December  31,  2006,  the Company had four direct  domestic
sales  representatives in the United States and 54 foreign dealers.  These sales
representatives  are  assigned  exclusive  territories  and  have  entered  into
contracts  with the Company  that contain  performance  quotas.  Domestic  sales
channels have been expanded to include  independent  sales  representatives  and
distributors  who began  training with its products in August 2003.  The Company
also plans to continue to market its products by identifying  customers  through
internal market research, trade shows and direct marketing programs. The Company
also utilized a Clinical Advisory Board comprised of leading ophthalmic surgeons
in the United States and Europe who spoke at conventions, train ophthalmologists
and visit foreign doctors and dealers to promote its products.

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

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

       The  Company  subcontracts  the  manufacturing  of some of its  ancillary
instruments, accessories and disposables through specified vendors in the United
States. These products are contracted in quantities and at costs consistent with
its  financial   purchasing   capabilities   and  pricing  needs.   The  Company
manufactures certain accessories at its facility in Salt Lake City.

       Product  Service  and  Support:  Service  for the  Company's  products is
overseen from its Salt Lake City location and is augmented by its  international
dealer  network,  which  provides  technical  service and repair.  Installation,
on-site  training  and a limited  product  warranty are included as the standard
terms of sale. The Company provides  distributors  with replacement  parts at no
charge during the warranty  period.  International  distributors are responsible
for  installation,  repair and other  customer  service to installed  systems in
their territory.  All systems parts are modular  sub-components  that are easily
removed and  replaced.  The  Company  maintains  adequate  parts  inventory  and
provides overnight replacement parts shipments to its dealers.

Research and Development

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

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

       Research, development and service expenses (which includes production and
manufacturing   support  and  the  service  department  expenses)  decreased  by
$605,000,  or 71%, to $250,000 for the twelve  months  ended  December 31, 2006,
from  $855,000  for the same period in 2005.  None of the costs of research  and
development activities during 2006 and 2005 was borne directly by customers.

                                       14
<PAGE>

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

Competition

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

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

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

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

       Ultrasound Equipment  Manufacturers.  As a relatively recent entrant into
the cataract surgical  equipment market with a newer equipment line, the Company
is  establishing  itself and, as yet, does not hold a  significant  share of the
market. The Company currently recognizes Bausch & Lomb, Alcon Laboratories,  and
Allergan  Medical  Optics as its primary  competitors  in the  ultrasound  phaco
cataract equipment market. In respect to ultrasound diagnostic equipment such as
the UBM,  A-Scan,  Pachymeter  and A/B Scan,  the Company is well  positioned to
compete against companies that currently hold a significant share of the market.
The Company recognizes Sonomed, Tomey, Nidek, OTI and Quantel.

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

       The Company believes that its ability to compete successfully will depend
on  its  capability  to  create  and  maintain  advanced   technology,   develop
proprietary products, attract and retain scientific personnel,  obtain patent or
other proprietary protection for its products and technologies,  obtain required

                                       15
<PAGE>

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  refractive  surgeries,  macular  degeneration  and  glaucoma in the
United States, the leading causes of adult blindness worldwide. The National Eye
Institute  stated in 2002 that the  number of  visually  impaired  Americans  is
likely to double over the next three  decades.  Their report  estimated that 2.4
million people suffer some visual impairment in this country.  The damage caused
by these diseases is irreversible.  The  preconditions  for the onset of macular
degeneration  or glaucoma  are low ocular  blood flow  and/or  high  intraocular
pressure. Diagnostic screening is important for individuals susceptible to these
diseases.  People in high risk  categories  include:  African  Americans over 40
years of age, all persons over 60 years of age, persons with a family history of
glaucoma or diabetes, and the very nearsighted. The Glaucoma Research Foundation
recommends  that these high risk  individuals be tested  regularly for glaucoma.
According to the U.S.  Census Bureau,  in 1995 there were over 30 million adults
65 years of age and older and 8 million  African  Americans  45 years of age and
older. The Glaucoma Research Foundation reports that glaucoma currently accounts
for more than 7 million visits to physicians annually.

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

Intellectual Property Protection

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

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

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

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

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

                                       16
<PAGE>

agreement,  the Company has agreed to be actively engaged in either research and
development  of a salable  product  utilizing  the  patent or in  marketing  and
selling such a product.

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

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

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

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

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

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

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

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

Regulation

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

                                       17
<PAGE>

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

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

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

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

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

       Upon receipt of the premarketing  approval  application,  the FDA makes a
threshold  determination  whether the  application is  sufficiently  complete to
permit  a  substantive  review.  If the FDA  determines  that  the  premarketing
approval is sufficiently  complete to permit a substantive  review, the FDA will
"file" the application.  Once the submission is filed, the FDA has by regulation

                                       18
<PAGE>

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

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

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

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

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

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

                                       19
<PAGE>

Regulatory Status of Products

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

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

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

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

Employees

       As of March 31, 2007, the Company had 21 full-time employees. This number
does  not  include  its  manufacturer's   representatives  who  are  independent
contractors  rather  than its  employees.  The  Company  also  utilizes  several
consultants  and  advisors.  There can be no assurance  that the Company will be
successful in recruiting or retaining key personnel. None of its employees are a
member of a labor  union and the  Company  has never  experienced  any  business
interruption as a result of any labor disputes.

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

                                       20
<PAGE>

working  in Salt  Lake  City.  The  Company  realized  a net cost  savings  from
downsizing of approximately  $2,394,000  during the twelve months ended December
31, 2002.

Item 2. Description of Property

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

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

Item 3. Legal Proceedings

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

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

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

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

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

       In December  2006,  a hearing on the motion for  summary  judgment in the
Todd Smith case (Third Judicial District Court, Salt Lake County, State of Utah,
Civil No.  030924951CN)  was held.  At the hearing the court  granted the motion

                                       21
<PAGE>

dismissing  the  case in its  entirety  against  the  Company  and  three of its
directors.  A notice  of  appeal  was  filed on  behalf  of Mr.  Smith  and then
subsequently withdrawn.

       Also in December  2006,  a hearing on the motion for summary  judgment in
the Corinne Powell case (Third Judicial District Court, Salt Lake County,  State
of Utah,  Civil No.  030918364)  was held.  At the hearing the court granted the
motion  dismissing  the case in its entirety  against the Company and one of the
directors. The appeal time has expired with no appeal being filed.

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

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

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


                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters

       The Company's  authorized capital stock consists of 800,000,000 shares of
common  stock,  $.001 par value per share,  and  5,000,000  shares of  preferred
stock,  $.001 par value per share.  The  Company has  created  seven  classes of
preferred  stock,  designated  as Series A preferred  stock,  Series B preferred
stock,  Series C preferred stock , Series D preferred stock,  Series E preferred
stock, Series F preferred stock and Series G preferred stock.

       The  Company's  common stock  trades on the OTC Bulletin  Board under the
symbol of "PMED.OB."  Prior to July 22, 1996, there was no public market for the
common stock.  From July 22, 1996 to June 25, 2003,  the Company's  common stock
was listed on the Nasdaq SmallCap Market.  Since June 25, 2003, the common stock
has traded on the OTC Bulletin  Board.  As of March 26,  2007,  the closing sale
prices of the common stock was $.016 per share.  The  following are the high and
low sale prices for the common  stock by quarter as reported by the OTC Bulletin
Board since January 1, 2004.

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

2004
   First Quarter                                  $  .21         $  .15
   Second Quarter                                    .16            .07
   Third Quarter                                     .12            .09
   Fourth Quarter                                    .12            .08

2005
   First Quarter                                     .10            .08
   Second Quarter                                    .09            .07
   Third Quarter                                     .10            .001
   Fourth Quarter                                    .048           .001

2006
   First Quarter                                     .047           .001
   Second Quarter                                    .014           .006
   Third Quarter                                     .007           .004
   Fourth Quarter                                    .005           .003

2007
   First Quarter                                     .032           .003


                                       22
<PAGE>

       The Company's Series A preferred stock,  Series B preferred stock, Series
C preferred stock,  Series D preferred stock, Series E preferred stock, Series F
preferred  stock and Series G preferred  stock are not  publicly  traded.  As of
March 31, 2007,  there were 4,781  record  holders of common  stock,  six record
holders of Series A preferred  stock,  four record holders of Series B preferred
stock,  no record  holders of Series C  preferred  stock,  one record  holder of
Series D preferred  stock,  one record  holder of Series E preferred  stock,  18
record  holders of Series F preferred  stock,  and one record holder of Series G
preferred stock.

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

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

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

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

Critical Accounting Policies

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

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

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

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

       4. Collectibility is  reasonably assured.  With limited  exceptions,  the
Company  requires down payments on product prior to shipment.  In some cases the
Company  requires  payment in full prior to shipment.  The Company also performs

                                       23
<PAGE>

credit checks on new customers and ongoing credit checks on existing  customers.
The Company  maintains an allowance for doubtful  accounts  receivable  based on
historical experience and management's current expectations.

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

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

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

General

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

       The Company is engaged in the design,  development,  manufacture and sale
of high technology  diagnostic and surgical eye care products.  Given the "going
concern" status of the Company, management has focused efforts on those products
and activities  that will, in its opinion,  achieve the most resource  efficient
short-term  cash  flow.  As seen in the  results  for the  twelve  months  ended
December  31,  2006,  diagnostic  products  have  been the  major  focus and the
Photon(TM) and other extensive  research and development  projects have been put
on  hold  pending  future  evaluation  when  the  Company's  financial  position
improves.  The  Company  does not  focus on a  specific  diagnostic  product  or
products but, instead, on this entire diagnostic product group.

       During the year ended December 31, 2006, the Company recorded an increase
in  the  warranty  accrual  of  $40,000.   This  increase  was  a  result  of  a
comprehensive  analysis  by  management  regarding  historical  warranty  costs.
Historically,  the Company has recorded a monthly  warranty  expense and related
increase to the warranty  accrual.  However,  in recent periods the usage of the
warranty  accrual  has  continued  to  increase.   After  reviewing  the  recent
historical  data,  management  determined  that the warranty  accrual  should be
increased by $40,000 to $155,000.  Management  will continue to closely  monitor
the warranty accrual usage to ensure that the proper amount has been accrued.

       During the twelve months ended December 31, 2006, management made certain
adjustments to the financial statements, including a decrease in the reserve for
obsolete or estimated  non-recoverable  inventory  of $37,000.  The Company also
recorded a net decrease in the  allowance  for doubtful  accounts  receivable of
$1,000,  impairment of  intangibles of $-0-, and decreases in accruals to settle
outstanding disputes in the amount of $98,000.

       The Company's  ultrasound  diagnostic  products include a P55 pachymetric
analyzer,  a P2200  pachymetric  analyzer,  a P2000 Ultrasound  A-Scan biometric
analyzer, a P2500 combination A/Scan and Pachymeter,  a P37 Ultrasound A/B Scan,
a P37-II  Ultrasound  A/B scan, a P2700  Ultrasound  A/B Scan, a P40  Ultrasound
Biomicroscope,   a  P45  Plus   Ultrasound   Biomicroscope,   a  P50  Ultrasound
Biomicroscope,  and a P60 Ultrasound Biomicroscope, the technology for which was
acquired from Humphrey  Systems in 1998. The Company  introduced the P45 Plus in

                                       24
<PAGE>

the fall of 2000,  which combines the A/B Scan, and the  biomicroscope  into one
instrument.  The Company  introduced the P60 in March 2005, which represents the
fourth  generation  of UBM  devices  and has  better  visual  clarity  and image
flexibility than earlier  versions.  In addition,  the Company markets its Blood
Flow  Analyzer(TM)  acquired in the  purchase of Ocular  Blood Flow Ltd. in June
2000. Other  diagnostic  products are the Dicon(TM) LD400 Auto Perimeter and the
Dicon (TM) CT 200e Corneal  Topographer,  which were acquired in the acquisition
of Vismed d/b/a Dicon in June 2000.

       The Company purchased the inventory,  design and production rights of the
SIStem(TM) , the Odyssey and the Surgetrol  from Mentor  Corporation  in October
1999, which was designed to perform  minimally  invasive  cataract  surgery.  In
November  1999,  the  Company  entered  into a  Mutual  Release  and  Settlement
Agreement with the manufacturer of the Precisionist ThirtyThousand(TM), in which
the Company  purchased the raw materials and finished  goods  inventory to bring
the manufacturing of this product  in-house.  During the fourth quarter of 2003,
the Company sold all inventory and rights  associated  with the  SIStem(TM)  and
Odyssey(TM) for $125,000. This transaction resulted in sales of $125,000 with no
cost of sales because a reserve for obsolete  inventory had been recorded on all
SIStem(TM) and Odyssey(TM) inventory.

       Because of the "going  concern"  status of the  Company,  management  has
focused  efforts on those  products and  activities  that will,  in its opinion,
achieve the most  resource  efficient  short-term  cash flow to the Company.  As
reflected in the results for the fiscal year ended December 31, 2005, diagnostic
products are currently the Company's  major focus and the  Photon(TM)  and other
extensive research and development projects have been put on hold pending future
evaluation when the financial position of the Company improves.  Due to the lack
of current  evidence to support  recoverability,  the  Company  has  recorded an
inventory  reserve  to offset the  inventory  associated  with the  Precisionist
Thirty  Thousand(TM) and the Photon(TM) as well as certain other inventory items
that are estimated to be non-recoverable due to the lack of significant turnover
of such items in recent periods.

       The Company has shown improvement in its manufacturing  efficiencies,  as
well  as the  timeliness  and  the  quality  of the  Company's  services  to its
customers.  For example,  a great deal of the  improvement  is  attributable  to
reforms in  operations,  which enabled  dramatically  improved  availability  of
product and decreased lead times. Additional  reorganization of services enabled
substantially reduced wait times and reserve requirements.  Specifically, during
2005 the  Company  was able to record  an  increase  in income of  approximately
$30,000 from a reduction in warranty reserves.  This reduction was a result of a
comprehensive  analysis  by  management  regarding  historical  warranty  costs.
Historically,  the Company has recorded a monthly  warranty  expense and related
increase to the warranty  accrual.  However,  in recent periods the usage of the
warranty accrual has continued to decline. After reviewing the recent historical
data,  the Company  determined  that the warranty  accrual  should be reduced by
approximately  $300,000.  The  Company  will  continue  to closely  monitor  the
warranty accrual usage to ensure that the proper amount has been accrued.

       Activities  for the  twelve  months  ended  December  31,  2006  and 2005
included sales of the Company's products and related  accessories and disposable
products.  In March 2004, the Company named a new President and Chief  Executive
Officer,  John Y. Yoon. Mr. Yoon resigned  effective December 31, 2005 to pursue
other opportunities. Mr. Yoon was replaced by Raymond P.L. Cannefax as President
and Chief Executive Officer on January 5, 2006. In April 2004, the Company named
Aziz A. Mohabbat as Vice  President of Operations and Chief  Operating  Officer.
Mr. Mohabbat resigned effective November 15, 2005 to pursue other opportunities.
In March 2006, the Company named Luis A. Mostacero as Vice President of Finance.
Mr. Mostacero  previously  served as the Company's  Controller from June 2000 to
August  2005.  In April  2006,  the  Company  named  Michael  S.  Austin as Vice
President of Sales and Marketing.  In November 2006 Mr. Austin resigned from the
Company.  In December 2006,  Christina  O'Connor was promoted to the position of
Vice  President  of  International  Sales and  Relations.  In January  2007,  Al
Franklin joined the Company as the Vice President of Domestic Sales.

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

                                       25
<PAGE>

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

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

       There were a number of factors that  contributed to the decrease in sales
of the Blood Flow Analyzer  (TM) and other  products.  September  11, 2001,  the
ensuing Afghanistan  conflict,  and the Iraq war had a significant impact on the
Company's international sales. The U.S. recessionary economic trend has impacted
its  domestic  sales.   Additionally,   the  Company   restructured   its  sales
organization  and sales  channels by  decreasing  its direct sales force who are
full-time  employees from 10 direct sales employees on January 1, 2003, to three
direct  sales  employees on December 31,  2005.  The  dependent  sales force was
reduced  because the Company  does not have  sufficient  revenues to justify the
larger  direct sales force.  One of the  challenges  for fiscal 2006 will be the
judicious reconstruction of the sales force in anticipation of increased sales.

       The  Company  intends to  increase  its  efforts  to sell its  diagnostic
products through  independent  sales  representatives  and ophthalmic  equipment
distributors,  which are paid  commissions  only for their sales. As of December
31, 2005, the Company had one independent sales representative and 54 ophthalmic
and medical product distributors outside the United States. The Company hopes to
benefit from these recently hired sales  representatives and distributors in the
United  States as they gain  familiarity,  through  training,  of the  Company's
diagnostic  products.  Due to concerns over the budget and the  effectiveness of
trade shows,  the Company  exhibited  at only two trade shows  during 2005.  The
Company  monitors trade show attendance to determine the extent to which it will
exhibit at future trade shows.

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

       On August 3, 2004,  the  Company  sold its  investment  in  International
Bio-Immune Systems for net proceeds of $505,000 pursuant to a stock purchase and
sale  agreement  with  William  Ungar,  a current  director and  shareholder  of
International Bio- Immune Systems. The securities sold to Mr. Ungar consisted of
2,663,254  common  shares of  International  Bio-Immune  Systems and warrants to
purchase  1,200,000 common shares of International  Bio-Immune  Systems at $2.50
per share. Because, for book purposes, the Company's investment in International
Bio-Immune  Systems  had been  reduced  to $0, the full  amount of the  $505,000
received from the sale of the International Bio-Immune Systems common shares and
warrants was reported as a gain in 2004.

                                       26
<PAGE>

Outstanding Commitments to Issue Shares

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

                                                   Underlying Shares
              Security                              of Common Stock

           Notes (1)                                    218,408,333
           Warrants (2)                                  25,059,392
           Preferred Stock (3)                              873,071
           Stock Options (4)                              7,075,500
                                                   ----------------
                  Total                                 251,416,296

(1)    Assumes full  conversion  of  $3,145,080 of notes issued to AJW Partners,
       LLC, AJW Offshore,  Ltd., AJW Qualified Partners, LLC, and New Millennium
       Capital Partners II, LLC at a conversion price of $.0144 per share (based
       upon  a  market  price  of  $.024  as of  February  13,  2007  with a 40%
       discount).
(2)    Consisting of warrants exerciseable at prices ranging from $.10 per share
       to $6.75 per share,  including warrants issued to AJW Partners,  LLC, AJW
       Offshore,  Ltd., AJW Qualified Partners,  LLC, and New Millennium Capital
       Partners  II, LLC to  purchase  16,534,392  shares of common  stock at an
       exercise  price of $.20 per share,  exerciseable  through the period from
       April 27, 2010 to June 30,  2010,  and  warrants  to  purchase  8,000,000
       shares  of  common  stock at an  exerciseable  price  of $.10 per  share,
       exerciseable through the period from February 28, 2011 to June 28, 2011.
(3)    Consisting of 6,753 shares of common stock  issuable  upon  conversion of
       5,627 shares of Series A preferred  stock,  10,783 shares of common stock
       issuable  upon  conversion  of 8,986 shares of Series B preferred  stock,
       8,750 shares of common stock issuable upon  conversion of 5,000 shares of
       Series D preferred  stock,  13,333  shares of common stock  issuable upon
       conversion of 250 shares of Series E preferred  stock,  245,217 shares of
       common stock  issuable  upon  conversion  of 4,598.75  shares of Series F
       preferred  stock,  and  588,235  shares of  common  stock  issuable  upon
       conversion of 588,235 shares of Series G preferred stock.
(4)    Consisting of stock options  granted to executive  officers and employees
       to purchase  4,825,500  shares of common stock at exercise prices ranging
       from $.01 per share to $2.75 per  share,  and stock  options  granted  to
       directors to purchase 2,250,000 shares of common stock at exercise prices
       ranging from $.09 per share to $2.75 per share.

       There are a total of 251,416,296 shares underlying our convertible notes,
warrants,  preferred  stock and stock options,  assuming full  conversion of the
outstanding  notes and preferred  stock and the exercise of all the  outstanding
warrants and stock options.  The number of our authorized shares of common stock
is 800,000,000 shares. The large number of our shares of common stock underlying
our  notes,  warrants,  preferred  stock and stock  options  will  require us to
increase the number of authorized shares. Failure to obtain stockholder approval
to increase the number of  authorized  shares  could  result in the  noteholders
commencing  legal  action  against  us and  foreclosing  on all of our assets to
recover  damages.  Any such  action  would  require  us to  curtail or cease our
operations.

Convertible Notes

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

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

       Under the terms of the securities purchase agreement,  the Company agreed
not,  without  the  prior  written  consent  of a  majority-in-interest  of  the
investors,  to negotiate or contract with any party to obtain  additional equity
financing  (including debt financing with an equity component) that involves (i)
the  issuance of common  stock at a discount  to the market  price of the common
stock on the date of issuance  (taking into account the value of any warrants or
options to acquire common stock in connection  therewith),  (ii) the issuance of
convertible  securities that are  convertible  into an  indeterminate  number of

                                       27
<PAGE>

shares of common  stock,  or (iii) the  issuance of warrants  during the lock-up
period  beginning  April 27,  2005 and  ending on the later of (a) 270 days from
April 27,  2005,  or (b) 180 days from the date the  registration  statement  is
declared effective.

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

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

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

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

       The  noteholders  have agreed to restrict  their ability to convert their
callable secured convertible notes or exercise their warrants and receive shares
of the  Company's  common  stock such that the number of shares of common  stock
held by them in the  aggregate  and their  affiliates  after such  conversion or
exercise  does not exceed  4.99% of the then  issued and  outstanding  shares of
common stock.  However,  the selling  stockholders may repeatedly sell shares of
common stock in order to reduce their  ownership  percentage,  and  subsequently
convert additional callable secured convertible notes. As of January 31, 2007, a
total of $854,920 in convertible notes had been converted pursuant to conversion
notices from the noteholders.

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

                                       28
<PAGE>


  o    $500,000 was disbursed on February 28, 2006;
  o    $500,000  was  disbursed  on June 28,  2006  after  the  Company  filed a
       registration  statement on June 15, 2006 to register the shares of common
       stock underlying the convertible  notes.  The registration  statement was
       subsequently  withdrawn on July 25, 2006 and a new registration statement
       was filed on September 15, 2006 to register  60,000,000  shares of common
       stock issuable upon conversion of the convertible notes.
  o    $500,000 will be disbursed  upon the  effectiveness  of the  registration
       statement that registers 60,000,000 shares of common stock underlying the
       convertible notes.

       Each closing under the securities  purchase  agreement was subject to the
following conditions:

  o    The Company delivers to the investors duly executed convertible notes and
       warrants;
  o    No litigation,  statute, regulation or order had been commenced,  enacted
       or  entered  by  or  in  any  court,   governmental   authority   or  any
       self-regulatory   organization   that  prohibits   consummation   of  the
       transactions contemplated by the securities purchase agreement; and
  o    No event  occurred  that could  reasonably be expected to have a material
       adverse effect on the Company's business.

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

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

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

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

                                       29
<PAGE>

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

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

       The Company is required to register 60,000,000 shares of its common stock
issuable upon the  conversion of the  convertible  notes that were issued to the
noteholders  pursuant  to the  securities  purchase  agreement  that the Company
entered into on February 28, 2006. The registration statement must be filed with
the Securities and Exchange  Commission  within 60 days of the February 28, 2006
closing date and the  effectiveness of the registration is to be within 135 days
of such closing date.  Penalties of 2% of the outstanding  principal  balance of
the convertible notes plus accrued interest are to be applied for each month the
registration is not effective  within the required time. The penalty may be paid
in cash or stock at our option.

Simple Conversion Calculation

       The number of shares of common  stock  issuable  upon  conversion  of the
convertible notes is determined by dividing that portion of the principal of the
notes to be  converted  and  interest,  if any,  by the  conversion  price.  For
example,  assuming  conversion of the  $3,145,080  principal  amount of notes on
January 31, 2007  (consisting of $3,500,000 in convertible  notes that were sold
to the four investors pursuant to the securities purchase agreements dated April
27,  2005  and  February  25,  2006,  plus  $500,000  in notes to be sold to the
investors upon the effectiveness of a registration  statement,  less $854,920 in
notes that were  converted  during the period  from June 30, 2005 to January 31,
2007) and a conversion  price of $.0144 per share, the number of shares issuable
upon conversion would be:

                     $3,145,080/$.0144 = 218,408,333 shares.

       The  Company's   obligation  to  issue  shares  upon  conversion  of  the
convertible notes is essentially  limitless.  The following is an example of the
amount of shares of common stock that are issuable upon conversion of $3,145,080
principal amount of convertible  notes, based on market prices 25%, 50%, and 75%
below the market price, as of February 13, 2007 of $.024.

    % Below     Price Per     With 40%        Number of             % of
     Market       Share       Discount      Shares Issuable     Outstanding*
    -------       -----       --------     ----------------     -----------

      25%         $.018        $.0108        291,211,111           142.8%
      50%         $.012        $.0072        436,816,667           214.2%
      75%         $.006        $.0036        873,633,333           428.3%

*Based on 201,956,394 shares outstanding.

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

Adjustable Conversion Price of Convertible Notes

       The callable secured convertible notes are convertible into shares of the
Company's  common  stock at a 40%  discount to the  trading  price of the common
stock prior to the conversion. The significant downward pressure on the price of

                                       30
<PAGE>

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

Possible Dilution to Stockholders

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

Failure to Repay Convertible Notes May Require Company Operations to Cease

       On April  27,  2005,  the  Company  entered  into a  securities  purchase
agreement  for the  sale of an  aggregate  of  $2,500,000  principal  amount  of
convertible  notes.  On February  28,  2006,  the Company  entered  into another
securities  purchase  agreement  for the  sale  of an  aggregate  of  $1,500,000
principal amount of convertible notes. These callable secured  convertible notes
are all  due and  payable,  with 8%  interest,  three  years  from  the  date of
issuance,  unless sooner  converted  into shares of the Company's  common stock.
Although the Company currently has $2,145,080 in convertible notes  outstanding,
the noteholders are obligated to purchase  additional  convertible  notes in the
aggregate amount of $500,000. Any event of default such as the Company's failure
to repay the principal or interest when due on the notes, the Company's  failure
to issue  shares  of  common  stock  upon  conversion  by the  noteholders,  the
Company's breach of any covenant,  representation  or warranty in the securities
purchase  agreement or related  convertible notes, the assignment or appointment
of a  receiver  to  control a  substantial  part of the  Company's  property  or
business,  the filing of a money  judgment,  writ or similar process against the
Company in excess of $50,000,  the  commencement  of a  bankruptcy,  insolvency,
reorganization or liquidation  proceeding against the Company, and the delisting
of  the  Company's  common  stock  could  require  the  early  repayment  of the
convertible  notes,  including a default interest rate of 15% on the outstanding
principal  balance of the notes if the default is not cured within the specified
grace period.

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

Results of Operations

       Fiscal  Year  Ended  December  31,  2006  Compared  to Fiscal  Year Ended
       December 31, 2005

       Net sales for the twelve  months  ended  December  31, 2006  decreased by
$6,000 to $2,195,000 as compared to $2,201,000 for the same period of 2005. This
reduction in sales was primarily due to decreased  sales of the P40, P45 and P60
Ultrasound Biomicroscopes, the P37 A/B Scan Ocular Ultrasound Diagnostic and the
P55 Pachymeter.

       For the twelve months ended  December 31, 2006,  sales from the Company's
diagnostic  products totaled $1,928,000,  or 88% of total revenues,  compared to
$1,949,000,  or 89% of total revenues for the same period of 2005. The remaining
12% of sales,  or $266,000  during the twelve months ended  December 31, 2006was
from parts, disposables, and service revenue.

                                       31
<PAGE>

       Sales of the P40, P45 and P60 UBM Ultrasound  Biomicroscopes decreased to
$547,000  during the twelve  months ended  December  31,  2006,  or 25% of total
revenues for the period, compared to $967,000, or 44% of total revenues, for the
same  period  last  year.  Sales of the Blood  Flow  Analyzer(TM)  increased  by
$114,000 to  $211,000,  or 10% of total  revenues,  for the twelve  months ended
December 31,  2006,  compared to net sales of $97,000,  or 4% of total  revenues
during the same  period in 2005.  Sales from the P37,  P37-II and P2700 A/B Scan
Ocular Ultrasound  Diagnostic  increased to $221,000,  or 10% of total revenues,
for the twelve month period ended December 31, 2006, up compared to $181,000 for
the  same  period  last  year.  Combined  sales  of  the  LD 400  and  TKS  5000
autoperimeters and the CT 200 Corneal  Topographer were $856,000,  or 39% of the
total  revenues,  for the twelve  months ended  December  31, 2006,  compared to
$671,000, or 31% of total revenues, for the same period of 2005.

       Sales for 2006  compared to 2005 have  remained  constant for the Company
due to a  variety  of  reasons  associated  with  the  corporate  reorganization
process.

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

       Sales of surgical  products are at a  standstill  pending FDA approval of
the Photon(TM) laser system. In the twelve month period ended December 31, 2006,
the Company  realized no sales in the surgical line consisting of the Photon(TM)
laser system.  There were also no sales in the surgical line for the  comparable
period of 2005.

       Gross profit for the twelve months ended  December 31, 2006  increased to
42% of total revenues,  compared to 27% of total revenues for the same period in
2005.  This  increase in gross  profit in 2006 was mainly due to  reductions  in
corporate  expenditures due to improved operating efficiencies during the twelve
months  ending  December 31,  2006.  There was no increase to cost of sales as a
result of a charge to the reserve for obsolete inventory in 2006.

       Marketing and selling expenses decreased by $207,000, or 32%, to $434,000
for the twelve months ended December 31, 2006,  from $641,000 for the comparable
period in 2005.  This  reduction was due primarily to a reduced  number of sales
representatives and lower travel related and associated sales expenses.

       General and  administrative  expenses  decreased by $286,000,  or 27%, to
$792,000 for the twelve months ended December 31, 2006,  from $1,078,000 for the
comparable period in 2005. This reduction in general and administrative expenses
was primarily due to the reduction in management  salaries  compared to previous
management  salaries and the reduction of the number of employees  that had been
previously hired to assist in the development,  testing,  marketing and sales of
the new P60 UBM.  Professional  legal  fees-related  party expenses decreased by
$33,000, or 15%, to $187,000 for the twelve months ended December 31, 2006, from
$220,000 for the comparable period in 2005.

       In addition, during the first quarter of 2005, the Company issued 515,206
shares of common  stock to two  shareholders  that had  purchased  shares of the
Company's Series G convertible preferred stock in a private offering.  Under the
terms of the private  offering,  the Company was required to file a registration
statement  with the  Securities  and  Exchange  Commission  for the  purpose  of
registering  the common shares  issuable to the Series G preferred  stockholders
upon  conversion  of their  Series G  preferred  shares  and  exercise  of their
warrants.  The shares  were  issued as a penalty  for the  Company  not having a
registration statement declared effective within 120 days of the initial closing
of the private offering.

       Also during 2006, the Company  collected  $1,000 in receivables that were
previously  allowed in the allowance  for doubtful  accounts.  During 2006,  the
Company decreased allowance for doubtful accounts by $28,000.

       Research, development and service expenses decreased by $605,000, or 71%,
to $250,000 for the twelve months ended December 31, 2006,  compared to $855,000
for the same  period of 2005.  This  reduction  was mainly due to the  increased
expenses in 2005 related to the  development  of the new P60 UBM,  including the
cost of compliance with regulatory requirements.

       Due to our ongoing cash flow difficulties,  most of the Company's vendors
and  suppliers  were  contacted  during 2005 and 2006 with attempts to negotiate
reduced payments and settlement of outstanding  accounts payable.  Although some

                                       32
<PAGE>

vendors  refused to negotiate  and demanded  payment in full,  some vendors were
willing to settle for a reduced amount. The accounts payable forgiven by vendors
and suppliers  resulted in a gain of $34,000 and $12,000  during the years ended
December 31, 2006 and 2005 respectively.

Liquidity and Capital Resources

       The Company used $828,000 in cash in operating  activities for the twelve
months ended  December 31, 2006,  compared to  $2,668,000  for the twelve months
ended December 31, 2005. The decrease in cash used for operating  activities for
the twelve  months ended  December 31, 2006 was  primarily  attributable  to the
Company's  net loss and  decreases  in accounts  payable,  accounts  receivable,
inventory and a significant decrease in the beneficial  conversion feature. Cash
use for investment  activities on December 31, 2006 was $20,000 compared to $-0-
for December 31, 2005.  Net cash used in financing  activities  was $988,000 for
the twelve months ended December 31, 2006, versus cash used of $2,603,000 in the
same period in 2005. The Company had working  capital of $370,000 as of December
31, 2006. In January 2005, the Company sold 2,000,000 shares of its common stock
to an  accredited  investor for $150,000 in cash.  In the past,  the Company has
relied  heavily upon sales of the Company's  common and preferred  stock to fund
operations. There can be no assurance that such equity funding will be available
on terms acceptable to the Company in the future.

       As of December 31, 2006, the Company had net operating loss carryforwards
(NOLs) of approximately $43.3 million. These loss carryforwards are available to
offset  future  taxable  income,  if any,  and have  begun to expire in 2001 and
extend  for twenty  years.  The  Company's  ability  to use net  operating  loss
carryforwards   (NOLs)  to  offset  future  income  is  dependent  upon  certain
limitations as a result of the pooling  transaction with Vismed and the tax laws
in effect at the time of the NOLs  being  utilized.  The Tax  Reform Act of 1986
significantly limits the annual amount that can be utilized for certain of these
carryforwards as a result of change of ownership.

       As of December 31, 2006, the Company had accounts payable of $400,000,  a
significant  portion  of which  was  over 90 days  past  due.  The  Company  has
contacted  many of the vendors or  companies  that have  significant  amounts of
payables  past  due  in an  effort  to  delay  payment,  renegotiate  a  reduced
settlement  payment,  or  establish  a longer  term  payment  plan.  While  some
companies have been willing to renegotiate the outstanding amounts,  others have
demanded payment in full. Under certain conditions, including but not limited to
judgments  rendered  against the Company in a court of law, a group of creditors
could  force  the  Company  into  bankruptcy  due to its  inability  to pay  the
liabilities  arising  out of such  judgments  at that time.  In  addition to the
accounts payable noted above, the Company also has  noncancelable  capital lease
obligations  and  operating  lease  obligations  that  require  the  payment  of
approximately $218,000 in 2006, and $194,000 in 2005.

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

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

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

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

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

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

       The  Company  has taken  measures  to reduce the amount of  uncollectible
accounts  receivable  such as  more  thorough  and  stringent  credit  approval,
improved  training and  instruction  by sales  personnel,  and  frequent  direct
communication  with the  customer  subsequent  to delivery  of the  system.  The
allowance for doubtful  accounts was15% of total  outstanding  receivables as of

                                       33
<PAGE>

December 31, 2006 and 20% as of December 31, 2005.  The  allowance  for doubtful
accounts  decreased  slightly  from  $100,000 at December 31, 2005 to $72,000 at
December 31, 2006.

       The Company  intends to continue its efforts to reduce the  allowance for
doubtful  accounts  as a  percentage  of  accounts  receivable.  The Company has
ongoing  efforts to collect a significant  portion of the sales price in advance
of the sale or in a timely manner after delivery. During the twelve months ended
December 31, 2006,  the Company  added a net zero to the  allowance for doubtful
accounts,  and during the twelve months ended December 31, 2005, the Company had
a net  recovery of  receivables  previously  allowed for of $1,000.  The Company
believes that by requiring a large portion of payment prior to shipment,  it has
greatly improved the collectibility of its receivables.

       The   Company   carried  an   allowance   for   obsolete   or   estimated
non-recoverable  inventory of $1,320,000 at December 31, 2006 and  $1,357,000 at
December  31,  2005,  or 58%  and  61% of  total  inventory,  respectively.  The
Company's  means of expansion and  development  of product has been largely from
acquisition of businesses,  product lines, existing inventory, and the rights to
specific  products.   Through  such  acquisitions,   the  Company  has  acquired
substantial  inventory,  some of which the eventual use and  recoverability  was
uncertain.  In  addition,  the Company  has a  significant  amount of  inventory
relating to the Photon(TM) laser system, which does not yet have FDA approval in
order to sell the product domestically.  Therefore,  the allowance for inventory
was established to reserve for these potential eventualities.

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

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

Effect of Inflation and Foreign Currency Exchange

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

Impact of New Accounting Pronouncements

       In May 2005, the FASB issued SFAS No. 154,  "Accounting Changes and Error
Corrections."  This  statement  replaces  APB Opinion No. 20 and SFAS No. 3. APB
Opinion No. 20  previously  required that most  voluntary  changes in accounting
principle be recognized by including  the  cumulative  effect of changing to the
new accounting principle in the net income of the period of the change. SFAS No.
154 requires retrospective application to prior periods' financial statements of
changes in accounting principle,  unless it is impracticable to determine either
the  period-specific  effects or the cumulative effect of the change. When it is
impracticable to determine the  period-specific  effects of an accounting change
on one or more individual prior periods presented,  this statement requires that
the accounting principle be applied to the balances of assets and liabilities as
of the beginning of the earliest period for which  retrospective  application is
practicable and that a  corresponding  adjustment be made to the opening balance
of retained  earnings for that period,  rather than being  reported in an income
statement.  The new  standard  will be  effective  for  accounting  changes  and
corrections  of errors made in fiscal years  beginning  after December 15, 2005.
The Company  believes  the  adoption of new  standards  will not have a material
effect  on its  financial  position,  results  of  operations,  cash  flows,  or
previously issued financial reports.

       In February  2006,  the FASB issued SFAS No. 155,  Accounting for Certain
Hybrid Financial Instruments.  This statement is an amendment of FASB Statements

                                       34
<PAGE>

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

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

       Statement  No. 156  requires  that all  separately  recognized  servicing
assets and  servicing  liabilities  be  initially  measured  at fair  value,  if
practicable.   The  board  concluded  that  fair  value  is  the  most  relevant
measurement  attribute for the initial  recognition of all servicing  assets and
servicing  liabilities,  because it  represents  the best measure of future cash
flows. This statement permits, but does not require, the subsequent  measurement
of servicing assets and servicing liabilities at fair value. An entity that uses
derivative  instruments to mitigate the risks  inherent in servicing  assets and
servicing liabilities is required to account for those derivative instruments at
fair value.  Under this  statement,  an entity can elect  subsequent  fair value
measurement of its servicing  assets and servicing  liabilities  by class,  thus
simplifying its accounting and providing for income statement recognition of the
potential  offsetting  changes in fair value of the servicing assets,  servicing
liabilities,  and  related  derivative  instruments.  An entity  that  elects to
subsequently measure servicing assets and servicing liabilities at fair value is
expected  to  recognize  declines  in fair  value of the  servicing  assets  and
servicing  liabilities  at fair value is expected to recognize  declines in fair
value of the servicing assets and servicing  liabilities more  consistently than
by  reporting  other-than-  temporary  impairments.  The  Company  believes  the
adoption  of new  standards  will not have a  material  effect on its  financial
position,  results of operations,  cash flows,  or previously  issued  financial
reports.

       In September  2006, the FASB issued SFAS No. 158,  Employers'  Accounting
for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R) ("SFAS 158").  Under SFAS 158,  companies
must  recognize a net  liability  or asset to report the funded  status of their
defined benefit pension and other postretirement  benefit plans on their balance
sheets.  The effective date of the  recognition  and  disclosure  provisions for
calendar-year  public  companies is for calendar years ending after December 15,
2006. The Company is currently evaluating the impact of this new standard but it
is not  expected  to have a  significant  effect on the  consolidated  financial
statements for the year ended December 31, 2006.

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

                                       35
<PAGE>

Item 7. Financial Statements

PARADIGM MEDICAL INDUSTRIES, INC.
Financial Statements
December 31, 2006 and 2005



















                                       36

<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   INDEX TO FINANCIAL STATEMENTS

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


                                                                            PAGE
                                                                            ----


Report of Independent Registered Public Accounting Firm                      F-2


Balance Sheet                                                                F-3


Statements of Operations                                                     F-4


Statements of Stockholders' Equity                                           F-5


Statements of Cash Flows                                                     F-6


Notes to Financial Statements                                                F-7



--------------------------------------------------------------------------------
                                                                             F-1
<PAGE>
REPORT  OF  INDEPENDENT  REGISTERED  PUBLIC  ACCOUNTING  FIRM

THE  BOARD  OF  DIRECTORS  AND  SHAREHOLDERS
PARADIGM  MEDICAL  INDUSTRIES,  INC.
SALT  LAKE  CITY,  UTAH

We  have  audited the accompanying balance sheet of PARADIGM MEDICAL INDUSTRIES,
INC.  (the  Company)  as  of  December  31,  2006, and the related statements of
operations,  stockholders'  deficit  and cash flows for the years ended December
31,  2006  and  2005.  These  financial statements are the responsibility of the
Company's  management.  Our  responsibility  is  to  express an opinion on these
financial  statements  based  on  our  audits.

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

In  our  opinion,  the financial statements referred to above present fairly, in
all  material  respects,  the financial position of Paradigm Medical Industries,
Inc. as of December 31, 2006, and the results of their operations and their cash
flows  for  the  years  ended  December  31,  2006  and 2005, in conformity with
accounting  principles  generally  accepted  in  the  United  States of America.

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

Chisholm, Bierwolf & Nilson LLC
Bountiful, Utah
April 2, 2007


                                                                             F-2
<PAGE>
<TABLE>
<CAPTION>
                                                 PARADIGM MEDICAL INDUSTRIES, INC.
                                                                     BALANCE SHEET

                                                                 DECEMBER 31, 2006
----------------------------------------------------------------------------------
<S>                                                                  <C>
        ASSETS
        ------

Current assets:
    Cash                                                             $    206,000
    Receivables, net                                                      410,000
    Inventories, net                                                      945,000
    Prepaid and other assets                                               11,000
                                                                     -------------

            Total current assets                                        1,572,000

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

            Total assets                                             $  1,932,000
                                                                     =============

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

        LIABILITIES AND STOCKHOLDERS' (DEFICIT)
        ---------------------------------------

Current liabilities:
    Accounts payable                                                 $    400,000
    Accrued liabilities                                                   802,000
    Current portion of capital lease obligations                                -
                                                                     -------------

            Total current liabilities                                   1,202,000
                                                                     -------------

Long-term liabilities:
                                                                     -------------
Convertible Notes Payable                                               2,655,000
                                                                     -------------
Total long-term liabilities                                             2,655,000
                                                                     -------------
Total liabilities                                                       3,857,000

Commitments and contingencies                                                   -

Stockholders' (deficit):
    Preferred stock, $.001 par value, 5,000,000 shares authorized,
      612,697 shares issued and outstanding (aggregate liquidation
      Preference of $456,000)                                               1,000
    Common stock, $.001 par value, 250,000,000 shares authorized,
      201,956,394 shares issued and outstanding                           202,000
    Additional paid-in capital                                         61,884,000
    Accumulated (deficit)                                             (64,012,000)
                                                                     -------------

            Total stockholders' (deficit)                              (1,925,000)
                                                                     -------------

            Total liabilities and stockholders' (deficit)            $  1,932,000
                                                                     =============
</TABLE>


--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
                                                                             F-3
<PAGE>
<TABLE>
<CAPTION>
                                                    PARADIGM MEDICAL INDUSTRIES, INC.
                                                             STATEMENTS OF OPERATIONS

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

                                                                  2006          2005
                                                          ---------------------------
<S>                                                       <C>            <C>
Sales                                                     $  2,195,000   $ 2,201,000
Cost of sales                                                1,277,000     1,599,000
                                                          ---------------------------

        Gross profit                                           918,000       602,000
                                                          ---------------------------

Operating expenses:
    General and administrative                                (792,000)   (1,078,000)
    Professional fees-related party                           (187,000)     (220,000)
    Marketing and selling                                     (434,000)     (641,000)
    Research and development                                  (250,000)     (855,000)
    Gain on settlement of liabilities                           34,000        12,000
                                                          ---------------------------

        Total operating expenses                            (1,629,000)   (2,782,000)
                                                          ---------------------------

        Operating loss                                        (711,000)   (2,180,000)
                                                          ---------------------------
Other income (expense):
    Other income                                               109,000        16,000
    Other expenses                                          (1,207,000)   (2,870,000)
    Interest expense                                            (7,000)      (15,000)
    Impairment of intangible assets                                  -      (340,000)
                                                          ---------------------------

        Total other income (expense)                        (1,105,000)   (3,209,000)
                                                          ---------------------------

        Income (loss) before provision for income taxes     (1,816,000)   (5,389,000)
Provision for income taxes                                           -             -
                                                          ---------------------------

        Net income (loss)                                 $ (1,816,000)  $(5,389,000)
                                                          ===========================

Net income (loss) applicable to common shareholders       $ (1,816,000)  $(5,389,000)
                                                          ===========================
Earnings (loss) per common share - basic                  $      (0.01)  $     (0.13)
                                                          ---------------------------
Earnings (loss) per common share - diluted                $      (0.01)  $     (0.13)
                                                          ===========================
Weighted average common shares - basic                     175,034,000    42,033,000
                                                          ---------------------------
Weighted average common shares - diluted                   175,903,000    42,942,000
                                                          ===========================
</TABLE>


--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
                                                                             F-4
<PAGE>
<TABLE>
<CAPTION>
                                                                                      PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                     STATEMENTS OF STOCKHOLDERS' EQUITY

                                                               FOR THE PERIOD JANUARY 1, 2005 THROUGH DECEMBER 31, 2006
-----------------------------------------------------------------------------------------------------------------------

                                                      PREFERRED                               ADDITIONAL
                                                          STOCK          COMMON    AMOUNT        PAID-IN   ACCUMULATED
                                                   (SEE NOTE 8)          SHARES                  CAPITAL       DEFICIT
                                                  ---------------------------------------------------------------------
<S>                                               <C>            <C>             <C>       <C>            <C>

BALANCE AT JANUARY 1, 2005                        $      2,000       25,627,794  $ 25,000  $  57,470,000  $(56,807,000)

Issuance of common stock for:
-----------------------------
Cash                                                         -        2,000,000     2,000        148,000             -
Services                                                     -          228,000         -         22,000             -
Conversion of convertible debentures                         -       66,880,000    67,000        395,000             -
Value attribute to discount on note payable                  -                -         -      2,009,000             -
Value attribute to discount on warrants                      -                -         -        491,000             -
Penalty provisions of series G preferred in
2004                                                         -          515,206     1,000         51,000             -

Net income                                                   -                -         -              -    (5,389,000)
                                                  ---------------------------------------------------------------------

BALANCE AT DECEMBER 31, 2005                             1,000       96,389,295    96,000   60,586,00000   (62,196,000)

Issuance of common stock for:
-----------------------------
Stock option valuation                                                                            23,000
Conversion of convertible debentures                         -      105,529,700   106,000        275,000             -
Value attribute to discount on note payable                  -                -         -        964,000             -
Value attribute to discount on warrants                      -                -         -         36,000             -

Conversion of preferred stock
                                                             -           39,999         -              -             -

Net loss                                                     -                -         -              -    (1,816,000)

                                                  ---------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2006                      $      1,000      201,958,994  $202,000  $  61,884,000  $(64,012,000)
                                                  =====================================================================
</TABLE>


--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
                                                                             F-5
<PAGE>
<TABLE>
<CAPTION>
                                                         PARADIGM MEDICAL INDUSTRIES, INC.
                                                                  STATEMENTS OF CASH FLOWS

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

                                                                    2006          2005
                                                                --------------------------
<S>                                                             <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss)                                           $(1,816,000)  $(5,389,000)
    Adjustments to reconcile net income (loss) to net
    cash used in operating activities:
        Depreciation and amortization                                31,000        77,000
        Issuance of common stock for satisfaction of penalty              -        53,000
        Issuance of common stock for services                             -        23,000
        Stock option valuation                                       23,000             -
        Beneficial conversion interest                              964,000     2,009,000
        Issuance of stock   options and warrants for services        36,000       491,000
        Provision for losses on receivables                         (28,000)       (1,000)
        Provision for losses on inventory                           (37,000)      (61,000)
Impairment of Intangibles and investments                                 -       340,000
(Gain) loss on settlement of liabilities                            (34,000)      (12,000)
        Changes in operating assets and liabilities
            (Increase) decrease in:
            Accounts Receivables                                     19,000       257,000
            Inventories                                             (55,000)      (72,000)
            Prepaid and other assets                                      -        56,000
        Increase (decrease) in:
            Accounts payable                                        (30,000)     (291,000)
            Accrued liabilities                                      98,000      (148,000)
                                                                --------------------------

                NET CASH USED IN
                OPERATING ACTIVITIES                               (828,000)   (2,668,000)
                                                                --------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Cash proceeds from sales of investment                          (20,000)            -
                                                                --------------------------

                NET CASH PROVIDED BY (USED IN)
                INVESTING ACTIVITIES                                (20,000)         0.00
                                                                --------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Principal payments on notes payable and long-term debt          (12,000)      (47,000)
    Proceeds from issuance of common stock                                -       150,000
    Proceeds from issuance of convertible notes                   1,000,000     2,500,000
                                                                --------------------------
                NET CASH (USED IN) PROVIDED BY
                FINANCING ACTIVITIES                                988,000     2,603,000
                                                                --------------------------

Net change in cash                                                  140,000       (65,000)

Cash, beginning of year                                              66,000       131,000
                                                                --------------------------

CASH, END OF YEAR                                               $   206,000   $    66,000
                                                                ==========================
</TABLE>


--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
                                                                             F-6
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

                                                      DECEMBER 31, 2006 AND 2005
--------------------------------------------------------------------------------

1.  ORGANIZATION  AND  SIGNIFICANT  ACCOUNTING  POLICIES

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

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

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

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

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

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


--------------------------------------------------------------------------------
                                                                             F-7
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

1.     ORGANIZATION  AND  SIGNIFICANT     ACCOUNTING  POLICIES  CONTINUED

trade  receivables  previously  written  off  are  recorded  when  received.

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

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

Also  during  2006,  the  Company  collected  $1,000  in  receivables  that were
previously  allowed  in  the  allowance for doubtful accounts.  During 2006, the
Company  decreased  allowance  for  doubtful  accounts  by  $28,000.

The  Company  has  taken measures to reduce the amount of uncollectible accounts
receivable  such  as  more  thorough  and  stringent  credit  approval, improved
training  and  instruction by sales personnel, and frequent direct communication
with  the  customer  subsequent  to  delivery  of  the system. The allowance for
doubtful  accounts  was15%  of  total outstanding receivables as of December 31,
2006  and  20%  as  of  December  31,  2005. The allowance for doubtful accounts
decreased slightly from $100,000 at December 31, 2005 to $72,000 at December 31,
2006.

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.  Leasehold improvements are depreciated over the
lesser  of the term of the lease or the useful life of the related asset. During


--------------------------------------------------------------------------------
                                                                             F-8
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

1.  ORGANIZATION  AND  SIGNIFICANT  ACCOUNTING  POLICIES  CONTINUED

PROPERTY  AND  EQUIPMENT  -  CONTINUE
the  years  2006  and  2005  depreciation  expense  was  $30,000  and  $77,000
respectively. New purchased asset that have a value of $2,000 or are capitalized
as  and  included  on  the  depreciation  schedule.

INTANGIBLE  ASSETS
As  of December 31, 2006, intangible assets consisted of goodwill related to the
purchase  of  Ocular  Blood  Flow, Ltd., product rights, capitalized payments to
manufacturers  for  engineering  and  design  services  and  patent  costs.  In
accordance  with  SFAS  142, "Goodwill and Other Intangible Assets," the Company
performed  an impairment test on all intangible assets at December 31, 2006.  As
a  result  no  impairment  change  was recognized on the Company's statements of
operations.  The  no change of impairment was based on a significant increase in
sales  of  the  Blood  Flow  Analyzer  during  2006.

Intangible  assets determined to have indefinite useful lives are not amortized.
The  Company  tests  such  intangible  assets  with  indefinite useful lives for
impairment  annually or more frequently if events or circumstances indicate that
an asset might be impaired.  Intangible assets determined to have definite lives
are amortized on a straight-line basis over their useful lives.  Product rights,
capitalized  engineering,  and  patents  were fully amortized as of December 31,
2006.  The  Company  reviews  such  intangible  assets  with  definite lives for
impairment  to ensure they are appropriately valued if conditions exist that may
indicate the carrying value may not be recoverable.  Such conditions may include
an  economic  downturn  in  a geographic market or a change in the assessment of
future  operations.

Goodwill  is  not  amortized.  The  Company  performs  tests  for  impairment of
goodwill  annually  or  more  frequently  if events or circumstances indicate it
might  be  impaired.  Such tests include comparing the fair value of a reporting
unit  with  its  carrying  value,  including  goodwill.  The  analysis  of  the
impairment test of goodwill resulted in a charge to the statements of operations
of $0 and $340,000 for the years ended December 31, 2006 and 2005, respectively.

Impairment assessments are performed using a variety of methodologies, including
cash  flow  analysis  and  estimates  of  sales  proceeds.  Where applicable, an
appropriate  discount  rate  is  used,


--------------------------------------------------------------------------------
                                                                             F-9
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

1.  ORGANIZATION  AND  SIGNIFICANT  ACCOUNTING  POLICIES  CONTINUED

INTANGIBLE  ASSETS  -  CONTINUE
based  on  the  Company's  cost  of  capital  rate or location-specific economic
factors.

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

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

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


--------------------------------------------------------------------------------
                                                                            F-10
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

1.  ORGANIZATION  AND  SIGNIFICANT  ACCOUNTING  POLICIES  CONTINUED

STOCK  -  BASED  COMPENSATION  -  CONTINUED
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.

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                                   -----------------------------
                                                            2006            2005
                                                   -----------------------------
<S>                                                <C>            <C>
Net income (loss) applicable to common
shareholders- as reported                          $ (1,820,000)  $  (5,390,000)

Deduct:  total stock-based employee compen-
sation determined under fair value based
method for all awards, net of related tax effects       (72,000)       (355,000)
                                                   -----------------------------

Net loss applicable to common shareholders -
pro forma                                          $ (1,892,000)  $  (5,745,000)
                                                   =============================

Earnings per share:
    Basic and diluted - as reported                $      (0.01)  $        (.14)
                                                   =============================
    Basic and diluted - pro forma                  $      (0.01)  $        (.13)
                                                   =============================
</TABLE>

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:

<TABLE>
<CAPTION>
                                  DECEMBER 31,
                          -------------------------
                                  2006         2005
                          -------------------------
<S>                       <C>           <C>
Expected dividend yield   $         -   $        -
Expected stock price
  Volatility                 216%-210%    189%-215%
Risk-free interest rate    4.30%-5.18%           4%
Expected life of options    3-5 years    2-7 years
</TABLE>

The  weighted  average  fair  value  of options granted during 2006 and 2005 are
$0.01  and  $0.07,  respectively.

--------------------------------------------------------------------------------
                                                                            F-11
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

1.  ORGANIZATION  AND  SIGNIFICANT  ACCOUNTING  POLICIES  CONTINUED

SHARE-BASED  PAYMENT
The  Company  has  stock  option  plans that  provide for  stock-based  employee
compensation, including the granting of stock options, to certain key employees.
Prior  to January 1, 2006, the Company  applied APB Opinion No. 25,  "Accounting
for Stock Issued to Employees",  and related  interpretations  in accounting for
awards  made under the  Company's  stock-based  compensation  plans.  Under this
method,  compensation  expense  was  recorded  on the date of grant  only if the
current  market  price  of  the  underlying  stock  exceeded the exercise price.

During the periods  presented  in the  accompanying  financial  statements,  the
Company has granted options under its Stock Option Plan. The Company has adopted
the  provisions  of SFAS No.  123(R) using the  modified-prospective  transition
method and the  disclosures  that follow are based on applying SFAS No.  123(R).
Under this transition method,  compensation  expense recognized during the three
months ended  September  30, 2005  included:  (a)  compensation  expense for all
share-based  awards  granted prior to, but not yet vested as of January 1, 2006,
and (b)  compensation  expense for all  share-based  awards  granted on or after
January 1, 2006.  Accordingly,  compensation cost of $23,000 has been recognized
for grants of options to employees and directors in the accompanying  statements
of operations  with an associated  recognized  tax benefit of $0 of which $0 was
capitalized  as an asset for the period ended  December 31, 2006.  In accordance
with  the  modified-prospective   transition  method,  the  Company's  financial
statements  for the prior year have not been  restated  to  reflect,  and do not
include,  the impact of SFAS 123(R).  Had  compensation  cost for the  Company's
stock option plans and agreements been determined based on the fair value at the
grant date for awards in 2005 consistent with the provisions of SFAS No. 123(R),
the  Company's  net loss and basic net loss per  common  share  would  have been
increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,                  2005
<S>                                          <C>

Net income (loss) , as reported              $(5,390,000)
Plus stock-based employee compensation
expense included in reported net loss, net
of related tax effects.                                -
Less stock-based employee compensation
expense determine under fair value based
method for all awards, net of related tax
effects                                         (355,000)
                                             ------------

Pro forma net earnings (loss)                $(5,745,000)
                                             ------------

Basis and diluted net loss per common
share, as reported                           $      (.13)
Basic net loss per share, pro forma          $      (.14)
Diluted net loss per share, Pro forma        $      (.13)
</TABLE>


--------------------------------------------------------------------------------
                                                                            F-12
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

1.  ORGANIZATION  AND  SIGNIFICANT  ACCOUNTING  POLICIES  CONTINUED

EARNINGS  PER  SHARE
The  computation  of  basic  earnings  per common share is based on the weighted
average  number  of  shares  outstanding  during  each  year.

The  computation  of diluted  earnings per common share is based on the weighted
average  number of shares  outstanding  during  the year plus the  common  stock
equivalents,  which would arise from the conversion of preferred stock to common
stock and from the exercise of stock options and warrants  outstanding using the
treasury  stock  method and the average  market price per share during the year.
Options  and  warrants  to  purchase  32,064,392  shares  of common  stock  were
considered in the computation of earning per share but were not included because
their inclusion would have been antidiluted.

The  following  table  is a reconciliation of basic and diluted weighted average
shares  for  the  years  ended  December  31,  2006  and  2005.

<TABLE>
<CAPTION>
                                      YEARS ENDED DECEMBER 31,
                                     -------------------------
                                            2006          2005
                                     -------------------------
<S>                                  <C>          <C>

Basic weighted average shares
outstanding                          175,034,000    42,033,000

Net loss                              (1,816,000)   (5,389,000)

                                               -             -
                                     -------------------------
Per share amount                           (0.01)        (0.13)
                                     =========================
</TABLE>

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


--------------------------------------------------------------------------------
                                                                            F-13
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

1.  ORGANIZATION  AND  SIGNIFICANT  ACCOUNTING  POLICIES  CONTINUED

REVENUE  RECOGNITION  -  CONTINUED
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.  The total research and
development expenses for the years ended December 2006 and 2005 was $250,000 and
855,000,  respectively.

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

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

The  nature  of the Company's business exposes it to risk from product liability
claims.  The Company maintains product liability insurance providing coverage up
to  $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. As of December 31, 2006, the
company  maintained  the  policy  in  placed.

A  significant  portion  of the Company's product sales is in foreign countries.
The  economic  and  political  instability  of  some  foreign


--------------------------------------------------------------------------------
                                                                            F-14
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

1.  ORGANIZATION  AND  SIGNIFICANT  ACCOUNTING  POLICIES  CONTINUED

CONCENTRATION  OF  RISK  -  CONTINUED
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,  2006  and  2005,  one  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.

WARRANTY
The  Company  provides  product  warranties on the sale of certain products that
generally  extend  for  one year from the date of sale.  The Company maintains a
reserve  for  estimated  warranty  costs  based  on  historical  experience  and
management's  best  estimates.
                                                               Years Ended
 Warranty Accruals                                             December 31,
 -----------------                                                2006
                                                              ------------
 Beginning balance - warranty liability                            125,000

 Less: Reductions for payments                                     (10,000)

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

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

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

RECLASSIFICATIONS
No amounts in the 2006 financial statements have been reclassified to conform to
the  presentation  of  the  current  year  financial  statements.

SERIES  G  PREFERRED  STOCK  DIVIDENDS
During  the  first  quarter of 2005, the Company issued 515,206 shares of common
stock  to  two  shareholders that had purchased shares of the Company's Series G
convertible  preferred  stock  in  a  private  offering.  Under the terms of the
private offering, the Company was required to file a registration statement with
the  Securities  and  SERIES


--------------------------------------------------------------------------------
                                                                            F-15
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

1.  ORGANIZATION  AND  SIGNIFICANT  ACCOUNTING  POLICIES  CONTINUED

G  PREFERRED  STOCK  DIVIDENDS  -  CONTINUE
Exchange Commission for the purpose of registering the common shares issuable to
the  Series G preferred stockholders upon conversion of their Series G preferred
shares  and  exercise of their warrants. The shares were issued as a penalty for
the  Company  not  having a registration statement declared effective within 120
days  of the initial closing of the private offering. These shares were value at
$0.10  per  share.

2.  GOING  CONCERN

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

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

In  addition,  the  Company  has  taken  significant  steps  to reduce costs and
increase  operating  efficiencies,  including  the  consolidation  of  several
manufacturing,  accounting  and management responsibilities.  Such consolidation
resulted  in  significant  headcount  reductions  as  well  as  savings in other
overhead  costs.  The  Company  has  also  significantly  reduced  the  use  of
consultants, which has resulted in a large decrease in expenses, and reduced the
direct  sales  force  from  five to three representatives, which has resulted in
less  payroll,  travel  and other selling expenses.  Although these cost savings
have  significantly  reduced  the  Company's  losses  and  ongoing  cash  flow
needs,  if  the  Company is unable to obtain equity or debt financing, it may be
unable  to  continue  development  of  its  products  and  may  be  required  to
substantially  curtail  or  cease  operations.


--------------------------------------------------------------------------------
                                                                            F-16
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

3.  DETAIL  OF  CERTAIN  BALANCE  SHEET  ACCOUNTS

<TABLE>
<CAPTION>
<S>                                    <C>
Receivables
    Trade receivables                  $   482,000
    Allowance for doubtful accounts        (72,000)
                                       ------------

                                       $   410,000
                                       ============

Inventories:
    Raw Materials                      $ 1,188,000
    Finished goods                       1,077,000
    Reserve for obsolescence            (1,320,000)
                                       ------------

                                       $   945,000
                                       ============

Accrued liabilities:
    Consulting and litigation reserve  $   555,000
    Payroll and employment benefits         44,000
    Sales tax payable                       10,000
    Customer deposits                       19,000
    Accrued royalties                        3,000
    Warranty and return allowance          155,000
    Other accrued expenses                  16,000
                                       ------------

                                       $   802,000
                                       ============
</TABLE>

4.  INTANGIBLE  ASSETS

Intangible  assets  consist  of  the  following  at  December  31,  2006:

<TABLE>
<CAPTION>
<S>                                            <C>
Goodwill, net of accumulated amortization of
120,000                                       $   339,000
                                               ------------
Other intangible assets:
    Product and technology rights                  769,000
    Engineering and design costs                   482,000
    Patents                                         92,000
                                               ------------

                                                 1,343,000
Accumulated amortization                        (1,343,000)
                                               ------------
Total other intangible asstes                            -
                                               ------------
Net intangible assets                          $   339,000
                                               ============
</TABLE>


--------------------------------------------------------------------------------
                                                                            F-17
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

4.  INTANGIBLE  ASSETS  CONTINUED

During  the  year  ended December 31, 2006, the Company has no carrying value of
its  unissued patent costs and product and technology rights for recoverability.
This  analysis,  based  on  the estimated future cash flows associated with such
assets,  resulted  in an impairment expense of zero value related to patents and
product  and  technology  rights.

The  Company  performed  an impairment test on all intangible assets at December
31,  2006.  As  a  result  no impairment expense was recognized in the Company's
statements  of  operations.  The  no  change  of  impairment  was  based  on  a
significant  increase  in  sales  of  the  Blood  Flow  Analyzer  during  2006.

5.  PROPERTY  AND  EQUIPMENT

Property  and  equipment  consists  of  the  following:

<TABLE>
<CAPTION>
<S>                                        <C>
Machinery and equipment                    $   765,000
Computer equipment and software                663,000
Furniture and fixtures                         252,000
Leasehold improvements                         166,000
                                           ------------

                                             1,846,000
Accumulated depreciation and amortization   (1,825,000)
                                           ------------

                                           $    21,000
                                           ============
</TABLE>

6.  LEASE  OBLIGATIONS

During  the  years  ended December 31, 2006 and 2005, the 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:

<TABLE>
<CAPTION>
<S>                            <C>
Computer and other equipment   $ 291,000

Less accumulated amortization   (287,000)
                               ----------

                               $   4,000
                               ==========
</TABLE>


--------------------------------------------------------------------------------
                                                                            F-18
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

6.  LEASE  OBLIGATIONS  CONTINUED

Amortization  expense  on  assets  under  capital  leases during the years ended
December  31,  2006  and  2005  was  $31,000  and  $32,000,  respectively.

Capital  lease  obligations  have  imputed interest rates of approximately 7% to
22%.  The leases are secured by equipment.  There are no future minimum payments
on  the capital lease obligations. Leases were paid in full in the year 2006 are
as  follows:

<TABLE>
<CAPTION>
<S>                                             <C>
                 2006                           $ 14,000

                                                ---------
                                                  14,000

Less amount representing interest                 (1,000)
                                                ---------

Present value of future minimum lease payments    13,000

Less current portion                             (13,000)
                                                ---------

Long-term portion                               $      -
                                                =========
</TABLE>

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,  2006  are  approximately  as  follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,                       AMOUNT
------------------------                      --------
<S>                                           <C>

        2007                                  $108,000
        2008                                   110,000
                                              --------

        Total future minimum rental payments  $218,000
                                              ========
</TABLE>

Rent  expense  related  to  noncancelable  operating  leases  was  approximately
$108,000  and  $140,000  for  the  years  ended  December  31,  2006  and  2005,
respectively.


--------------------------------------------------------------------------------
                                                                            F-19
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

7.  INCOME  TAXES

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

<TABLE>
<CAPTION>
                                         YEARS ENDED
                                         DECEMBER 31,
                                   ------------------------
                                      2006         2005
                                   ------------------------
<S>                                <C>         <C>
Income tax (provision) benefit at
  statutory rate                   $ 619,000   $ 2,101,000
NOL adjustment                             -       893,000
Taxable temporary differences         22,000        57,000
Deductible temporary differences     (38,000)     (156,000)
Non-deductible expenses             (351,000)   (1,064,000)
Change in valuation allowance       (252,000)   (1,831,000)
                                   ------------------------

                                   $       -   $         -
                                   ========================
</TABLE>

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

<TABLE>
<CAPTION>
                                   ----------------------------
                                       2006           2005
                                   ----------------------------
<S>                                <C>            <C>
Net operating loss carryforward    $ 14,720,000   $ 15,127,000
Depreciation, amortization, and
impairment                                    -      1,009,000
Allowance and reserves                2,439,000        771,000
Research and development tax
Credit                                   56,000         56,000
                                   ----------------------------
                                     17,215,000     16,963,000

Valuation allowance                 (17,215,000)   (16,963,000)
                                   ----------------------------

                                   $          -   $          -
                                   ============================
</TABLE>

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-20
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

7.  INCOME  TAXES  CONTINUED

At  December  31,  2006,  the  Company  had  net operating loss carryforwards of
approximately  $43.3  million  and  research  and  development  tax  credit
carryforwards  of  approximately  $56,000.  These carryforwards are available to
offset  future  taxable income and expire in 2006 through 2021.  The utilization
of the net operating loss carryforwards is dependent upon the tax laws in effect
at  the  time  the  net  operating  loss carryforwards can be utilized.  The Tax
Reform  Act  of 1986 significantly limits the annual amount that can be utilized
for  certain  of  these  carryforwards  as  a result of the change in ownership.

8.  CAPITAL  STOCK

The  Company  has  established  a  series  of  preferred  stock  with a total of
5,000,000  authorized  shares and a par value of $.001, and one series of common
stock  with  a  par value of $.001 and a total of 250,000,000 authorized shares.

On  April  7,  2005  the Company issued 228,000 shares of common stock to Mackey
Price  Thompson  &  Ostler  in  payment  of  $22,500  in  legal  services.

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,  2006  was  $6,000.

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


--------------------------------------------------------------------------------
                                                                            F-21
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8.  CAPITAL  STOCK  -  CONTINUED

SERIES  A  PREFERRED  STOCK  -  CONTINUED
4.   The  holders  of  the  shares  have  no  voting  rights.

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

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

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

Upon the liquidation of the Company, the holders of the Series B Preferred Stock
are  entitled  to  receive,  prior  to any distribution of any assets or surplus
funds  to  the  holders  of shares of common stock or any other stock, an amount
equal  to  $4.00 per share, plus 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,  2006  was  $36,000.

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

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

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


--------------------------------------------------------------------------------
                                                                            F-22
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8.  CAPITAL  STOCK  CONTINUED

SERIES  C  PREFERRED  STOCK
In January 1998, the Company authorized the issuance of a total of 30,000 shares
of Series C Preferred Stock, $.001 par value, $100 stated value.  As of December
31,  2005  there  were  no  Series  C
Preferred  Stock  issued and outstanding.  The Series C Preferred Stock have the
following  rights  and  privileges:

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

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

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

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

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

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

2.   Upon  the liquidation of the Company, the holders of the Series D Preferred
     Stock  are  entitled  to  receive  an  amount  per  share  equal


--------------------------------------------------------------------------------
                                                                            F-23
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8.  CAPITAL  STOCK  CONTINUED

     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,
     2006  was  $9,000.

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

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

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

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

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


--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
                                                                            F-24
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8.  CAPITAL  STOCK  CONTINUED

     preference  at  December  31,  2006  was  $13,000.

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

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

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

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

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


--------------------------------------------------------------------------------
                                                                            F-25
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8.  CAPITAL  STOCK  CONTINUED

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,  2006  was  $245,000.

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

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

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

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


--------------------------------------------------------------------------------
                                                                            F-26
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8.  CAPITAL  STOCK  CONTINUED

2.   Upon  the liquidation of the Company, the holders of the Series G Preferred
     Stock  are  entitled to receive an amount per share equal to the greater of
     (a)  the amount they would have received had they converted the shares into
     Common  Stock  immediately  prior to such liquidation plus all declared but
     unpaid  dividends;  or (b) the stated value of $.25 per share plus declared
     but unpaid dividends. Total liquidation preference at December 31, 2006 was
     $147,000.

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

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


--------------------------------------------------------------------------------
                                                                            F-27
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

8.  CAPITAL  STOCK  CONTINUED

The  following  table summarizes preferred stock activity during the years ended
December  31,  2006  and  2005:
<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
<S>            <C>      <C>     <C>      <C>      <C>     <C>      <C>        <C>      <C>      <C>      <C>       <C>
Balance at
January 1,
2005             5,627  $    -    8,986  $     -       -  $     -      5,000  $     -   1,000   $     -  4,598.75  $      -

Issuance of
Series G
preferred
stock
for cash             -       -        -        -       -        -          -        -       -         -         -         -
Conversion of
preferred
stock                -       -        -        -       -        -          -        -       -         -         -         -
               ============================================================================================================
Balance at
December 31,
2005             5,627       -    8,986        -       -        -      5,000        -   1,000         -  4,598.75         -

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

Conversion of
preferred
stock                -       -        -        -       -        -          -        -    (750)        -         -         -
               ============================================================================================================
Balance at
December 31,
2006             5,627  $    -    8,986  $     -       -  $     -      5,000  $     -     250   $     -  4,598.75  $      -
               ============================================================================================================

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

Liquidation
preference              $6,000           $36,000          $     -             $ 9,000           $53,000            $245,000
               ============================================================================================================

                     SERIES G
                 SHARES      AMOUNT
<S>            <C>          <C>
Balance at
January 1,
2005            1,726,560   $  2,000

Issuance of
Series G
preferred
stock
for cash                -          -
Conversion of
preferred
stock          (1,138,325)    (1,000)
               ======================
Balance at
December 31,
2005              588,235      1,000

Issuance of
Series G
preferred
stock
for cash                -          -

Conversion of
preferred
stock                   -          -
               ======================
Balance at
December 31,
2006              588,235   $  1,000
               ======================

Authorized      2,000,000
               ======================

Liquidation
preference                  $147,000
               ======================
</TABLE>
--------------------------------------------------------------------------------
                                                                            F-28
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

9.  CONVERTIBLE  NOTES

CONVERTIBLE  NOTES

April  27,  205  Sale of $2,500,000 in Convertible Notes.  To obtain funding for
the Company's ongoing operations, the Company entered into a securities purchase
agreement  with  four accredited investors on April 27, 2005 for the sale of (i)
$2,500,000  in convertible notes and (ii) warrants to purchase 16,534,392 shares
of its common stock.  The sale of the convertible notes and warrants is to occur
in  three  traunches and the investors provided the Company with an aggregate of
$2,500,000  as  follows:

      -     $850,000  was  disbursed  on  April  27,  2005;

      -     $800,000  was disbursed on June 23, 2005 after filing a registration
statement on June 22, 2005 to register the shares of common stock underlying the
convertible  notes  and  the  warrants;  and

      -     $850,000  was  disbursed on June 30, 2005, the effective date of the
registration  statement.

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

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


--------------------------------------------------------------------------------
                                                                            F-29
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

9.  CONVERTIBLE  NOTES  CONTINUED

financing  and  the  option  must be extended to each investor during the 15-day
period  following  delivery  of  such  notice.

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

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

The  warrants  are  exercisable  until  five  years  from  the  date  of


--------------------------------------------------------------------------------
                                                                            F-30
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

9.  CONVERTIBLE  NOTES  CONTINUED

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

The  noteholders have agreed to restrict their ability to convert their callable
secured  convertible  notes or exercise their warrants and receive shares of the
Company's  common  stock  such that the number of shares of common stock held by
them  in  the  aggregate  and their affiliates after such conversion or exercise
does not exceed 4.99% of the then issued and outstanding shares of common stock.
However,  the selling stockholders may repeatedly sell shares of common stock in
order  to reduce their ownership percentage, and subsequently convert additional
callable secured convertible notes.  As of January 31, 2007, a total of $854,920
in  convertible notes had been converted pursuant to conversion notices from the
noteholders.

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

  -  $500,000  was  disbursed  on  February  28,  2006;

  -  $500,000  was  disbursed  on  June  28,  2006  after  the  Company  filed a
registration  statement  on June 15, 2006 to register the shares of common stock
underlying  the  convertible  notes. The registration statement was subsequently
withdrawn  on  July  25,  2006  and  a  new  registration statement was filed on
September  15,  2006 to register 60,000,000 shares of common stock issuable upon


--------------------------------------------------------------------------------
                                                                            F-31
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

9.  CONVERTIBLE  NOTES  CONTINUED

conversion  of  the  convertible  notes.

  -  $500,000  will  be  disbursed  upon  the  effectiveness of the registration
statement  that  registers  60,000,000  shares  of  common  stock underlying the
convertible  notes.

  -  The  Company  delivers to the investors duly executed convertible notes and
warrants;

  -  No  litigation, statute, regulation or order had been commenced, enacted or
entered  by  or  in  any  court,  governmental  authority or any self-regulatory
organization that prohibits consummation of the transactions contemplated by the
securities  purchase  agreement;  and

.. -  No  event  occurred  that could reasonably  be  expected to have a material
adverse  effect  on  the  Company's  business.

     Each  closing  under  the  securities purchase agreement was subject to the
     following  conditions:

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

In  addition,  the Company agreed not to conduct any equity financing (including
debt  financing  with  an equity component) during the period beginning February
28,  2006  and ending two years after the end of the above lock-up period unless
it  first  provided each investor an option to purchase its prorata share (based
on  the  ratio  of  each  investor's  purchase  under  the  securities  purchase
agreement)  of  the  securities  being  offered  in  any  proposed


--------------------------------------------------------------------------------
                                                                            F-32
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

9.  CONVERTIBLE  NOTES  CONTINUED

equity  financing.  Each investor must be provided written notice describing any
proposed equity financing at least 20 business days prior to the closing of such
proposed  equity  financing  and  the  option  must be extended to each investor
during  the  15-day  period  following  delivery  of  such  notice.

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

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


--------------------------------------------------------------------------------
                                                                            F-33
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

9.  CONVERTIBLE  NOTES  CONTINUED

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

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

The  Company  is  required  to  register  60,000,000  shares of its common stock
issuable  upon  the  conversion of the convertible notes that were issued to the
noteholders  pursuant  to  the  securities  purchase  agreement that the Company
entered  into  on  February  28, 2006.  The registration statement must be filed
with  the  Securities and Exchange Commission within 60 days of the February 28,
2006  closing date and the effectiveness of the registration is to be within 135
days of such closing date.  Penalties of 2% of the outstanding principal balance
of  the convertible notes plus accrued interest are to be applied for each month
the  registration is not effective within the required time.  The penalty may be
paid  in  cash  or  stock  at  our  option

10.  STOCK  OPTION  PLAN  AND  WARRANTS

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


--------------------------------------------------------------------------------
                                                                            F-34
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

10.  STOCK  OPTION  PLAN  AND  WARRANTS  CONTINUED

The  Company  granted  the  following options and warrants during the year ended
December  31,  2005:

     -    Options  employees,  officers,  and the board of directors to purchase
          1,250,000  shares  of  common  stock at an exercise price ranging from
          $0.09  to  $0.10.

     -    Warrants  to purchase 16,534,392 shares of common stock at an exercise
          price  of  $0.20  per  share in return for the sale of callable secure
          convertible  notes.

     -    Warrants to investors to purchase 200,000 shares of common stock at an
          exercise  price  of  $0.15.

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

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

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

A  schedule  of  the  options  and  warrants  is  as  follows:

<TABLE>
<CAPTION>
                            NUMBER OF            EXERCISE
                     ------------------------    PRICE PER
                       OPTIONS     WARRANTS        SHARE
                     ---------------------------------------
<S>                  <C>          <C>          <C>
Outstanding at
  January 1, 2005     3,846,206    2,446,964   $0.10 - 12.98
    Granted           1,250,000   16,734,392     0.09 - 0.20
    Exercised                 -            -               -
    Expired            (274,603)     (10,048)    0.50 - 7.50
    Forfeited          (889,103)     410,882    0.22 - 12.98
                     ---------------------------------------
Outstanding at
  December 31, 2005   3,932,500   19,582,190    0.10 - 12.98
                     -----------  -----------  -------------
    Granted           4,700,000    8,000,000     0.01 - 0.10
    Exercised                 -            -               -
    Expired            (225,000)  (2,522,798)    0.50 - 7.50
    Forfeited        (1,402,500)           -     0.10 - 2.75
                     ---------------------------------------
Outstanding at
  December 31, 2006   7,005,000   25,059,392   $ 0.01 - 6.75
                     =======================================
</TABLE>
--------------------------------------------------------------------------------
                                                                            F-35
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

10.  STOCK  OPTION  PLAN  AND  WARRANTS  CONTINUED

The  following  table  summarizes  information  about stock options and warrants
outstanding  at  December  31,  2006:

<TABLE>
<CAPTION>
                             OUTSTANDING                    EXERCISABLE
                -----------------------------------  ----------------------
                               WEIGHTED
                               AVERAGE
                              REMAINING    WEIGHTED                WEIGHTED
  RANGE OF                   CONTRACTUAL    AVERAGE                 AVERAGE
  EXERCISE        NUMBER         LIFE      EXERCISE     NUMBER     EXERCISE
   PRICES       OUTSTANDING    (YEARS)       PRICE    EXERCISABLE    PRICE
---------------------------------------------------  ----------------------
<S>            <C>          <C>           <C>        <C>          <C>
$0.01 - 0.75    30,989,392          0.52  $    0.01    2,759,339  $    0.17
 2.00 - 5.00     1,025,000          2.80       3.11    1,027,500       3.14
 6.00 - 8.13        50,000          3.42       6.75       50,000       6.75
       12.98             -             -      12.98            -      12.98
---------------------------------------------------  ----------------------

$0.01 - 12.98   32,064,392          0.60  $    3.80    3,836,839  $    1.14
===================================================  ======================
</TABLE>

11.  GAIN  ON  SETTLEMENT  OF  LIABILITIES

Due  to  the Company's ongoing cash flow difficulties, during 2006 and 2005 most
vendors and suppliers were contacted with attempts to negotiate reduced payments
and  settlements  of  outstanding  accounts payable and accrued expenses.  While
some  vendors  refused  to  negotiate and demanded payment in full, some vendors
were  willing  to settle for a reduced amount.  The accounts payable forgiven by
vendors and suppliers and accrued expenses settled resulted in a gain of $34,000
and  $12,000  in  2006  and  2005,  respectively.

12.  RELATED  PARTY  TRANSACTIONS

A  law firm, of which the chairman of the board of directors of the Company is a
shareholder,  has rendered legal services to the Company.  The Company paid this
firm  $148,000  and  $220,000,  for  the years ended December 31, 2006 and 2005,
respectively.  As  of  December  31,  2006, the Company owed this firm $124,000,
which  is  included  in  accounts  payable.


--------------------------------------------------------------------------------
                                                                            F-36
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

13.  SUPPLEMENTAL  CASH  FLOW  INFORMATION

During  the  year  ended  December  31,  2006,  the  Company:

     -    Incurred  paid  obligation of approximately $13,000 for the settlement
          of  accrued  liabilities  of  approximately  $47,000  and  recorded  a
          corresponding  gain  of  $34,000.

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

<TABLE>
<CAPTION>
                     YEARS ENDED
                     DECEMBER 31,
                   ----------------
                    2006     2005
                   ----------------
<S>                <C>     <C>
Interest            7,000  $ 15,000
                   ================

Income taxes       $    -  $      -
                   ================
</TABLE>


--------------------------------------------------------------------------------
                                                                            F-37
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

14.  EXPORT  SALES

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

<TABLE>
<CAPTION>
                      YEARS ENDED
                      DECEMBER 31,
                 ----------------------
GEOGRAPHIC AREA     2006        2005
---------------  ----------------------
<S>              <C>         <C>
Far East         $  535,000  $  500,000
South America        42,000      27,000
Middle East          98,000     162,000
Europe              511,000     817,000
Canada              100,000      62,000
Mexico                7,000       1,000
Africa                    -       1,000
                 ----------------------

                 $1,293,000  $1,570,000
                 ======================
</TABLE>

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
nondiscriminatory no matching contributions at this time. During the years ended
December  31,  2006  and  2005,  the  Company made no contributions to the Plan.

16.  COMMITMENTS  AND  CONTINGENCIES  CONTINUED

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

The  agreement  provides  that the Company and MEDA agree to jointly develop and
collaborate in the improvement and enhancement of the Company's products and, in
the  interest  of  product  development,  enhancement  and differentiation, MEDA
agrees  to  give consideration to potential software development or enhancements


--------------------------------------------------------------------------------
                                                                            F-38
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

16.  COMMITMENTS  AND  CONTINGENCIES  CONTINUED

made  available  to  the  Company for its products. Moreover, in the interest of
product  improvement,  MEDA  agrees  to  collaborate  with  the  Company and its
designated  engineers,  employees  and  consultants  to consider and potentially
implement jointly or individually the development of product enhancements on the
Company's  products  to  be  manufactured  by  MEDA.

The software and hardware modifications designed jointly by the Company and MEDA
will  be  considered the joint intellectual property of the Company and MEDA and
may  be  used,  without  restriction,  unless otherwise previously agreed to, by
either  party.  MEDA  also agrees to provide a 12 month warranty on all products
that  it  manufactures  for  the  Company. If defects cannot be corrected at our
facilities,  the  products  may be returned to MEDA for the purposes of carrying
out such repairs as required, and MEDA agrees to return the repaired products to
the  Company or its designated agent or distributor within ten working days from
the  date  of  receiving such products, at no cost to the Company, and MEDA will
pay  return  freight  costs.

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

MEDA  provides  the  Company  with  several  ultrasound  devices.  These devices
include  the  P37-II  A/B  Scan,  the  P2000  A-Scan  Biometric  Analyzer, P2200
Pachymeter  and the P2500, which is a combined A-Scan and pachymeter.  MEDA also
manufactures  the  P2700  and  P37-II  A/B  Scans  and  the  P50  Ultrasound
Biomicroscope.  The  agreement  provides  exclusive  distribution  rights to the
Company


--------------------------------------------------------------------------------
                                                                            F-39
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

16.  COMMITMENTS  AND  CONTINGENCIES  CONTINUED

throughout  most  of the world, including the United States and Canada, once FDA
approval  is  received  on  these  devices.

The agreement shall be effective for three years from date of execution.  At the
end  of the three year term, representatives of the Company and MEDA will confer
to  determine  whether  to  extend  the term of the agreement.  This will have a
practical  effect  of  extending the term of the agreement for an additional 120
days.  If  mutual  agreement  for  extending  the  term  of the agreement is not
reached within 120 days after the end of the three year term, then the agreement
will  be  deemed terminated.  However, if within the 120 day period, the Company
and  MEDA  mutually  agree  to extend the term of the agreement, then thereafter
either  party  may  terminate the agreement by providing 12 months prior written
notice  to  the other party.  All outstanding orders at the time of notification
will  be  supplied  under  the terms of the agreement, and MEDA will continue to
fulfill  all  orders  from  the  Company  until  the  12 month notice period has
expired.

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

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


--------------------------------------------------------------------------------
                                                                            F-40
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

16.  COMMITMENTS  AND  CONTINGENCIES  CONTINUED

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

The  Company  entered  into  an  employment  agreement  with John Y. Yoon, which
commenced on March 18, 2004 and was to expire on March 18, 2007.  The employment
agreement  required  Mr. Yoon to devote substantially all of his working time as
the  Company's President and Chief Executive Officer, providing that he could be
terminated  for  "cause"  (as  defined in the agreement) and prohibited him from
competing  with  the  Company  for  two  years  following the termination of his
employment  agreement.  The  employment agreement provided for the payment of an
initial  base salary of $175,000, effective as of April 1, 2004.  The employment
agreement  also provided for salary increases and bonuses as shall be determined
at  the  discretion of the Board of Directors.  The employment agreement further
provided  for  the issuance of stock options to purchase 1,000,000 shares of the
Company's  common stock at $.13 per share.  The options were to vest in 36 equal
monthly  installments  of  27,778 shares, beginning on April 30, 2004 until such
shares  were vested.  Mr. Yoon resigned as President and Chief Executive Officer
of  the  Company on December 31, 2005 to pursue other opportunities. At the time
of  his  resignation,  stock options to purchase 583,338 shares of the Company's
common  stock  were  vested.  Under the terms of the 1995 Stock Option Plan, the
vested  options  terminated  on  March  31,  2006.

The  Company  entered  into  an  employment  agreement  with Aziz A. Mohabbat on
October  5,  2004, which was effective as of April 1, 2004, and was to expire on
March  18,  2006.  The  employment


--------------------------------------------------------------------------------
                                                                            F-41
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

16.  COMMITMENTS  AND  CONTINGENCIES  CONTINUED

agreement  required Mr. Mohabbat to devote substantially all of his working time
as  the  Company's  Vice  President  of  Operations and Chief Operating Officer,
provided  that  he could be terminated for "cause" (as defined in the agreement)
and  prohibited  him from competing with the Company for two years following the
termination  of  the employment agreement. The employment agreement provided for
the  payment  of  an  initial  base salary of $144,500, effective as of April 1,
2004.  The  employment  agreement also provided for salary increases and bonuses
as  shall  be  determined at the discretion of the Company's Board of Directors.
The  employment  agreement further provided for the issuance of stock options to
purchase  200,000 shares of the Company's common stock at $.12 per share.  These
options were to vest in 36 equal monthly installments of 5,556 shares, beginning
on April 30, 2004, until such shares were vested.  Mr. Mohabbat resigned as Vice
President  of  Operations and Chief Operating Officer of the Company on November
15,  2005  to pursue other opportunities.  At the time of his resignation, stock
options  to  purchase  105,564 shares of the Company's common stock were vested.
Under  the terms of the 1995 Stock Option Plan, the vested options terminated on
February  13,  2006.

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

In addition, the board resolutions provided that the Company was to issue to Mr.
Hemmer  warrants  to purchase 125,000 shares of common stock at $2.63 per share,
exercisable  for  a period of five years, and warrants to purchase 75,000 shares
of  common stock at $7.50 per share, exercisable for a period of five years, but
such  warrants  were  not  to  be  issued  until Mr. Hemmer exercised all of the
warrants  to  purchase  125,000  common  shares  at  $2.63  per  share.


--------------------------------------------------------------------------------
                                                                            F-42
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

16.  COMMITMENTS  AND  CONTINGENCIES  CONTINUED

The  Company  has  paid  a  total  of $87,500 to Mr. Hemmer under the consulting
agreement.

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

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

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

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


--------------------------------------------------------------------------------
                                                                            F-43
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

16.  COMMITMENTS  AND  CONTINGENCIES  CONTINUED

Company's  calculations,  is  $981.  The  Company made payment of this amount to
Photomed  and  Dr. Eichenbaum on January 5, 2005 and, as a result, seeks to have
the  legal  action  dismissed.  However, if the parties are unable to agree on a
method  for  calculating  royalties,  there  is  a  risk  that  PhotoMed and Dr.
Eichenbaum  might  amend  their  complaint to request termination of the license
agreement  and,  if  successful, the Company would lose its right to manufacture
and  sell  the  Photon(TM)  laser  system.

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

On September 10, 2003, an action was filed against the Company by Larry Hicks in
the  Third  Judicial District Court, Salt Lake County, State of Utah, (Civil No.
030922220), for payments due under a consulting agreement with us. The complaint
claims that monthly payments of $3,083 are due for the months of October 2002 to
October  2003  under  a  20  consulting  agreement  and,  if  the  agreement  is
terminated,  for  the  sum  of  $110,000 minus whatever the Company has paid Mr.
Hicks  prior to such termination, plus costs, attorney's fees and a wage penalty
pursuant  to  Utah  law.  The Company has filed an answer in which it denies any
liability  to  Mr.  Hicks.  Formal  discovery  in  the matter has commenced. The
Company  disputes  the  amount  allegedly  owed and intends to vigorously defend
against  such  action.

COMPLETION  OF  SETTLEMENT  OF  FEDERAL  AND  STATE  CLASS  ACTION  LAWSUITS
On  August  26,  2005,  the  federal  court  entered  an  order  and  final


--------------------------------------------------------------------------------
                                                                            F-44
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

16.  COMMITMENTS  AND  CONTINGENCIES  CONTINUED

judgment granting final approval of the settlement agreement reached on February
22,  2005 in the federal court class action lawsuit and dismissing the complaint
filed  in  the  lawsuit  with  prejudice  as  against the Company and its former
executive  officers,  Thomas  F.  Motter,  Mark R. Miehle and John W. Hemmer. In
addition,  the court permanently enjoined class members in the lawsuit and their
successors  and  assigns  from instituting any other actions against the Company
and  its  former executive officers that had been or could have been asserted by
the  class  members against the Company and its former executive officers in the
federal  court  class  action
lawsuit.

Following  the  entry of the order and final judgment in the federal court class
action  lawsuit,  there  was  a  30  days  period  to appeal the order and final
judgment. The 30 day period lapsed and no appeal was made of the order and final
judgment.  Consequently,  the  order  and  final judgment entered by the federal
court  is  non-appealable.  Under  the  terms of settlement of the federal court
class  action lawsuit, U.S. Fire Insurance Company, which issued a Directors and
Officers  Liability  and  Company  Reimbursement  Policy  to the Company for the
period  from July 10, 2002 to July 10, 2003, agreed to pay the sum of $1,507,500
in cash to the class members that purchased securities of the Company during the
period  between  April  17,  2002  and  November  4,  2002.

On  August  23,  2005,  the  state  court  entered a final judgment and order of
dismissal  with  prejudice,  granting  final approval of the terms of settlement
reached on February 23, 2005 in the state court class action lawsuit, dismissing
the  state  class  action  lawsuit  and all claims contained therein against the
Company  and  its  former executive officers, and enjoining the class members in
the  lawsuit  from  prosecuting  the  settled claims against the Company and its
former  executive  officers.

Following  the entry of the final judgment and order of dismissal with prejudice
in the state court class action lawsuit, there was a 30 day period to appeal the
final  judgment  and  order.  The 30 day period has now lapsed and no appeal was
made of the final judgment and order. Consequently, the final judgment and order
entered  by  the  state court is nonappealable. Under the terms of settlement of
the  state  court  class  action  lawsuit,  U.S.  Fire  agreed to pay the sum of
$625,000  in  cash  to  the  class  members  that  purchased  shares of Series E


--------------------------------------------------------------------------------
                                                                            F-45
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

16.  COMMITMENTS  AND  CONTINGENCIES  CONTINUED
Convertible  preferred  stock  on  or  about  July  11,  2001.

The  federal  court  class action lawsuit was initially filed on May 14, 2003 by
Richard  Meyer,  individually and on behalf of all others similarly situated, in
the  United  States  District  Court  for  the District of Utah. The lawsuit was
consolidated  into  a single action on June 28, 2004 with two other class action
lawsuits -- the class action lawsuit filed by Michael Marone on June 2, 2003 and
the class action lawsuit filed by Lidia Milian on July 11, 2003 against Paradigm
Medical  and  its  former executive officers in the same court. The consolidated
action  was captioned: In re: Paradigm Medical Industries Securities Litigation,
with  lead  plaintiffs  Rock  Solid  Investments  of  Miami, Inc., Brito & Brito
Accounting,  Inc.  and  Joseph  Savanjo.

The  state court class action lawsuit was initially filed on October 14, 2003 by
Albert  Kinzinger,  Jr.,  individually  and  on  behalf  of all others similarly
situated,  against  Paradigm  Medical  and  its former executive officers in the
Third  District  Court  for  Salt  Lake  County,  State  of  Utah.

On  February  22,  2005,  the  Company executed written settlement agreements to
settle  the federal and state court class action lawsuits. As a condition to the
settlement  agreements,  the  courts  in  such lawsuits must have entered orders
granting  final approval of the settlements reached in those respective actions,
and  such  orders  must  have  become  final  and  nonappealable.

17.  RECENT  ACCOUNTING  PRONOUNCEMENTS

In  May 2005, the  FASB  issued  SFAS  no.  154,  "Accounting  Changes and Error
Corrections."  This  statement  replaces  APB  Opinion No. 20 and SFAS No 3. APB
Opinion  No  20  previously  required  that most voluntary changes in accounting
principle be recognize by including the cumulative effect of changing to the new
accounting  principle in the net income of the period of the change. SFAS No 154
requires  retrospective  application  to  prior periods' financial statements of
changes  in accounting principle, unless it is impracticable to determine either
the  period-specific effects or the cumulative effect of the change.  When it is
impracticable  to  determine the period-specific effects of an accounting change
on  one or more individual prior periods presented, this Statement requires that
the accounting principle be applied to the balances of assets and liabilities as
of  the  beginning of the earliest period for which retrospective application is
practicable  and  that a corresponding adjustment be made to the opening balance
of


--------------------------------------------------------------------------------
                                                                            F-46
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

17.  RECENT  ACCOUNTING  PRONOUNCEMENTS  CONTINUED

retained  earnings  for  that  period,  rather  than being reported in an income
statement.  The  new  standard  will  be  effective  for  accounting changes and
corrections  of  errors  made in fiscal years beginning after December 15, 2005.
The  Company  believes  the  adoption  of  new standard will not have a material
effect  on  its  financial  position,  results  of  operations,  cash  flows, or
previously  issued  financial  reports.

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

In  September 2006, the Financial Accounting Standards Board issued Statement of
Financial  Accounting Standards No. 157, "Fair Value Measurements" ("SFAS 157"),
which  defines  fair  value, establishes a framework for measuring fair value in
generally accepted accounting principles ("GAAP"), and expands disclosures about
fair  value  measurements.  Where  applicable,  SFAS 157 simplifies and codifies
related  guidance  within  GAAP  and  does  not  require  any  new  fair  value
measurements.  SFAS  157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years.  Earlier adoption is encouraged. The Company does not expect the adoption
of SFAS 157 to have a significant effect on its financial position or results of
operation.


--------------------------------------------------------------------------------
                                                                            F-47
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

17.  RECENT  ACCOUNTING  PRONOUNCEMENTS  CONTINUED

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

In  March  2006,  the  Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards No. 156, "Accounting for Servicing of Financial
Assets  --  an Amendment of FASB Statement No. 140 ("SFAS 156")." This statement
requires  an  entity  to recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into a
servicing  contract  in  any  of  the  following  situations:  a transfer of the
servicer's  financial  assets that meets the requirements for sale accounting; a
transfer  of  the  servicer's  financial  assets to a qualifying special-purpose
entity  in  a guaranteed mortgage securitization in which the transferor retains
all of the resulting securities and classifies them as either available-for-sale
securities  or  trading  securities;  or  an  acquisition  or  assumption  of an
obligation to service a financial asset that does not relate to financial assets
of  the  service or its consolidated affiliates. The statement also requires all
separately recognized servicing assets and servicing liabilities to be initially
measured  at  fair value, if practicable, and permits an entity to choose either
the  amortization  or fair value method for subsequent measurement of each class
of  servicing  assets  and  liabilities.  The  statement further permits, at its
initial  adoption,  a one-time reclassification of available-for-sale securities
to  trading  securities  by  entities  with recognized servicing rights, without
calling into question the treatment of other available-for-sale securities under
Financial  Accounting  Standards  Board  Statement  No.  115,  provided that the
available-for-sale  securities  are  identified in some manner as offsetting the
entity's  exposure  to  changes  in  fair value of servicing assets or servicing
liabilities  that  a  servicer  elects to subsequently measure at fair value and
requires  separate


--------------------------------------------------------------------------------
                                                                            F-48
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

17.  RECENT  ACCOUNTING  PRONOUNCEMENTS  CONTINUED

presentation of servicing assets and servicing liabilities subsequently measured
at  fair value in the statement of financial position and additional disclosures
for  all  separately recognized servicing assets and servicing liabilities. SFAS
156 is effective for fiscal years beginning after September 15, 2006, with early
adoption  permitted  as  of the beginning of an entity's fiscal year. Management
believes the adoption of SFAS 156 will have no immediate impact on the Company's
financial  condition  or  results  of  operations.

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

In  May  2005,  the  Financial  Accounting  Standards  Board issued Statement of
Financial  Accounting  Standards  No.  154,  "Accounting  Changes  and  Error
Corrections  -  a  Replacement  of  APB Opinion No. 20 and FASB Statement No. 3"
("SFAS  154"), to change financial reporting requirements for the accounting for
and reporting of a change in accounting principle. This statement applies to all
voluntary  changes  in  accounting  principles  and  it  also applies to changes
required  by  an  accounting  pronouncement  in  the  unusual  instance that the
pronouncement  does  not  include  specific  transition


--------------------------------------------------------------------------------
                                                                            F-49
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

17.  RECENT  ACCOUNTING  PRONOUNCEMENTS  CONTINUED

provisions.  When a pronouncement includes specific transition provisions, those
provisions  should be followed. The adoption of SFAS 154 is not expected to have
a  material  impact  on  the  Company's  financial  statements.

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

Impairment  of  Long-Lived  Assets  -  In  accordance  with Financial Accounting
Standards Board Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived  Assets,"  the  Company records impairment of long-lived assets to be
held and used or to be disposed of when indicators of impairment are present and
the  undiscounted  cash flows estimated to be generated by those assets are less
than  the  carrying  amount.

18.  SUBSEQUENT  EVENTS

In December 2006, a hearing on the motion for summary judgment in the Todd Smith
case  (Third Judicial District Court, Salt Lake County, State of Utah, Civil No.
030924951CN)  was  held.  At the hearing the court granted the motion dismissing
the  case  in  its  entirety  against  the Company and three of its directors. A
notice  of  appeal  was  filed  on  behalf  of  Mr.  Smith and then subsequently
withdrawn.

Also  in  December  2006,  a  hearing  on the motion for summary judgment in the
Corinne  Powell  case (Third Judicial District Court, Salt Lake County, State of
Utah, Civil No. 030918364) was held. At the hearing the court granted the motion
dismissing  the  case  in  its  entirety  against  the  Company  and  one of the
directors.  The  appeal  time  has  expired  with  no  appeal  being  filed.

On  January  31 and February 1, 2007, the Company received FDA 510(k) pre-market
approval  for  a new generation of ultrasound devices to be manufactured by MEDA
Co.,  Inc. pursuant to the terms of the Worldwide OEM Agreement that the Company
entered  into  with  MEDA  on  June  12,  2006.  MEDA  is one of China's leading
developers  and  producers of ultasound devices. This 510(K) approval allows the
new  devices  to  be  sold  in  the  United  States.

The new ultrasound devices, which are to be manufactured by MEDA and sold by the
Company  in  the  United  States,  include  the


--------------------------------------------------------------------------------
                                                                            F-50
<PAGE>
                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED
--------------------------------------------------------------------------------

P2000  A-Scan  (used  to  measure axial length of the eye), the P2200 Pachymeter
(used  for  measuring  corneal  thickness),  the  P2500  A-Scan/Pachymeter  (a
combination  of  the  two stand alone devices), the P2700 AB/Scan (an ultrasound
imaging  device  for  detecting  abnormalities within the eye) and the P37-II (a
more  advanced  AB/Scan used to provide portability for ophthalmology veterinary
applications) and the P50 Ultrasound Biomicroscope for high frequency imaging of
the  anterior  chamber  of  the  eye.


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
































<PAGE>

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

       None.

Item 8A.  Controls and Procedures

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

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


                                    PART III

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

       As of March 31, 2007,  the Company's  executive  officers and  directors,
their ages and their positions are set forth below:

       Name                       Age    Position
       ----                       ---    --------
       Raymond P.L. Cannefax      58     President and Chief Executive Officer
       Randall A. Mackey, Esq.    61     Chairman of the Board and Director
       David M. Silver, PhD.      65     Director
       Keith D. Ignotz            60     Director
       John C. Pingree            66     Director

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

       Raymond P.L.  Cannefax has served as the  Company's  President  and Chief
Executive  Officer since January 5, 2006. Mr. Cannefax  previously served as the
Company's  Vice  President of Sales and Marketing from January 2003 to May 2005.
From May 2005 to January  2006,  Mr.  Cannefax  served as Vice  President of the
Asia/Pacific Region for Sonomed, Inc., a manufacturer of ophthalmic products and
a wholly owned  subsidiary of Escalon Medical Corp. From January 2002 to January
2003,  Mr.  Cannefax was Vice  President of Business  Development  and Sales for
Vermax,  Inc., a  manufacturer  of products for hotel  properties.  From 1996 to
January 2002, he was  President,  Chief  Operating  Officer and founder of Aspen
Network,  Inc., a software development and ecommerce company. From 1992 to 1996,
Mr. Cannefax was President and Chief Executive Officer of Apollo Telecom,  Inc.,
a  telecommunications  company.  From  1986 to  1992,  he was a  Regional  Sales
Director and a Senior District Manager of Sprint Communications Corporation. Mr.
Cannefax received a B.S. degree in Psychology and Zoology from the University of
Utah in 1976.

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

                                       37
<PAGE>

June  2001 to May 2003,  and as a  director  from 1998 to May 2003 of  Cimetrix,
Incorporated, a software development company. Mr. Mackey has additionally served
as Chairman of the Board from July 2000 to July 2003 and as a trustee  from 1993
to July 2003 of Salt Lake Community College.

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

       Keith D.  Ignotz has been a director  since  November  2000.  Since March
2005,  Mr.  Ignotz has been  President  and Chief  Executive  Officer of Diakine
Therapeutics,  Inc., a pharmaceutical  therapeutics  company. From 1992 to 2004,
Mr. Ignotz was with SpectRx, Inc., a medical technology company that he founded,
which develops, manufactures and markets alternatives to traditional blood based
medical  tests,  serving  from 2002 to 2004 as the Chief  Executive  Officer  of
Guided Therapeutics,  Inc., a wholly-owned subsidiary of SpectRx, Inc., and from
1992 to 2002 as President and Chief Operating Officer of SpectRx, Inc. From 1986
to 1992,  Mr.  Ignotz was Senior Vice  President of Allergan  Humphrey,  Inc., a
medical  electronics  company.  From 1985 to 1986,  he was President of Humphrey
Instruments  Limited-SKB,  a medical electronics company, and from 1980 to 1985,
Mr.  Ignotz  was  President  of  Humphrey   Instruments  GmbH,  also  a  medical
electronics company. Mr. Ignotz also served on the Board of Directors of Vismed,
Inc.,  d/b/a Dicon from 1992 to 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 and Audiology since 1990, a director of AeroVectrix,  Inc.,
a drug  delivery  company,  since August  2005,  and as a member of the American
Diabetes  Association  and the American  Marketing  Association  of the American
Association of Diabetes Education.

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

Appointment of New President and Chief Executive Officer

       On January 5, 2006,  Raymond P.L. Cannefax was appointed as the Company's
President and Chief Executive Officer,  replacing John Y. Yoon who had served in
those  positions  from March 18, 2004 to December 31, 2005. Mr. Yoon resigned as
the Company's  President and Chief  Executive  Officer,  effective  December 31,
2005, to pursue other opportunities.

Appointment  of New Vice  President of Finance,  New Vice  President of Domestic
Sales,  New Vice  President of  International  Sales,  and New Vice President of
Operations

       On March 20, 2006,  Luis A. Mostacero was appointed as the Vice President
of Finance.  Mr. Mostacero previously served as the Controller from June 2000 to
August  2005.  On January 4, 2006,  Alfred B.  Franklin  was  appointed  as Vice
President of Domestic  Sales,  replacing  Michael S. Austin who resigned as Vice
President  of Sales  and  Marketing  on  November  28,  2006,  to  pursue  other
opportunities;  Christina  M.  O'Connor  was  appointed  as  Vice  President  of
International  Sales;  and Julio C. Maximo was  appointed  as Vice  President of
Operations.

Board Meetings and Committees

       The Board of Directors  held a total of four  meetings  during the fiscal
year  ended  December  31,  2006.  No  director  attended  fewer than 75% of all
meetings  of the Board of  Directors  during  the 2006  fiscal  year.  The Audit
Committee of the Board of Directors  consists of directors  Dr. David M. Silver,
Randall A. Mackey,  Keith D. Ignotz and John C. Pingree. The Audit Committee met

                                       38
<PAGE>

one time during the fiscal year.  The Audit  Committee is primarily  responsible
for reviewing the services  performed by its independent  public accountants and
internal audit  department  and  evaluating  its  accounting  principles and its
system of internal accounting controls.  The Compensation Committee of the Board
of Directors consists of directors Dr. David M. Silver, Randall A. Mackey, Keith
D. Ignotz and John C. Pingree.  The  Compensation  Committee met one time during
the fiscal  year.  The  Compensation  Committee  is  primarily  responsible  for
reviewing  compensation  of executive  officers and  overseeing  the granting of
stock options.

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

       The Company's  Board of Directors has determined that Keith D. Ignotz and
John C. Pingree,  who  currently  serve as directors of the Company as well as a
member  of the  Company's  audit  committee,  are  independent  audit  committee
financial experts.

Item 10. Executive Compensation

       The following table sets forth,  for each of the last three fiscal years,
the  compensation  received  by  Raymond  P.L.  Cannefax,  President  and  Chief
Executive  Officer,  and other executive officers whose salary and bonus for all
services in all capacities  exceed  $100,000 for the fiscal years ended December
31, 2006, 2005 and 2004.

<TABLE>
<CAPTION>
                                                   Summary Compensation Table


                                                                                      Change in
                                                                                       Pension
                                                                                      Value and
                                                                        Non-Equity   Non-qualified
                                                                        Incentive      Deferred
                                                                           Plan         Compen-       All Other
Name and                                           Stock     Option       Compen-       sation          Compen-
Principal Position     Year   Salary$   Bonus($)   Awards   Awards($)     sation       Earnings         sation         Total
------------------     ----   -------   --------   ------   ---------   ----------   -------------    ---------      ---------
<S>                    <C>    <C>       <C>        <C>      <C>         <C>          <C>              <C>            <C>
Raymond P.L.           2006   127,940      -         -          -            -              -              -         $ 127,940
Cannefax  President    2005    64,285      -         -          -            -              -              -            64,285
and Chief Executive    2004         0      -         -          -            -              -              -                 0
Officer(1)
----------------------
(1)    Mr. Cannefax has served as President and Chief Executive Officer since January 5, 2006.

</TABLE>

<TABLE>
<CAPTION>

                                         Supplemental All Other Compensation Table


                                                                          Registrant
                                                                          Contribu-                    Dividends
                   Perks                                                   tions to                        or
                    and                                    Payments/       Defined                      Earnings
                   Other         Tax        Discounted      Accruals      Contribu-                     on Stock
                 Personal     Reimburse-    Securities     on Termin-        tion        Insurance     or Option
Name             Benefits       ments       Purchases     ation Plans       Plans        Premiums        Awards      Other
------------     --------     ----------    ----------    -----------     ----------     ---------     ----------    -----
<S>              <C>          <C>           <C>           <C>             <C>           <C>            <C>           <C>
Raymond P.L.         -            -             -              -              -              -             -           -
Cannefax
</TABLE>

                                       39
<PAGE>
<TABLE>
<CAPTION>
                                                     Grants of Plan-Based Awards


                          Estimated Future Payouts Under      Estimated Future Payouts
                            Non-Equity Incentive Plan        Under Equity Incentive Plan
                                      Awards                          Awards
                         -------------------------------    -------------------------------
                                                                                                              All Other
                                                                                               All Other       Option
                                                                                                 Stock        Awards:
                                                                                                Awards:      Number of     Exercise
                                                                                               Number of     Securities     or Base
                                                                                               Shares of       Under-      Price of
                                                                                                Stock or       lying        Option
               Grant     Threshold    Target     Maximum    Threshold     Target    Maximum      Units        Options       Awards
   Name         Date        ($)         ($)        ($)         (#)         (#)        ($)         (#)           (#)         ($/Sh)
------------   ------    ---------   --------    -------    ---------     ------    -------    ----------    ----------    --------
<S>            <C>       <C>         <C>         <C>        <C>           <C>       <C>        <C>           <C>           <C>
Raymond P.L.   1/5/06        -          -           -           -           -          -           -         4,500,000       $.01
Cannefax
</TABLE>


<TABLE>
<CAPTION>
                                            Outstanding Equity Awards At Fiscal Year End

                                                                                                                           Equity
                                                                                                             Equity       Incentive
                                                                                                            Incentive       Plan
                                                                                                              Plan        Awards:
                                                                                                              Awards      Market or
                                              Equity                                                        Number of      Payout
                                             Incentive                                           Market     Unearned      Value of
                             Number of     Pan Awards                              Number      Value of      Shares,      Unearned
                Number of   Securities      Number of                                of        Shares or    Units or      Shares,
               Securities   Underlying     Securities                             Shares or    Units of      Other        Units or
               Underlying   Unexercised     Underlying                            Units of       Stock       Rights        Other
              Unexercised    Options:      Unexercised    Option                    Stock      That Have    That Have    Rights That
                 Options        (#)          Unearned    Exercise     Option      Held That       Not          Not        Have Not
                   (#)        Unexer-         Options     Price     Expiration    Have Not       Vested      Vested        Vested
    Name      Exercisable    cisable           (#)         ($)         Date       Vested(#)       ($)          (#)           ($)
------------  -----------   -----------    -----------   --------   ----------    ---------    ---------    ----------   ----------
<S>           <C>           <C>            <C>           <C>        <C>           <C>          <C>          <C>          <C>
Raymond P.L.       0             0               -           -          -              -            -            -             -
Cannefax
</TABLE>

<TABLE>
<CAPTION>
                    Option Exercises and Stock Vested for Fiscal 2006


                                 Option Awards                    Stock Awards
                       -------------------------------  -------------------------------
                          Number of                       Number of
                       Shares Acquired  Value Realized  Shares Acquired  Value Realized
                         on Exercise     on Exercise      on Vesting       on Vesting
        Name                 (#)             ($)             (#)              ($)
---------------------  ---------------  --------------  ---------------  --------------
<S>                    <C>              <C>             <C>              <C>

Raymond P.L. Cannefax         0               -               0                -
</TABLE>

                                           40
<PAGE>

                        Pension Benefits for Fiscal 2006


                                    Number of
                                      Years     Present Value
                                     Credited   of Accumulated  Payments During
                                     Service       Benefit      Last Fiscal Year
         Name           Plan Name      (#)           ($)              ($)
---------------------   ---------   ---------   --------------  ----------------
Raymond P.L. Cannefax     None           -             -                -


Director Compensation

       Outside  directors  are  currently  not paid a  director's  fee for their
services but are reimbursed for their expenses in attending  board and committee
meetings.  Directors  are not  precluded  from  serving the Company in any other
capacity and receiving  compensation  therefore.  The directors were not granted
any options to purchase  shares of the  Company's  common  stock  during 2005 or
2006.

<TABLE>
<CAPTION>
                                     Director Compensation for Fiscal 2006


                                                                          Change in
                                                                         Pension Value
                          Fees                                                and
                        Earned or                         Non-Equity     Nonqualified
                         Paid In     Stock     Option   Incentive Plan     Deferred        All Other
                          Cash       Awards    Awards    Compensation    Compensation     Compensation   Total
Name                       ($)        ($)       ($)          ($)           Earnings           ($)         ($)
---------------------   ---------    ------    ------   --------------   --------------   ------------   -----
<S>                     <C>          <C>       <C>      <C>               <C>             <C>            <C>
Keith D. Ignotz             0          -         -            -                -               -           0
Randall A. Mackey           0          -         -            -                -               -           0
John C. Pingree             0          -         -            -                -               -           0
David M. Silver, PhD.       0          -         -            -                -               -           0
</TABLE>


Employee 401(k) Plan

       In  October  1996,  the  Company's  Board of  Directors  adopted a 401(k)
Retirement  Savings  Plan.  Under the terms of the 401(k) plan,  effective as of
November  1,  1996,  the  Company  may  make  discretionary   employer  matching
contributions  to its employees who choose to  participate in the plan. The plan
allows the board to determine the amount of the contribution at the beginning of
each  year.  The  board  adopted a  contribution  formula  specifying  that such
discretionary   employer  matching   contributions   would  equal  100%  of  the
participating  employee's contribution to the plan up to a maximum discretionary
employee  contribution  of 3% of a  participating  employee's  compensation,  as
defined by the plan. All persons who have completed at least six months' service
with the Company and satisfy other plan requirements are eligible to participate
in the plan. The plan is currently  available to the Company's  employees at the
employees' expense with no matching contribution from the Company.

1995 Stock Option Plan

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

                                       41
<PAGE>

approved an  amendment  to the plan to  increase  the number of shares of common
stock  reserved  for  issuance  thereunder  from  1,200,000  shares to 1,700,000
shares.  On September 11, 2001,  its  shareholders  approved an amendment to the
plan to increase  the number of shares of common  stock  reserved  for  issuance
thereunder  from  1,700,000  shares to 2,700,000  shares.  On June 13, 2003, its
shareholders  approved an amendment to the plan to increase the number of shares
of common stock  reserved  for  issuance  thereunder  from  2,700,000  shares to
3,700,000  shares.  On July 11, 2005, its shareholders  approved an amendment to
the plan to increase the number of shares of common stock  reserved for issuance
thereunder from 3,700,000 shares to 5,000,000 shares.

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

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

Employment Agreements

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

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

                                       42
<PAGE>

       The Company entered into an employment agreement with John Y. Yoon, which
commenced on March 18, 2004 and was to expire on March 18, 2007.  The employment
agreement  required Mr. Yoon to devote  substantially all of his working time as
the Company's President and Chief Executive Officer,  providing that he could be
terminated  for "cause" (as defined in the  agreement)  and  prohibited him from
competing  with the  Company  for two years  following  the  termination  of his
employment  agreement.  The employment  agreement provided for the payment of an
initial base salary of $175,000,  effective as of April 1, 2004.  The employment
agreement also provided for salary  increases and bonuses as shall be determined
at the discretion of the Board of Directors.  The employment  agreement  further
provided for the issuance of stock options to purchase  1,000,000  shares of the
Company's  common stock at $.13 per share.  The options were to vest in 36 equal
monthly  installments  of 27,778 shares,  beginning on April 30, 2004 until such
shares were vested.  Mr. Yoon resigned as President and Chief Executive  Officer
of the Company on December 31, 2005 to pursue other  opportunities.  At the time
of his  resignation,  stock options to purchase  583,338 shares of the Company's
common  stock were vested.  Under the terms of the 1995 Stock  Option Plan,  the
vested options terminated on March 31, 2006.

       The Company entered into an employment agreement with Aziz A. Mohabbat on
October 5, 2004,  which was effective as of April 1, 2004,  and was to expire on
March 18,  2006.  The  employment  agreement  required  Mr.  Mohabbat  to devote
substantially  all of his  working  time  as the  Company's  Vice  President  of
Operations and Chief Operating Officer, provided that he could be terminated for
"cause" (as defined in the agreement) and prohibited him from competing with the
Company for two years following the termination of the employment agreement. The
employment  agreement  provided  for the  payment of an initial  base  salary of
$144,500,  effective as of April 1, 2004. The employment agreement also provided
for salary increases and bonuses as shall be determined at the discretion of the
Company's Board of Directors.  The employment agreement further provided for the
issuance of stock options to purchase  200,000  shares of the  Company's  common
stock  at $.12  per  share.  These  options  were to  vest in 36  equal  monthly
installments  of 5,556  shares,  beginning on April 30, 2004,  until such shares
were vested.  Mr.  Mohabbat  resigned as Vice  President of Operations and Chief
Operating  Officer  of  the  Company  on  November  15,  2005  to  pursue  other
opportunities. At the time of his resignation, stock options to purchase 105,564
shares of the  Company's  common stock were vested.  Under the terms of the 1995
Stock Option Plan, the vested options terminated on February 13, 2006.

Retirement Agreement

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

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

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

Item 11.  Security  Ownership of Certain  Beneficial  Owners and  Management and
          Related Stockholder Matters

       The  following  table  sets forth  certain  information  with  respect to
beneficial  ownership of the Company's common stock as of March 31, 2007 for (i)
each  executive  officer  (ii) each  director,  (iii) each  person  known to the
Company to be the beneficial  owner of more than 5% of the  outstanding  shares,
and (iv) all directors and officers as a group.

                                       43
<PAGE>

                                                               Percent of
Name and Address(1)                   Number of Shares          Ownership
-------------------------             ----------------         ----------
Raymond P.L. Cannefax (2)                  4,500,000              2.2%
Dr. David M. Silver (2)                      761,166               *
Randall A. Mackey (2)                        725,000               *
Keith D. Ignotz (2)                          525,709               *
John C. Pingree (2)                          431,500               *
                                         -----------
Executive officers and directors
   as a group (five persons)               6,943,375              3.5%
-----------------
*Less than 1%.

(1)    Unless otherwise indicated, the address of each listed stockholder is c/o
       Paradigm Medical Industries,  Inc., 2355 South 1070 West, Salt Lake City,
       Utah, 84119.
(2)    The amounts  shown  include  shares that may be  acquired  currently,  or
       within 60 days after March 31, 2007 through the exercise of stock options
       are follows: Mr. Cannefax,  4,500,000 shares; Dr. Silver, 725,000 shares;
       Mr. Mackey,  725,000 shares; Mr. Ignotz, 525,851 shares; and Mr. Pingree,
       275,000 shares.

Item   12. Certain Relationships and Related Transactions

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

       Randall A. Mackey,  a director since January 21, 2000, and from 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 & Ostler,
which  rendered  legal services in connection  with various  corporate  matters.
Legal fees and expenses  paid to Mackey  Price  Thompson & Ostler for the fiscal
years  ended  December  31,  2006  and  2005,  totaled  $148,000  and  $220,000,
respectively. In addition, on April 7, 2005 the Company issued 250,000 shares of
common  stock to Mackey  Price  Thompson & Ostler in payment of $22,500 in legal
services. As of December 31, 2006, the Company owed this firm $133,850, which is
included in accounts payable.

                                     PART IV

Item 13. Exhibits and Reports on Form 8-K

       (a) Exhibits

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

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

  2.1       Amended  Agreement  and  Plan of  Merger  between  Paradigm  Medical
            Industries,  Inc., a  California  corporation  and Paradigm  Medical
            Industries, Inc., a Delaware corporation(1)
  3.1       Certificate of Incorporation(1)
  3.2       Amended Certificate of Incorporation(8)
  3.3       Bylaws(1)
  4.1       Specimen Common Stock Certificate (2)
  4.2       Specimen Class A Warrant Certificate(2)
  4.3       Form of Class A Warrant Agreement(2)
  4.4       Underwriter's Warrant with Kenneth Jerome & Co., Inc.(3)
  4.5       Specimen Series C Convertible Preferred Stock Certificate(4)
  4.6       Certificate of the Designations,  Powers,  Preferences and Rights of
            the Series C Convertible Preferred Stock(4)
  4.7       Specimen Series D Convertible Preferred Stock Certificate (5)

                                       44
<PAGE>

  4.8       Certificate of the Designations,  Powers,  Preferences and Rights of
            the Series D Convertible Preferred Stock (6)
  4.9       Warrant to Purchase Common Stock with Dr. Michael B. Limberg (6)
 4.10       Certificate of Designations,  Powers,  Preferences and Rights of the
            Series G Convertible Preferred Stock (7)
 10.1       Exclusive Patent License Agreement with PhotoMed(1)
 10.2       Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
 10.3       1995 Stock Option Plan (1)
 10.4       License Agreement with Sunnybrook Health Science Center(8)
 10.5       Employment Agreement with John Y. Yoon(9)
 10.6       Stock Purchase and Sale Agreement with William Ungar (10)
 10.7       Employment Agreement with Aziz A. Mohabbat (11)
 10.8       Investment Banking Agreement with Alpha Advisory Services, Inc. (12)
 10.9       Manufacturing and Distribution  Agreement with E-Technologies,  Inc.
            (12)
10.10       Settlement  Agreement with Innovative Optics,  Inc., Barton Dietrich
            Investments, L.P. and United States Fire Insurance Company (13)
10.11       Stipulation and Agreement of Settlement (14)
10.12       Supplemental Agreement (14)
10.13       Stipulation of Settlement (14)
10.14       Supplemental Agreement (14)
10.15       Securities Purchase Agreement with AJW Partners,  LLC, AJW Offshore,
            Ltd.,  AJW  Qualified  Partners,  LLC  and  New  Millennium  Capital
            Partners II, LLP (the "Purchasers")(15)
10.16       Form of Callable Secured Convertible Note with each purchaser(15)
10.17       Form of Stock Purchase Warrant with each purchaser(15)
10.18       Security Agreement with Purchasers(15)
10.19       Intellectual Property Security Agreement with Purchasers(15)
10.20       Registration Rights Agreement with Purchasers(15)
10.21       Stock Purchase Agreement with Mackey Price Thompson & Ostler(16)
10.22       Employment Agreement with Raymond P.L. Cannefax(17)
10.23       Securities Purchase Agreement with AJW Partners,  LLC, AJW Offshore,
            Ltd.,  AJW  Qualified  Partners,  LLC  and  New  Millennium  Capital
            Partners II, LLP(18)
10.24       Form of Callable Secured Convertible Note with each purchaser(18)
10.25       Form of Stock Purchase Warrant with each purchaser(18)
10.26       Security Agreement with Purchasers(18)
10.27       Intellectual Property Security Agreement with Purchasers(18)
10.28       Registration Rights Agreement with Purchasers(18)
10.29       Settlement Agreement with Dr. Joseph Spadafora (19)
10.30       Worldwide OEM Agreement with MEDA Co., Ltd.(20)
 31.1       Certification  pursuant  to 18 U.S.C.  Section  1350,  as enacted by
            Section 302 of the Sarbanes-Oxley Act of 2002
 31.2       Certification  pursuant  to 18 U.S.C.  Section  1350,  as enacted by
            Section 302 of the Sarbanes-Oxley Act of 2002
 32.1       Certification  pursuant  to  18  U.S.C.  Section  1350,  as  adopted
            pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 32.2       Certification  pursuant  to  18  U.S.C.  Section  1350,  as  adopted
            pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
-----------------

(1)         Incorporated by reference from Registration  Statement on Form SB-2,
            as filed on March 19, 1996.
(2)         Incorporated  by  reference  from  Amendment  No. 1 to  Registration
            Statement on Form SB-2, as filed on May 14, 1996.
(3)         Incorporated  by  reference  from  Amendment  No. 2 to  Registration
            Statement on Form SB-2, as filed on June 3, 1996.
(4)         Incorporated  by reference  from Annual  Report on Form  10-KSB,  as
            filed on April 16, 1998.
(5)         Incorporated by reference from Registration  Statement on Form SB-2,
            as filed on April 29, 1999.
(6)         Incorporated  by reference  from Report on Form 10-QSB,  as filed on
            August 16, 2000.
(7)         Incorporated  by reference  from Report on Form 10-QSB,  as filed on
            November 14, 2003.
(8)         Incorporated  by  reference  from  Amendment  No. 2 to  Registration
            Statement on Form SB-2, as filed on December 15, 2003.

                                       45
<PAGE>

(9)         Incorporated  by reference from Current Report on Form 8-K, as filed
            on March 23, 2004.
(10)        Incorporated by reference from Quarterly  Report on Form 10-QSB,  as
            filed on August 16, 2004.
(11)        Incorporated  by  reference  from  Amendment  No. 6 to  Registration
            Statement on Form SB-2, as filed on October 20, 2004.
(12)        Incorporated  by reference  from Report on Form 10-QSB,  as filed on
            November 15, 2004.
(13)        Incorporated  by reference from Current Report on Form 8-K, as filed
            on January 27, 2005.
(14)        Incorporated  by reference from Current Report on Form 8-K, as filed
            on February 23, 2005.
(15)        Incorporated  by reference from Current Report on Form 8-K, as filed
            on May 18, 2005.
(16)        Incorporated by reference from Registration  Statement on Form SB-2,
            as filed on June 22, 2005.
(17)        Incorporated  by reference from Current Report on Form 8-K, as filed
            on January 18, 2006.
(18)        Incorporated  by reference from Current Report on Form 8-K, as filed
            on March 1, 2006.
(19)        Incorporated by reference from Registration  Statement on Form SB-2,
            as filed on June 15, 2006.
(20)        Incorporated  by reference from Current Report on Form 8-K, as filed
            on June 19, 2006.

     (b)  Reports on Form 8-K

       No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 2006.

Item 14. Principal Accountant Fees and Services

       Fees for the 2006 annual audit of the  financial  statements  and related
quarterly  review  services were $28,600.  Fees in 2006 related to the review of
registration  statements  and  assistance  in  responding  to SEC comments  were
$1,300.  Fees in 2006 for edgarization of filings were $2,600.  Fees in 2006 for
tax  return  preparation  were  $3,500.  There  were no  other  fees in 2006 for
meetings and other consultation.

       Fees for the 2005 annual audit of the  financial  statements  and related
quarterly  review  services were $45,000.  Fees in 2005 related to the review of
registration  statements  and  assistance  in  responding  to SEC comments  were
$8,000. Fees in 2005 for edgarization of filings were $11,000.  Fees in 2005 for
tax return  preparation  were $4,000.  Other fees in 2005 for meetings and other
consultation were $10,000.
























                                       46
<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: March 31, 2007                  By: /s/  Raymond P.L. Cannefax
                                          ------------------------------------
                                           Raymond P.L. Cannefax,
                                           President and Chief Executive Officer

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

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

/s/ Raymond P.L. Cannefax     President and Chief Executive    March 31, 2007
---------------------------   Officer (Principal Executive
Raymond P.L. Cannefax         Officer)



/s/ Randall A. Mackey         Chairman of the Board and        March 31, 2007
---------------------------   Director
Randall A. Mackey



/s/ David M. Silver           Director                         March 31, 2007
---------------------------
David M. Silver, Ph.D.



/s/ Keith D. Ignotz           Director                         March 31, 2007
---------------------------
Keith D. Ignotz



/s/ John C. Pingree           Director                         March 31, 2007
---------------------------
John C. Pingree



/s/ Luis A. Mostacero         Vice President of Finance        March 31, 2007
---------------------------   (Principal Financial and
Luis A. Mostacero              Accounting Officer)


                                       47

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