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, 2005, or

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

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

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

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

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

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

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


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

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

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

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

         Registrant's revenues for the fiscal year ended December 31, 2005 were
$2,201,000.

         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, 2005 was approximately $2,853,000 based upon
the closing sale price of such stock as reported on the OTC Bulletin Board on
that date.

         As of April 13, 2006, registrant had outstanding 160,959,428 shares of
common stock, 5,627 shares of Series A preferred stock, 8,986 shares of Series B
preferred stock, no shares of Series C preferred stock and 5,000 shares of
Series D preferred stock, 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]

                                           1
<PAGE>

                                     PART I

Item 1. Description of Business

General

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

         The Company's diagnostic products include a pachymeter, a P55
pachymetric analyzer, a P37 Ultrasonic A/B Scan, P40, P45 and P60 UBM Ultrasound
Biomicroscopes, a P37 A/B Scan, two perimeters, a corneal topographer and the
Blood Flow Analyzer(TM). The diagnostic ultrasonic products including the P55
pachymetric analyzer, the P37 Ultrasonic A/B Scan and the P40 UBM Ultrasound
Biomicroscope were acquired from Humphrey Systems, a division of Carl Zeiss in
1998. The Company developed and offered for sale in the fall of 2000 the P45,
which combines the P37 Ultrasonic A/B Scan and the UBM biomicroscope in one
machine. 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/ Dicon(TM) in June 2000. The Company
purchased Ocular Blood Flow, Ltd. in June 2000 whose principal product is the
Blood Flow Analyzer(TM). This product is designed for the measurement of
intraocular pressure and pulsatile ocular blood flow volume for detection and
monitoring of glaucoma. The Company is currently developing additional
applications for all of its diagnostic products.

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

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

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

                                       2
<PAGE>

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.

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

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

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

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

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

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


                                       3
<PAGE>

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

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

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

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

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.

                                       4
<PAGE>

Overview

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

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

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

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

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

                                       5
<PAGE>

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

Products

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

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

         The Precisionist(TM) 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
greater control for the surgeon and allows the safe operation at much higher
vacuum settings by sampling changes in aspiration 100 times per second. Greater
vacuum in phaco surgery means less use of ultrasound or laser energy to fragment
the cataract and less chance for surrounding tissue damage. In addition to the
full complement of surgical modalities (e.g., irrigation, aspiration, bipolar
coagulation and anterior vitrectomy), system automation includes "dimensional"
audio feedback of vacuum levels and voice confirmation for major system
functions, providing an intuitive environment in which the advanced phaco
surgeon can concentrate on the surgical technique rather than the equipment.
Sales of the Precisionist(TM) and related accessories were 0% of total revenues
in both the fiscal years 2005 and 2004, respectively.

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

         Photon(TM) Laser System: The Photon(TM) laser cataract system, which is
still subject to FDA approval, is designed to be installed as a seamless plug-in
upgrade or add-on to the Company's Precisionist(TM) Ocular Surgery
Workstation(TM). The plug-in platform concept is unique in the ophthalmic
surgical market for systems of this magnitude and presents a unique market
opportunity for the Company. The main elements of the laser system are the
Nd:YAG laser module, Photon(TM) laser software package and interchangeable
disposable hand held fiber optic laser cataract probe. The Photon(TM) laser
utilizes the on board microprocessor computer of the Workstation(TM) to generate
short pulse laser energy developed through the patented LCP(TM) to targeted
cataract tissue inside the eye, while simultaneously irrigating the eye and

                                       6
<PAGE>

aspirating the diseased cataract tissue from the eye. The probe is smaller in
diameter than conventional ultrasound phaco needles and presents no damaging
vibration or heat build up in the eye. The Company's Phase I clinical trials
demonstrated that this probe could easily reduce the size of the cataract
incision from 3.0 mm to under 2.0 mm thereby reducing surgical trauma and
complementing current foldable intraocular implant technology.

         The laser probe may also eliminate any possibility for burns around the
incision or at the cornea and may therefore be used with cataract surgery
techniques that utilize a more delicate clear cornea incision which can
eliminate sutures and be conducted with topical anesthesia. However, this system
may not effectively remove harder grade cataracts. Harder grade cataracts can be
removed using the already existing ultrasound capability of the
Precisionist(TM). Because of the "going concern" status of the Company,
management has focused efforts on those products and activities that will, in
its opinion, achieve the most resource efficient short-term cash flow to the
Company. As reflected in the results for the fiscal year ended December 31,
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
surgery. In contrast, the Company's laser system, which utilizes short
centralized energy bursts, should permit the delivery of the laser beam with
less trauma to adjacent tissue. Therefore, unlike ultrasonic systems, whose
vibrations and shock waves affect (and can damage) non-cataracts tissues within
the eye, the Company's Photon(TM) laser cataract system should only affect
tissues with which it comes into direct contact.

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

         The Photon(TM) Ocular Surgery Workstation(TM) has not been commercially
developed with any other added hardware or software features. There is no
guarantee that the ophthalmic surgery market will accept the laser in this
capacity or that the FDA will grant approval. Regulatory approval would require
completion of pending Photon(TM) clinical trials and resubmission of a 510(k)
predicate device application to the 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.

         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.

                                       7
<PAGE>

These include replacement ultrasound tips, sleeves, tubing sets and fluidics
packs, instrument drapes and laser cataract probes. The Company intends to
expand its disposable accessories as it penetrates the cataract surgery market
and expands the treatment applications for its Workstation(TM). 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 Analyzer(TM): In June 1997, the Company received FDA
clearance to market the Blood Flow Analyzer(TM) for early detection and
treatment management of glaucoma and other retina related diseases. The device
measures not only intraocular pressure but also pulsatile ocular blood flow, the
reduction of which may cause nerve fiber bundle death through oxygen deprivation
thus resulting in visual field loss associated with glaucoma. The Company's
Blood Flow Analyzer(TM) is a portable automated in office system that presents
an affordable method for ocular blood flow testing for the ophthalmic and
optometric practitioner. This was its first diagnostic eye care device. The
device is a portable desktop system that utilizes a proprietary and patented
pneumatic Air Membrane Applanation Probe(TM) or AMAP(TM), which can be attached
to any model of standard examination slit lamp, which is then placed on the
cornea of the patient's eye to measure the intraocular pressure within the eye.
The device is unique in that it reads a series of intraocular pressure pulses
over a short period of time (approximately five to ten seconds) and generates a
waveform profile, which can be correlated to blood flow volume within the eye. A
proprietary software algorithm developed by David M. Silver, Ph.D., at Johns
Hopkins University, calculates the blood flow volume. The device presents a
numerical intraocular pressure reading and blood flow analysis rating in a
concise printout, which is affixed to the patient history file. In addition, the
data generated by the device can be downloaded to a personal computer system for
advanced database development and management.

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

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

         The manufacturing activities for the Blood Flow Analyzer(TM) have been
moved to the Salt Lake City facility from the outsourced plant located in
England. On October 21, 2002, the Company received FDA approval on its 510(k)
application for additional indications of use for the Blood Flow Analyzer(TM).
The additional indications include pulsatile ocular blood flow and pulsatile
ocular blood volume. These are diagnostic measurements that assess the
hemodynamic and vascular health of the eye. Also, the Company is continuing its
aggressive campaign to educate the insurance payers about the Blood Flow
Analyzer(TM), its purposes and the significance of its performance in patient
care in order to achieve reimbursements to the doctors using its Blood Flow
Analyzer(TM). Sales of the Blood Flow Analyzer(TM) and related accessories
accounted for 4% and 18% of total sales for the fiscal years ended December 31,
2005 and 2004, respectively.

                                       8
<PAGE>

         Dicon(TM) Perimeters: Dicon(TM) perimeters consist of the LD 400, the
TKS 5000, and software consisting of FieldLink(TM), FieldView(TM) and Advanced
FieldView. Perimeters are used to determine retinal sensitivity testing the
visual pathway. Perimeters have become a standard of care in the detection and
monitoring of glaucoma worldwide. Perimetry is reimbursable worldwide. The
Dicon(TM) perimeters feature patented kinetic fixation and voice synthesis now
in 27 different languages. Software programs are sold to assist in the analysis
of the test results. Sales of the perimeters and related accessories generated
28% and 27% of the total revenues for 2005 and 2004, 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.

         Dicon(TM) Corneal Topographers: Dicon(TM) corneal topographers include
the CT 200(TM) and the CT 50. Corneal topographers are used to determine the
shape and integrity of the cornea, the anterior surface of the eye. Clinical
applications for corneal topographers include refractive surgery that eliminates
the need for eyeglasses and optometric applications including contact lens
fitting. Revenues from the topographer and related accessories were 3% and 7% of
the total revenues for 2005 and 2004, respectively. 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 2% and 3% of the total revenues for 2005 and 2004, 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%
and 9% of the total revenues for 2005 and 2004, respectively.

         P40 and P45 UBM Ultrasound Biomicroscopes: Humphrey Systems developed
the P40 UBM Ultrasound Biomicroscope in conjunction with the New York Eye and
Ear Infirmary in Manhattan and the University of Toronto. The P40 biomicroscope
and its intellectual property were included in the purchase from Humphrey
Systems and gives the Company the proprietary rights to this device. The P40
biomicroscope creates a high resolution computer image of the unseen parts of
the eye that is a "map" for the glaucoma surgeon. The P40 biomicroscope is an
"enabling technology" for the ophthalmologist, one that the Company has
repositioned for broader market sales penetration. Formerly sold only to
glaucoma 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 9% and 11% of the total revenues for 2005 and 2004, respectively. The
P45 biomicroscope and related accessories sales contributed 13% and 16% of the
total revenues for 2005 and 2004, respectively.

         On October 25, 2004, the Company entered into a Manufacturing and
Distribution Agreement with E-Technologies, Inc., a Iowa based developer of
software and related technology for technical applications. Under the terms of
the agreement, E-Technologies granted to the Company the exclusive right to
manufacture, market, sell and distribute an ultrasound biomicroscope. Upon

                                       9
<PAGE>

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 21% and 0% of
total revenues for 2005 and 2004, 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.

         Parts and Services: The parts and service revenue from the repair and
service of equipment sold accounted for 12% and 9% of total revenues in both
2005 and 2004, respectively.

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


                                                   Commercial     Reimbursement    % 2004     %2005            Regulatory
     Product (1)             Product Class         Development        Status        Sales     Sales            Approvals
<S>                     <C>                         <C>                <C>          <C>        <C>     <C>
P55 Pachymetric         System, Imaging, Pulsed     Complete           Yes           3%        2%      FDA 510(K) K844299*
Analyzer                    Echo Diagnostic                                                            ISO 9001: 1994, EN ISO
                                                                                                       9001**

P37 A/B Scan Ocular      Transducer, Ultrasound     Complete           Yes           9%        8%      FDA 510(K) K844299*
Ultrasound Diagnostic          Diagnostic                                                              ISO 9001: 1994,
                                                                                                       EN ISO 9001**

P40 UBM Ultrasound      System, Imaging, Pulsed     Complete           Yes           11%       9%      FDA 510(K) K844299*
BioMicroscope               Echo Ultrasound                                                            ISO 9001: 1994,
                               Diagnostic                                                              EN ISO 9001**

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

P60 UBM Ultrasound      System, Imaging, Pulsed     Complete           Yes           0%        21%     FDA 510(K) K844299*
Biomicroscope,              Echo Ultrasound                                                            ISO 9001: 1994,
Workstation Plus               Diagnostic                                                              EN ISO 9001**

BFA Ocular Blood Flow      Tonometer, Manual        Complete                         18%       4%      FDA 510(K) K844299*
Analyzer(TM) and                  Diagnostic                        Yes****                            ISO 9001: 1994,
Disposables                                                                                            EN ISO 9001**

CT 200 Corneal            Topographer Corneal       Complete           Yes           7%        3%      FDA 510(K) K844299*
Topography System              AC-Powered                                                              ISO 9001: 1994,
                               Diagnostic                                                              EN ISO 9001**
</TABLE>

                                       10
<PAGE>
<TABLE>
<S>                     <C>                         <C>                <C>          <C>        <C>     <C>

LD 400 Autoperimetry      Perimeter, Automatic      Complete           Yes           24%       23%     FDA 510(K) K844299*
System                         AC-Powered                                                              ISO 9001: 1994,
                               Diagnostic                                                              EN ISO 9001**

TKS 5000                  Perimeter, Automatic      Complete           Yes           3%        5%      FDA 510(K) K844299*
Autoperimetry System     AC-Powered, Diagnostic                                                        ISO 9001: 1994,
                                                                                                       EN ISO 9001**

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

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

Parts and Services          Perimeter, BFA,         Complete           Yes           9%        12%     FDA 510(K) K844299* ISO
                        Tonometer, Topographer,                                                        9001: 1994,
                               Ultrasound                                                              EN ISO 9001**
                         Workstations, Systems,
                                Imaging

</TABLE>
_____________________________

(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 Anello.

                                       11
<PAGE>

Marketing and Sales

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

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

         Current Market Acceptance and Potential: The principal purchasers of
the Company's products have been ophthalmologists, optometrists, 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
growth trend over the past ten years, (The National Eye Institute reported in
March 2002 that the number of blind or visually impaired Americans is likely to
double over the next 30 years.) (ii) the entry by emerging countries (including
China, Russia, and other countries in Asia, Eastern Europe and Africa) into
advanced technology medical care for their populations, (iii) increased
awareness worldwide of the benefits of the minimally invasive phaco cataract
procedure and (iv) the introduction of technology improvements such as the
Company's laser system.

         Marketing Organization: The Company markets its products
internationally through a network of dealers and domestically through direct
sales representatives, independent sales representatives, and ophthalmic product
distributors. As of December 31, 2005, the Company had two 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 utilizes a Clinical Advisory Board comprised of leading ophthalmic surgeons
in the United States and Europe who speak at conventions, train ophthalmologists
and visit foreign doctors and dealers to promote its products.

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

         Manufacturing and Raw Materials: Currently, the Company maintains a
16,926 square foot facility in Salt Lake City. The Company transferred the
manufacturing activities for the Blood Flow Analyzer(TM) 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.

                                       12
<PAGE>

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

         Product Service and Support: Service for the Company's products is
overseen from its Salt Lake City location and is augmented by its international
dealer network, 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) increased by
$87,000, or 11%, to $855,000 for the twelve months ended December 31, 2005, from
$768,000 for the same period in 2004. None of the costs of research and
development activities during 2005 and 2004 was borne directly by customers.

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

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

Competition

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

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

                                       13
<PAGE>

         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
Thousand(TM) ultrasonic phaco system has the ability to use either reusable or
single use disposable components. The Photon(TM) laser cataract system will
utilize probes and cassette packs designed for single use and semi-disposable
instruments priced at a level consistent with the demands of health care cost
containment. This will allow the health care providers a substantial measure of
cost containment, while providing the Company with the quality control and
income capability of cassette sales.

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

         Ultrasound Equipment Manufacturers. As a relatively recent entrant into
the cataract surgical equipment market with a newer equipment line, the Company
is establishing itself and, as yet, does not hold a significant share of the
market. The Company currently recognizes Bausch & Lomb, Alcon Laboratories, and
Allergan Medical Optics as its primary competitors in the ultrasound phaco
cataract equipment market.

         Laser Equipment Manufacturers. There are several other companies
attempting to develop laser equipment for cataract surgery. These companies can
be differentiated by the laser wavelength employed for the cataract surgery.
Based on the information currently available to us; Er:YAG laser wavelength
appears to offer a less viable means of removing cataracts than the Nd:YAG
wavelength used by the Photon(TM). One competitor uses a Nd:YAG wavelength,
however the laser is used only to vibrate an ultrasonic needle. Thus the device
remains an ultrasonic system subject to 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 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

                                       14
<PAGE>

analyzer. The blood flow analyzer is designed to detect glaucoma in an earlier
stage than is presently possible. In addition, the device performs tonometry and
blood flow analysis. Other ophthalmic diagnostic devices that do not detect
glaucoma in the early stages of the disease as does the Company's analyzer
retail at comparable prices. Thus, the Company believes that it can compete in
the diagnostic market place based upon the lower price and improved diagnostic
functions of the analyzer.

Intellectual Property Protection

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

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

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

         The Company secured the exclusive worldwide rights to this patent
shortly after its issue, and to the international patents pending, from PhotoMed
by means of a license agreement dated July 7, 1993. The license agreement
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 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
partes are unable to agree on a method for calculating royalties, there is a

                                       15
<PAGE>

risk that PhotoMed and Dr. Eichenbaum might amend the complaint to request
termination of the license agreement and, if successful, the Company would lose
its rights to manufacture or sell the Photon(TM) laser system.

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

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

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

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

         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

                                       16
<PAGE>

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 Photon(TM) laser system.

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

                                       17
<PAGE>

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 systems, the Photon(TM) laser
cataract system it is developing and the ocular blood flow analyzer are all
devices which require FDA approval. Therefore, a significant aspect of the
acceptance of the devices in the market is the Company's effectiveness in
obtaining the necessary approvals. Having an approved Investigational Device
Exemption allows the Company to export a product to qualified investigational
sites.

Regulatory Status of Products

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

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

         The Company submitted a Premarket Notification 510(k) application to
the FDA for the Photon(TM) laser cataract system in September 1993. The FDA
requested clinical support data for claims made in the 510(k), and in October
1994 the Company submitted an Investigational Device Exemption application to

                                       18
<PAGE>

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

         The Company received a warning letter dated August 30, 2000 from the
Office of Compliance, Center for Devices and Radiological Health of the Food and
Drug Administration relating to certain deficiencies in the human clinical
trials for its Photon(TM) Laser Cataract System. The warning letter 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 Photon(TM) laser system. In December 2001,
the Company received a preliminary review from the FDA regarding the
supplemental submission. As a result of that preliminary review, the Company
submitted additional clinical information to the FDA on February 6, 2002. The
application is receiving ongoing review by the FDA. On May 7, 2002, the Company
received a letter from the FDA requesting further clinical information. The
Company has generated additional clinical information in response to the letter
and 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, 2006, the Company had 22 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
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

                                       19
<PAGE>

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
disputes the amount allegedly owed and intends to vigorously defend against the
action.

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

         It is anticipated that once the parties can agree on the correct
calculations on the royalties, the legal action will be dismissed. An issue in
dispute concerning the method of calculating royalties is whether royalties
should be paid on returned equipment. Since July 1, 2001, only one Photon(TM)
laser system has been sold and no systems returned. 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 August 3, 2003, a complaint was filed against the Company by Corinne
Powell, a former employee, in the Third Judicial District Court, Salt Lake
County, State of Utah (Civil No. 030918364). Defendants consist of the Company
and Randall A. Mackey, Dr. David M. Silver and Keith D. Ignotz, directors of the
Company. The complaint alleges that at the time the Company laid off Ms. Powell
on March 25, 2003, she was owed $2,030 for business expenses, $11,063 for
accrued vacation days, $12,818 for unpaid commissions, the fair market value of
50,000 stock options exercisable at $5.00 per share that she claims she was
prevented from exercising, attorney's fees and a continuing wage penalty under
Utah law. On March 29, 2005, the Company agreed to a settlement with Ms. Powell
of her claims for unpaid business expenses, accrued vacation days, and unpaid
commissions by agreeing to pay her the sum of $13,000. The Company made payment
to Ms. Powell for the agreed upon settlement amount. The Company believes the
remaining claims are without merit and intends to vigorously defend against such
claims.

         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 are due for the
months of October 2002 to October 2003 under the 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.

                                       20
<PAGE>

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

         On March 31, 2005, an action was filed against the Company by Joseph W.
Spadafora in the United States District Court, District of Utah (Civil No.
2:05CV00278 TS). The complaint alleges that Dr. Spadafora was a clinical
investigator in the study for the FDA involving the Company's Photon(TM) laser
system where he performed numerous surgeries using the Photon(TM). Dr. Spadafora
contends that in meetings with Company personnel he suggested ways in which the
handpiece on the Photon(TM) could be improved. Dr. Spadafora further contends
that on August 5, 1999, 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
is requesting in his complaint that a court order be entered declaring that he
is the inventor or co-inventor of the patent and, as a result, is entitled to
all or part of the royalties and profits that the Company earned or will earn
from the sale of any product incorporating or using the improved handpiece, plus
interest and attorney's fees. Formal discovery has been in progress. The Company
disputes the claims made by Dr. Spadafora and intends to vigorously defend
against such action.

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

Completion of Settlement of Federal and State Class Action Lawsuits

         On August 26, 2005, the federal court entered an order and final
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 non-appealable. Under the terms
of settlement of the state court class action lawsuit, U.S. Fire agreed to pay
the sum of $625,000 in cash to the class members that purchased shares of Series
E Convertible preferred stock on or about July 11, 2001.

         The federal court class action lawsuit was initially filed on May 14,
2003 by Richard Meyer, individually and on behalf of all others similarly

                                       21
<PAGE>

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 non-appealable.

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, 2005


                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters

         The Company's authorized capital stock consists of 250,000,000 shares
of common stock, $.001 par value per share, and 5,000,000 shares of preferred
stock, $.001 par value per share. The Company has created seven classes of
preferred stock, designated as Series A preferred stock, Series B preferred
stock, Series C preferred stock , Series D preferred stock, Series E preferred
stock, Series F preferred stock and Series G preferred stock.

         The Company's common stock and Class A warrants trade on the OTC
Bulletin Board under the respective symbols of "PMED.OB" and "PMEDW.OB." Prior
to July 22, 1996, there was no public market for the common stock. From July 22,
1996 to June 25, 2003, its common stock and Class A warrants were listed on the
Nasdaq SmallCap Market. Since June 25, 2003, its common stock and Class A
warrants have traded on the OTC Bulletin Board. As of April 13, 2006, the
closing sale prices of the common stock and Class A warrants were $.012 per
share and $.03 per warrant, respectively. The following are the high and low
sale prices for the common stock and Class A warrants by quarter as reported by
Nasdaq from January 1, 2000 to June 25, 2003 and by the OTC Bulletin Board since
June 25, 2003.

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


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

2005
     First Quarter ....................         .10      .08      .02       .01
     Second Quarter ...................         .09      .07      .01       .01
     Third Quarter.....................         .10.     001      .16      .006
     Fourth Quarter....................        .048     .001      .09      .006

2006
     First Quarter ....................        .047     .001     .056      .016

                                       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, 2006, there were 743 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.

                                       23
<PAGE>

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

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

         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, 2005, 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, 2005, the Company recorded an
increase in the warranty accrual of $30,000. 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 $30,000 to $119,000. Management will continue to closely monitor
the warranty accrual usage to ensure that the proper amount has been accrued.

                                       24
<PAGE>

         During the twelve months ended December 31, 2005, management made
certain adjustments to the financial statements, including a decrease in the
reserve for obsolete or estimated non-recoverable inventory of $61,000. The
Company also recorded a net decrease in the allowance for doubtful accounts
receivable of $1,000, impairment of intangibles of $340,000, and decreases in
accruals to settle outstanding disputes in the amount of $148,000.

         The Company's ultrasound diagnostic products include a P55 pachymetric
analyzer, a P37 Ultrasound A/B Scan, a P40 Ultrasound Biomicroscope, a P45 Plus
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 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, 2005 and 2004
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.

         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

                                       25
<PAGE>

pulsatile ocular blood flow, volume and pulsatility equivalence index. Also, the
Company is continuing its efforts to educate the payors of Medicare claims
throughout the country about the Blood Flow Analyzer(TM), its purposes and the
significance of its performance in patient care in order to achieve
reimbursements to the providers. These efforts should lead to a more positive
effect on sales.

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

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 callable secured convertible
notes and (ii) warrants to purchase 16,534,392 shares of its common stock. The
sale of the callable secured convertible notes and warrants is to occur in three
traunches and the investors are obligated to provide 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, which registered the
              shares of common stock underlying the callable secured convertible
              notes and the warrants; and
         o    $850,000 was disbursed on June 30, 2005, upon the effectiveness of
              the registration statement on June 29, 2005, which registered the
              shares of common stock underlying the callable secured convertible
              notes and the warrants.

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

         o    The Company delivered to the investors duly executed callable
              secured 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.

         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 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 pro-rata 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 callable secured 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 callable
secured 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
callable secured convertible notes mature in three years from the date of
issuance, and are convertible into our 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.

                                       27
<PAGE>

         The callable secured 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 callable secured 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 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.

         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 our 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.

         The Company is required to register the shares of its common stock
issuable upon the conversion of the callable secured convertible notes and the
exercise of the warrants. The registration statement must be filed with the
Securities and Exchange Commission within 60 days of the April 27, 2005 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
callable secured 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. The Company filed a
registration statement with the Securities and Exchange Commission on June 22,
2005 to register the shares of common stock issuable upon the conversion of the
callable secured convertible notes and the exercise of the warrants. The
registration statement was declared effective on June 29, 2005.

         As of June 30, 2005, the average of the three lowest intraday trading
prices of the Company's common stock during the preceding 20 trading days as
reported on the OTC Bulletin Board was $.05 and, therefore, the conversion price
for the callable secured convertible notes was $.03. Based on this conversion
price, the $2,500,000 callable secured convertible notes, excluding interest,
were convertible into 83,333,333 shares of the Company's common stock. As of
June 30, 2005, none of the callable secured convertible notes had been
converted.

         Since June 30, 2005, a total of $588,561 in callable secured
convertible notes have been converted into 131,251,200 shares of the Company's
common stock pursuant to conversion notices from The NIR Group. The dates of
these conversion notices, the amount of the notes converted, the conversion
price of the notes converted, and the shares issued to the noteholders upon
conversion were as follows:

                                       28
<PAGE>

                                                               Shares Issued to
        Date of Notice    Amount of Notes   Conversion Price      Noteholders
        of Conversion        Converted          of Notes        Upon Conversion
        --------------    ---------------   ----------------    ----------------

July 7, 2005                     39,900              .0285             1,400,000
July 14, 2005                    40,460              .0289             1,400,000
July 20, 2005                    32,110              .0247             1,300,000
July 26, 2005                    29,682              .0194             1,530,000
July 29, 2005                    28,458              .0186             1,530,000
August 8, 2005                   22,032              .0144             1,530,000
August 16, 2005                  25,480               .014             1,820,000
August 22, 2005                  22,386              .0123             1,820,000
August 26, 2005                  16,898              .0119             1,420,000
August 27, 2005                   4,760              .0119               400,000
September 2, 2005                20,600              .0103             2,000,000
September 12, 2005               16,380             .00819             2,000,000
September 16, 2005               13,800              .0069             2,000,000
September 22, 2005               11,580             .00579             2,000,000
September 28, 2005               11,628              .0051             2,280,000
October 3, 2005                   7,157            .003139             2,280,000
October 10, 2005                  7,157            .003139             2,280,000
October 12, 2005                  6,840               .003             2,280,000
October 19, 2005                  8,430               .003             2,810,000
October 25, 2005                  8,430               .003             2,810,000
October 31, 2005                  8,795             .00313             2,810,000
November 3, 2005                  8,599             .00306             2,810,000
November 11, 2005                 9,947             .00354             2,810,000
November 15, 2005                11,187              .0033             3,390,000
November 21, 2005                10,814             .00319             3,390,000
December 7, 2005                  9,661             .00285             3,390,000
December 13, 2005                 9,187             .00271             3,390,000
December 22, 2005                 9,840             .00246             4,000,000
December 29, 2005                 9,360             .00234             4,000,000
January 11, 2006                  8,476            .002119             4,000,000
January 18, 2006                  8,476            .002119             4,000,000
January 24, 2006                  8,476            .002119             4,000,000
January 27, 2006                  8,556            .002139             4,000,000
February 13, 2006                 6,578              .0012             5,481,600
February 21, 2006                 6,682            .001219             5,481,600
February 23, 2006                 6,907             .00126             5,481,600
February 28, 2006                 8,984            .001639             5,481,600
March 7, 2006                    15,513             .00283             5,481,600
March 15, 2006                   30,971             .00565             5,481,600
March 20, 2006                   30,093             .00549             5,481,600
March 27, 2006                   24,120             .00804             3,000,000
March 31, 2006                   23,220             .00774             3,000,000
                              ---------                              -----------
     Total                    $ 588,561                              131,251,200

         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
callable secured convertible notes and (ii) warrants to purchase 12,000,000
shares of its common stock. The sale of the callable secured 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:

         o    $500,000 was disbursed on February 28, 2006;
         o    $500,000 will be disbursed after filing a registration statement
              that registers the shares of common stock underlying the callable
              secured convertible notes and the warrants; and

                                       29
<PAGE>

         o    $500,000 will be disbursed upon the effectiveness of the
              registration statement that registers the shares of common stock
              underlying the callable secured convertible notes and the
              warrants.

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

         o    The Company delivered to the investors duly executed callable
              secured 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.

         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 pro-rata 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 callable secured 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 callable
secured 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
callable secured convertible notes mature in three years from the date of
issuance, and are convertible into our 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 callable secured 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 callable secured 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 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 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.

         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

                                       30
<PAGE>

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 our 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.

         The Company is required to register the shares of its common stock
issuable upon the conversion of the callable secured convertible notes and the
exercise of the warrants. 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 callable secured 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.

         As of April 14, 2006, the Company had 160,959,428 shares of its common
stock issued and outstanding and $2,411,439 callable secured convertible notes
outstanding that may be converted into an estimated 335,000,000 shares of common
stock at current market prices, and outstanding warrants to purchase 20,534,392
shares of its common stock. Additionally, the Company has an obligation to sell
$1,000,000 callable secured convertible notes that may be converted into an
estimated 139,000,000 shares of common stock at current market prices and issue
warrants to purchase 8,000,000 shares of common stock in the near future. In
addition, the number of shares of common stock issuable upon conversion of the
outstanding callable secured convertible notes may increase if the market price
of our stock declines. All the shares, including all of the shares issuable upon
conversion of the notes and upon exercise of our warrants, may be sold without
restriction. The sale of these shares may depress the market price of the
Company's common stock.

         The Company's obligation to issue shares upon conversion of the
callable secured convertible notes is essentially limitless. The following is an
example of the amount of shares of common stock that are issuable upon
conversion of $3,411,439 principal amount of callable secured convertible notes
(excluding accrued interest), based on market prices 25%, 50%, and 75% below the
market price, as of April 13, 2006 of $.012.


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

      25%          $.009        $.0054        631,747,963          392.5%
      50%          $.006        $.0036        947,621,944          588.7%
      75%          $.003        $.0018      1,895,243,889         1,177.5%

*Based on 160,959,428 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.

         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
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 the 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.

                                       31
<PAGE>

         The issuance of shares upon conversion of callable secured 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.

         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
callable secured 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 callable secured 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
our common stock. Although the Company currently has $2,411,439 in callable
secured convertible notes outstanding, the noteholders are obligated to purchase
additional callable secured convertible notes in the aggregate amount of
$1,000,000. 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 our 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 callable secured 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 callable secured
convertible notes will be converted into shares of its common stock, in
accordance with the terms of the callable secured convertible notes. If the
Company is required to repay the callable secured 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, 2005 Compared to Fiscal Year Ended
December 31, 2004

         Net sales for the twelve months ended December 31, 2005 decreased by
$861,000, or 28%, to $2,201,000 as compared to $3,062,000 for the same period of
2004. This reduction in sales was primarily due to reduced sales of the Blood
Flow Analyzer(TM) and a softening of sales of the Dicon(TM) perimeters and
corneal topographers.

         For the twelve months ended December 31, 2005, sales from the Company's
diagnostic products totaled $1,949,000, or 89% of total revenues, compared to
$2,780,000, or 91% of total revenues for the same period of 2004. The remaining
11% of sales, or $252,000 during the twelve months ended December 31, 2005,was
from parts, disposables, and service revenue.

         Sales of the P40, P45 and P60 UBM Ultrasound Biomicroscopes increased
to $967,000 during the twelve months ended December 31, 2005, or 43% of total
quarterly revenues for the period, compared to $855,000, or 28% of total
revenues, for the same period last year. Sales of the Blood Flow Analyzer(TM)
decreased by $464,000 to $97,000, or 4% of total revenues, for the twelve months
ended December 31, 2005, compared to net sales of $561,000, or 18% of total
revenues during the same period in 2004. Sales from the P37 A/B Scan Ocular
Ultrasound Diagnostic decreased to $181,000, or 8% of total revenues, for the
twelve month period ended December 31, 2005, compared to $265,000, or 9% of
total revenues, for the same period last year. Combined sales of the LD 400 and
TKS 5000 autoperimeters and the CT 200 Corneal Topographer were $671,000, or 31%
of the total revenues, for the twelve months ended December 31, 2005, compared
to $1,022,000, or 34% of total revenues, for the same period of 2004.

                                       32
<PAGE>

         Sales have been lower for the Company due to a variety of reasons.
Sales of the Blood Flow Analyzer(TM) decreased due in part from the
reorganization of the Company's sales force. The Company anticipates reversing
the downward trend in sales through additional efforts by the Company to gain
more widespread support for the Blood Flow Analyzer(TM) though 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, 2005,
the Company realized no sales in the surgical line consisting of the
Precissionist Thirty Thousand(TM) and the Photon(TM) laser system. There were
also no sales in the surgical line for the comparable period of 2004.

         Gross profit for the twelve months ended December 31, 2005 decreased to
27% of total revenues, compared to 60% of total revenues for the same period in
2004. The decrease in gross profit in 2005 was mainly due to issuance of new
product demonstration equipment and physician testing and analysis for the new
P60 UBM, as well as pricing adjustments related to the P60 product introduction
during the twelve months ending December 31, 2005. There was no increase or
decrease to cost of sales as a result of a change to the reserve for obsolete
inventory in 2005.

         Marketing and selling expenses decreased by $160,000, or 20%, to
$641,000, for the twelve months ended December 31, 2005, from $801,000 for the
comparable period in 2004. The reduction was due primarily to a reduced number
of sales representatives and lower travel related and associated sales expenses.

         General and administrative expenses increased by $424,000, or 48%, to
$1,298,000 for the twelve months ended December 31, 2005, from $874,000 for the
comparable period in 2004. The increase in general and administrative expenses
was primarily due to the additional employees who were hired to assist in the
development, testing, marketing and sales of the new UBM.

         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 2005, the Company collected $1,000 in receivables that were
previously allowed in the allowance for doubtful accounts. During 2005, the
Company increased allowance for doubtful accounts by $100,000.

         Research, development and service expenses increased by $87,000, or
11%, to $855,000 for the twelve months ended December 31, 2005, compared to
$768,000 in the same period of 2004. Most of the increase was due to the costs
of development and compliance with regulatory requirements in releasing the new
P60 UBM.

         Due to our ongoing cash flow difficulties, most of the Company's
vendors and suppliers were contacted during 2004 and 2005 with attempts to
negotiate reduced payments and settlement of outstanding accounts payable. While
some vendors refused to negotiate and demanded payment in full, some vendors
were willing to settle for a reduced amount. The accounts payable forgiven by
vendors and suppliers resulted in a gain of $12,000 and $206,000 during the
years ended December 31, 2005 and 2004, respectively.

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

                                       33
<PAGE>

Liquidity and Capital Resources

         The Company used $2,668,000 in cash in operating activities for the
twelve months ended December 31, 2005, compared to $477,000for the twelve months
ended December 31, 2004. The increase in cash used for operating activities for
the twelve months ended December 31, 2005 was primarily attributable to the
Company's net loss and decreases in accounts payable and accrued liabilities and
an increase in inventory, specifically for the P60 UBM. Net cash received in
financing activities was $2,603,000 for the twelve months ended December 31,
2005, versus cash used of $56,000 in the same period in 2004. The Company had
working capital of $154,000 as of December 31, 2005. 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, 2005, the Company had net operating loss
carry-forwards (NOLs) of approximately $39 million. These loss carry-forwards
are available to offset future taxable income, if any, and have begun to expire
in 2001 and extend for twenty years. The Company's ability to use net operating
loss carryforwards (NOLs) to offset future income is dependant upon certain
limitations as a result of the pooling transaction with Vismed and the tax laws
in effect at the time of the NOLs can be utilized. The Tax Reform Act of 1986
significantly limits the annual amount that can be utilized for certain of these
carryforwards as a result of change of ownership.

         As of December 31, 2005, the Company had accounts payable of $459,000,
a significant portion of which was over 90 days past due. The Company has
contacted many of the vendors or companies that have significant amounts of
payables past due in an effort to delay payment, renegotiate a reduced
settlement payment, or establish a longer-term payment plan. While some
companies have been willing to renegotiate the outstanding amounts, others have
demanded payment in full. Under certain conditions, including but not limited to
judgments rendered against the Company in a court of law, a group of creditors
could force the Company into bankruptcy due to its inability to pay the
liabilities arising out of such judgments at that time. In addition to the
accounts payable noted above, the Company also has non-cancelable capital lease
obligations and operating lease obligations that require the payment of
approximately $194,000 in 2005, and $14,000 in 2006.

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

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

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

         3. The Company has reduced its direct sales force to 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 was 20% of total outstanding receivables as of
December 31, 2005 and 14% as of December 31, 2004. The allowance for doubtful
accounts decreased slightly from $101,000 at December 31, 2004 to $100,000 at
December 31, 2005.

         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, 2005, the Company added a net of $1,000 to the allowance for
doubtful accounts, and during the twelve months ended December 31, 2004, the
Company had a net recovery of receivables previously allowed for of $87,000. The
Company believes that by requiring a large portion of payment prior to shipment,
it has greatly improved the collectibility of its receivables.

                                       34
<PAGE>

         The Company carried an allowance for obsolete or estimated
non-recoverable inventory of $1,357,000 at December 31, 2005 and $1,418,000 at
December 31, 2004, or 61% and 66% 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.

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 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 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.

                                       35
<PAGE>

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

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

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

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

                                       36
<PAGE>

Item 7. Financial Statements

PARADIGM MEDICAL INDUSTRIES, INC.
Financial Statements
December 31, 2005 and 2004

                                       37
<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,  2005,  and the related  statements  of
operations, stockholders' equity and cash flows for the years ended December 31,
2005  and  2004.  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, 2005, and the results of their operations and their cash
flows  for the years  ended  December  31,  2005 and 2004,  in  conformity  with
accounting principles generally accepted in the United States of America.

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

Chisholm, Bierwolf & Nilson
Bountiful, Utah
April 20, 2006

                                                                             F-2
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                                   Balance Sheet

                                                               December 31, 2005
--------------------------------------------------------------------------------

              Assets
              ------

Current assets:
     Cash                                                       $        66,000
     Receivables, net                                                   401,000
     Inventories, net                                                   853,000
     Prepaid and other assets                                            11,000
                                                                ----------------

                  Total current assets                                1,331,000

Property and equipment, net                                              32,000
Intangibles, net                                                        339,000
                                                                ----------------

                  Total assets                                  $     1,702,000
                                                                ----------------

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

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

Current liabilities:
     Accounts payable                                           $       459,000
     Accrued liabilities                                                704,000
     Current portion of capital lease obligations                        14,000
                                                                ----------------

                  Total current liabilities                           1,177,000
                                                                ----------------

Convertible Notes Payable                                             2,038,000
                                                                ----------------
Total long-term liabilities                                           2,038,000
                                                                ----------------
Total liabilities                                                     3,215,000
Commitments and contingencies                                                 -

Stockholders' equity:
     Preferred stock, $.001 par value, 5,000,000
       shares authorized, 613,447 shares issued and
       outstanding (aggregate liquidation Preference
       of $496,000)                                                       1,000
     Common stock, $.001 par value, 250,000,000
       shares authorized, 96,389,295 shares issued
       and outstanding                                                   96,000
     Additional paid-in capital                                      60,586,000
     Accumulated deficit                                            (62,196,000)
                                                                ----------------

                  Total stockholders' equity                         (1,513,000)
                                                                ----------------

                  Total liabilities and stockholders' equity    $     1,702,000
                                                                ----------------


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

 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,
----------------------------------------------------------------------------------------------------------

                                                                                     2005       2004
                                                                        ----------------------------------

<S>                                                                     <C>                 <C>
Sales                                                                   $       2,201,000   $    3,062,000
Cost of sales                                                                   1,599,000        1,217,000
                                                                        ----------------------------------

         Gross profit                                                             602,000        1,845,000
                                                                        ----------------------------------

Operating expenses:
     General and administrative                                                (1,298,000)        (874,000)
     Marketing and selling                                                       (641,000)        (801,000)
      Research and development                                                   (855,000)        (768,000)
      Gain on settlement of liabilities                                             12,000         206,000
                                                                        ----------------------------------

         Total operating expenses                                              (2,782,000)      (2,237,000)
                                                                        ----------------------------------

         Operating loss                                                        (2,180,000)        (392,000)
                                                                        ----------------------------------
Other income (expense):
     Other income                                                                  16,000                -
      Other expenses                                                           (2,870,000)         (27,000)
     Interest expense                                                             (15,000)         (22,000)
      Gain on sale of investment                                                        -          505,000
      Impairment of intangible assets                                            (340,000)               -
                                                                        ----------------------------------

         Total other income (expense)                                          (3,209,000)         456,000
                                                                        ----------------------------------

         Income (loss) before provision for income taxes                       (5,389,000)          64,000
Provision for income taxes                                                              -                -
                                                                        ----------------------------------

         Net income (loss)                                              $      (5,389,000)  $       64,000
                                                                        ----------------------------------

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

Net income (loss) applicable to common shareholders                     $      (5,389,000)  $       10,000
                                                                        ----------------------------------
Earnings (loss) per common share - basic                                $           (0.13)  $            -
                                                                        ----------------------------------
Earnings (loss) per common share - diluted                              $           (0.13)  $            -
                                                                        ----------------------------------
Weighted average common shares - basic                                         42,033,000       25,405,000
                                                                        ----------------------------------
Weighted average common shares - diluted                                       42,942,000       27,669,000
                                                                        ----------------------------------

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

The accompanying notes are an integral part of these financial statements                              F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                                                        PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                       Statements of Stockholders' Equity

                                                                                   Years Ended December 31, 2005 and 2004
-------------------------------------------------------------------------------------------------------------------------
                                    Preferred                                  Additional         Stock
                                      Stock         Common        Amount        Paid-In        Subscription   Accumulated
                                  (See Note 8)      Shares                      Capital         Receivable      Deficit
                                 ----------------------------------------------------------------------------------------

<S>                                  <C>         <C>             <C>        <C>                    <C>      <C>
Balance at January 1, 2004           $ 2,000     25,372,794      $ 25,000   $ 57,470,000            -       $ (56,817,000)

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

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

registration rights

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

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

Conversion of preferred stock          (1000)     1,138,325         1,000              -            -                   -

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                -              -             -      2,009,000            -                   -
on note payable

Value attribute to discount
on warrants                                -              -             -        491,000            -                   -

Penalty provisions of series
G preferred in 2004                        -        515,206         1,000         51,000            -                   -

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

Balance at December 31, 2005         $ 1,000     96,389,295      $ 96,000   $ 60,586,000         $  -       $ (62,196,000)
                                 ----------------------------------------------------------------------------------------


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

The accompanying notes are an integral part of these financial statements                                             F-5
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                                                          PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                   Statements of Cash Flows

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

                                                                                    2005               2004
                                                                        -----------------------------------
<S>                                                                     <C>                <C>
Cash flows from operating activities:
     Net income (loss)                                                  $     (5,389,000)  $         64,000
     Adjustments to reconcile net income (loss) to net
     cash used in operating activities:
         Depreciation and amortization                                            77,000            137,000
               Issuance of common stock for satisfaction of penalty               53,000                  -
               Issuance of common stock for services                              23,000                  -
         Beneficial conversion interest                                        2,009,000                  -
         Issuance of stock    options and warrants for services                  491,000                  -
         Provision for losses on receivables                                      (1,000)          (369,000)
         Provision for losses on inventory                                       (61,000)          (224,000)
               Gain on sale of investment                                              -           (505,000)
Impairment of Intangibles and investments                                        340,000
(Gain) loss on settlement of liabilities                                         (12,000)          (206,000)
         (Gain) loss on disposal of assets                                             -             13,000
         (Increase) decrease in:
              Accounts Receivables                                               257,000            420,000
              Inventories                                                        (72,000)           507,000
              Prepaid and other assets                                            56,000             76,000
         Increase (decrease) in:
              Accounts payable                                                  (291,000)            42,000
              Accrued liabilities                                               (148,000)          (432,000
                                                                        ------------------------------------

                  Net cash used in
                  operating activities                                        (2,668,000)          (477,000)
                                                                        ------------------------------------

Cash flows from investing activities:
     Cash proceeds from sales of investment                                            -            532,000
                                                                        ------------------------------------

                  Net cash provided by (used in)
                  investing activities                                              0.00            532,000
                                                                        ------------------------------------

Cash flows from financing activities:
     Principal payments on notes payable and long-term debt                      (47,000)           (56,000)
     Proceeds from issuance of common stock                                      150,000                  -
     Proceeds from issuance of convertible notes                               2,500,000                  -
                                                                        ------------------------------------
                  Net cash (used in) provided by
                  financing activities                                         2,603,000            (56,000)
                                                                        ------------------------------------

Net change in cash                                                               (65,000)            (1,000)

Cash, beginning of year                                                          131,000            132,000
                                                                        ------------------------------------

Cash, end of year                                                       $         66,000   $        131,000
                                                                        ------------------------------------

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

The accompanying notes are an integral part of these financial statements                               F-6
</TABLE>
<PAGE>

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements

                                                      December 31, 2005 and 2004
--------------------------------------------------------------------------------

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

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

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

                        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   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.


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

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


1.   Organization       Inventories
     and Significant    Inventories  are  stated at the lower of cost or market,
     Accounting         cost is determined using the weighted average method.
     Policies
     Continued          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.  During the years
                        2005  and  2004  depreciation  expense  was  77,000  and
                        132,000 respectively.

                        Intangible Assets
                        As of December 31, 2005,  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,
                        2005. As a result an  impairment  change of $340,000 was
                        recognized  on the Company's  statements of  operations.
                        The  impairment  was based on a significant  decrease in
                        sales of the Blood Flow Analyzer during 2005.

                        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, 2005.
                        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,


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

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

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

                        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.

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

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

1.   Organization       Stock - Based Compensation - Continued
     and Significant    Stock options and warrants granted to non-employees  for
     Accounting         services are accounted  for in accordance  with SFAS No.
     Policies           123, which  requires  expense  recognition  based on the
     Continued          fair value of the options/warrants  granted. The Company
                        calculates  the  fair  value  of  options  and  warrants
                        granted by use of the Black-Scholes pricing model.

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

                                                    Years Ended December 31,
                                             --------------------------------
                                                   2005           2004
                                             --------------------------------

Net income (loss) applicable to common
shareholders-as reported                      $    (5,390,000)   $     10,000

Deduct:  total stock-based employee
compensation determined under fair value
based method for all awards, net of related
tax effects                                          (355,000)       (362,000)
                                             --------------------------------

Net loss applicable to common shareholders -
pro forma                                     $    (5,745,000)   $   (352,000)
                                             --------------------------------

Earnings per share:
     Basic and diluted - as reported          $          (.14)   $          -
                                             --------------------------------
     Basic and diluted - pro forma            $          (.13)   $       (.01)
                                             --------------------------------

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

                                                  December 31,
                                     ----------------------------------------
                                             2005                2004
                                     ----------------------------------------

    Expected dividend yield            $                 -   $             -
    Expected stock price
      Volatility                                 189%-215%         112%-173%
    Risk-free interest rate                             4%                4%
    Expected life of options                     2-7 years         2-7 years

                        The  weighted  average  fair  value of  options  granted
                        during 2005 and 2004 are $0.07 and $0.09, respectively.

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

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

1.   Organization       Earnings Per Share
     and Significant    The  computation  of basic  earnings per common share is
     Accounting         based  on  the   weighted   average   number  of  shares
     Policies           outstanding during each year.
     Continued
                        The computation of diluted  earnings per common share is
                        based  on  the   weighted   average   number  of  shares
                        outstanding  during  the  year  plus  the  common  stock
                        equivalents,  which would arise from the  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
                        23,514,690 shares of common stock at prices ranging from
                        $0.10 to $12.98 per share were  outstanding  at December
                        31, 2005.

                        The  following  table is a  reconciliation  of basic and
                        diluted  weighted  average  shares  for the years  ended
                        December 31, 2005 and 2004.

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

                                                    2005             2004


Basic weighted average shares outstanding          42,033,000     25,405,000

Common stock equivalent-convertible
preferred stock                                       909,000      2,047,000


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


Diluted weighted average shares outstanding        42,942,000     27,669,000
                                             --------------------------------

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

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

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


1.   Organization       Research and Development
     and Significant    Costs   incurred  in   connection   with   research  and
     Accounting         development  activities are expensed as incurred.  These
     Policies           costs  consist of direct and indirect  costs  associated
     Continued          with  specific  projects as well as fees paid to various
                        entities that perform certain  research on behalf of the
                        Company. The total research and development expenses for
                        the years ended  December 2005 and 2004 was $855,000 and
                        768,000, 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, 2005,
                        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  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.

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

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

1.   Organization       Concentration of Risk - Continued
     and Significant    During the years ended  December  31, 2005 and 2004,  no
     Accounting         single  customer  represented  more than 10  percent  of
     Policies           total  net  sales.  Accounts  receivable  are  due  from
     Continued          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.

                        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 2005  financial  statements  have been
                        reclassified  to  conform  to  the  presentation  of the
                        current year financial statements.

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

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

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

1.   Organization       Series G Preferred Stock Dividends - Continued
     and Significant    related to the 356,682 common shares to be issued to the
     Accounting         Series G preferred  stockholders  because a registration
     Policies           statement  had not been  declared  effective  as of that
     Continued          date.

                        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.  These shares were value at $0.10 per
                        share.

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

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

                        In addition,  the Company has taken significant steps to
                        reduce  costs  and  increase   operating   efficiencies,
                        including the  consolidation  of several  manufacturing,
                        accounting   and   management   responsibilities.   Such
                        consolidation    resulted   in   significant   headcount
                        reductions as well as savings in other  overhead  costs.
                        The  Company has also  significantly  reduced the use of
                        consultants,  which has resulted in a large  decrease in
                        expenses,  and reduced the direct  sales force from 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

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

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

2.   Going              Company is unable to obtain equity or debt financing, it
     Concern            may be unable to continue  development  of its  products
     Continued          and may be  required to  substantially  curtail or cease
                        operations.


3.   Detail of          Receivables
     Certain              Trade receivables                      $    501,000
     Balance              Allowance for doubtful accounts            (100,000)
     Sheet                                                       ------------
     Accounts
                                                                 $    401,000
                                                                 ------------
                        Inventories:
                          Raw Materials                          $  1,278,000
                          Finished goods                              932,000
                          Reserve for obsolescence                 (1,357,000)
                                                                 ------------

                                                                 $    853,000
                                                                 ------------
                        Accrued liabilities:
                          Consulting and litigation reserve      $    492,000
                          Payroll and employment benefits              46,000
                          Sales tax payable                             9,000
                          Customer deposits                            29,000
                          Accrued royalties                             1,000
                          Warranty and return allowance               119,000
                          Other accrued expenses                        8,000
                                                                 ------------

                                                                 $    704,000
                                                                 ------------

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

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


4.   Intangible        Intangible assets consist of the following at December
     Assets            31, 2005:

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

                        Amortization  expense for the years ended  December  31,
                        2005 and 2004 was $0.00 and $3,000, respectively.

                        During the year ended December 31, 2005, 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, 2005.  As a result an
                        impairment  change  of  $340,000  was  recognize  in the
                        Company's  statements of operations.  The impairment was
                        based on a  significant  decrease  in sales of the Blood
                        Flow Analyzer during 2005.

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

Machinery and equipment                                    $        750,000
Computer equipment and software                                     658,000
Furniture and fixtures                                              252,000
Leasehold improvements                                              166,000
                                                           -----------------

                                                                  1,826,000
Accumulated depreciation and amortization                        (1,794,000)
                                                           -----------------

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


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

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

6.   Lease              During the years ended  December 31, 2005 and 2004,  the
     Obligations        Company leased certain  equipment  under  noncancellable
                        capital  leases.  These  leases  provide the Company the
                        option to purchase  the leased  assets at the end of the
                        initial lease term. Assets under capital leases included
                        in fixed assets and are as follows:

                        Computer and other equipment         $        291,000

                        Less accumulated amortization                (259,000)
                                                             ----------------

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


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

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

6.   Lease              Amortization  expense  on assets  under  capital  leases
     Obligations        during the years  ended  December  31, 2005 and 2004 was
     Continued          $32,000 and $39,000, respectively.

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


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

                        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, 2005 are approximately as follows:

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

                                  2006                           $    105,000
                                  2007                                108,000
                                  2008                                110,000
                                                            ----- ------------

                      Total future minimum rental payments       $    323,000
                                                            ------------------

                        Rent expense related to  noncancelable  operating leases
                        was  approximately  $140,000  and $137,000 for the years
                        ended December 31, 2005 and 2004, respectively.

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

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


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

                                                      Years Ended
                                                     December 31,
                                          ------------------------------------
                                                 2005              2004
                                          ------------------------------------

Income tax (provision) benefit at
  statutory rate                          $       2,101,000  $       (24,000)
NOL adjustment                                      893,000                -
Taxable temporary differences                        57,000
Deductible temporary differences                   (156,000)
Meals and entertainment                                   -           (3,000)
Non-deductible expenses                          (1,064,000)               -
Change in valuation allowance                    (1,831,000)          27,000
                                          -----------------------------------

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

Net operating loss carryforward                            $     15,127,000
Depreciation, amortization, and impairment                        1,009,000
Allowance and reserves                                              771,000
Research and development tax credit
  carryforwards                                                      56,000
                                                           -----------------

                                                                 16,963,000

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

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

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



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

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


7.   Income             At December 31, 2005, the Company had net operating loss
     Taxes              carryforwards   of   approximately   $38.6  million  and
     Continued          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            The Company has  established a series of preferred stock
     Stock              with a total of  5,000,000  authorized  shares and a par
                        value of $.001,  and one  series of common  stock with a
                        par value of $.001 and a total of 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, 2005 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-20
<PAGE>

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

8.   Capital            Series A Preferred Stock - Continued
     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, 2005 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-21
<PAGE>

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


8.   Capital  Stock     Series C Preferred Stock
     Continued          In January 1998, the Company  authorized the issuance of
                        a total of 30,000  shares of Series C  Preferred  Stock,
                        $.001 par value,  $100 stated value.  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 to the   greater

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

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


8.   Capital  Stock           of (a) the amount  they would  have  received  had
     Continued                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, 2005 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
                              preference at December 31, 2005 was $53,000.


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

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

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

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

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

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

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


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

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

8.   Capital  Stock       2.  Upon the  liquidation of the Company,  the holders
     Continued                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, 2005 was $245,000.

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

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

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

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

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

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


8.   Capital  Stock       2.  Upon the  liquidation of the Company,  the holders
     Continued                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, 2005 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-26
<PAGE>

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


8.   Capital  Stock     The following table summarizes  preferred stock activity
     Continued          during the years ended December 31, 2005 and 2004:

<TABLE>
<CAPTION>

                       Series A      Series B      Series C          Series D          Series E       Series F         Series G
                  Shares Amount  Shares Amount   Shares  Amount    Shares   Amount  Shares  Amount  Shares  Amount   Shares  Amount
<C>               <C>     <C>    <C>   <C>    <C>          <C>      <C>      <C>     <C>     <C>     <C>      <C>  <C>         <C>
Balance at
January 1,
2004              5,627   $ -    8,986 $    -       -      $ -      5,000    $ -     1,000   $  -    4,597    $ -  1,981,560   $ -

Issuance of
Series G
preferred stock
for cash              -     -        -      -       -        -         -       -         -      -        -      -          -  2,000

Conversion of
preferred stock       -     -        -      -       -        -         -       -         -      -        -      -   (255,000)     -
                -------------------------------------------------------------------------------------------------------------------
Balance at
December 31,
2004              5,627     -    8,986      -       -        -      5,000      -     1,000      -    4,597      -  1,726,560  2,000

Issuance of
Series G
preferred stock
for cash              -     -        -      -       -        -         -       -         -      -        2      -          -      -

Conversion of
preferred stock       -     -        -      -       -        -         -       -         -      -        -      - (1,138,325)(1,000)
                -------------------------------------------------------------------------------------------------------------------

Balance at
December 31,
2005              5,627   $ -    8,986 $    -       -      $ -      5,000    $ -     1,000   $  -    4,599    $ -    588,235  1,000
                -------------------------------------------------------------------------------------------------------------------

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

Liquidation
preference            $ 6,000        $ 36,000              $ -           $ 9,000          $ 53,000         $245,000       $ 147,000
                -------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                F-27
</TABLE>
<PAGE>

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

9.   Convertible        Convertible Notes
     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 callable  secured  convertible
                        notes and (ii) warrants to purchase 16,534,392 shares of
                        its  common  stock.  The  sale of the  callable  secured
                        convertible  notes  and  warrants  is to  occur in three
                        traunches and the investors are obligated to provide 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,   which
                        registered  the shares of common  stock  underlying  the
                        callable secured convertible notes and the warrants; and

                        o $850,000  was  disbursed  on June 30,  2005,  upon the
                        effectiveness of the registration  statement on June 29,
                        2005,  which  registered  the  shares  of  common  stock
                        underlying the callable  secured  convertible  notes and
                        the warrants.

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

                        o The Company  delivered to the investors  duly executed
                        callable secured 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.

                        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  April 27, 2005 and ending on the later of (a)

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

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

9.   Convertible        270 days from April 27,  2005,  or (b) 180 days from the
     Notes              date the registration statement is declared effective.
     Continued
                        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  pro-rata  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 callable secured  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 callable secured  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 callable secured  convertible  notes
                        mature in three years from the date of issuance, and are
                        convertible   into  our  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 callable  secured  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  callable secured
                        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 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

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

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

9.   Convertible        within 30 days  following  the issue  date of the notes;
     Notes              (b)  130%  of  the  outstanding  principal  and  accrued
     Continued          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 60 day of the 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 selling  stockholders  have agreed to restrict their
                        ability to convert their  callable  secured  convertible
                        notes or exercise  their  warrants and receive shares of
                        our  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.

                        The Company is  required  to register  the shares of its
                        common  stock   issuable  upon  the  conversion  of  the
                        callable secured  convertible  notes and the exercise of
                        the warrants.  The registration  statement must be filed
                        with the  Securities and Exchange  Commission  within 60
                        days  of  the  April  27,  2005  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 callable  secured
                        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.  The  Company  filed  a
                        registration  statement with the Securities and Exchange
                        Commission  on June 22, 2005 to  register  the shares of
                        common  stock   issuable  upon  the  conversion  of  the
                        callable secured  convertible  notes and the exercise of
                        the warrants.  The  registration  statement was declared
                        effective on June 29, 2005.

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

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

9.   Convertible        As of June 30,  2005,  the  average of the three  lowest
     Notes              intraday  trading  prices of the Company's  common stock
     Continued          during the  preceding 20 trading days as reported on the
                        OTC  Bulletin  Board  was  $.05  and,   therefore,   the
                        conversion  price for the callable  secured  convertible
                        notes  was $.03.  Based on this  conversion  price,  the
                        $2,500,000 callable secured convertible notes, excluding
                        interest, were convertible into 83,333,333 shares of the
                        Company's common stock. As of June 30, 2005, none of the
                        callable secured convertible notes had been converted.

                        As of December 31, 2005, a total of $461,558 in callable
                        secured  convertible  notes  have  been  converted  into
                        66,880,000 shares of the Company's common stock pursuant
                        to notices of conversion  from The NIR Group.  The dates
                        of these notices of conversion,  the amount of the notes
                        converted,  the conversion price of the notes converted,
                        and the shares issued to the noteholders upon conversion
                        were as follows: (See 10-K page 27).

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

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

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

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

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


10.  Stock Option       The Company  granted the following  options and warrants
     Plan and           to  non-employees  during  the year ended  December  31,
     Warrants           2005:
     Continued
                          o   Options to  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.

                          o   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.

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

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

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

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

Outstanding at
   January 1, 2004                3,628,456         2,807,983 $    2.00 - 12.98
     Granted                      1,775,000                 -       0.10 - 0.14
     Exercised                            -                 -                 -

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

                        The following table summarizes  information  about stock
                        options and warrants outstanding at December 31, 2005:

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

  $  0.16 - 0.75   20,209,981        0.64 $     0.03      2,668,922  $    0.20
     2.00 - 5.00    2,254,709        1.84       3.56      2,253,459       3.67
     6.00 - 8.13    1,050,000        0.21       7.46      1,050,000       7.46
           12.98            -         N/A      12.98              -      12.98
-----------------------------------------------------   -----------------------

  $ 0.16 - 12.98   23,514,690        0.74 $     0.71      5,972,381  $    2.84
-----------------------------------------------------   -----------------------


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

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

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

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

12.  Gain on            Due to the  Company's  ongoing  cash flow  difficulties,
     Settlement of      during  2005 and 2004 most  vendors and  suppliers  were
     Liabilities        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 $12,000
                        and $206,000 in 2005 and 2004, respectively.

13. Related Party       A law  firm,  of  which  the  chairman  of the  board of
     Transactions       directors of the Company is a shareholder,  has rendered
                        legal  services to the  Company.  The Company  paid this
                        firm $220,000 and $100,000, for the years ended December
                        31,  2005 and 2004,  respectively.  As of  December  31,
                        2005,  the  Company  owed  this firm  $93,000,  which is
                        included in accounts payable.

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

14.  Supplemental       During the year ended December 31, 2005, the Company:
     Cash Flow
     Information          o   Incurred paid obligation of approximately  $13,000
                              for  the  settlement  of  accrued  liabilities  of
                              approximately $25,000 and recorded a corresponding
                              gain of $12,000.


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

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

14.  Supplemental       Actual amounts paid for interest and income taxes are as
     Cash Flow          follows:
     Information
     Continued                                               Years Ended
                                                             December 31,
                                                     -------------------------
                                                        2005         2004

                        Interest                     $ 15,000    $    22,000
                                                     -------------------------

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

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

                                                    Years Ended
                                                    December 31,
                                         -----------------------------------
                        Geographic Area        2005              2004
                                         -----------------------------------

                        Far East         $         500,000 $        529,000
                        South America               27,000           50,000
                        Middle East                162,000          233,000
                        Europe                     817,000          684,000
                        Canada                      62,000           68,000
                        Mexico                       1,000                -
                        Africa                       1,000            9,000
                                         -----------------------------------

                                         $       1,570,000 $      1,573,000
                                         -----------------------------------


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

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

16.  Savings Plan       In  November  1996,  the  Company  established  a 401(k)
                        Retirement  Savings Plan for the Company's  officers and
                        employees. The Plan provisions include eligibility after
                        six months of service,  a three year  vesting  provision
                        and nondiscriminatory no matching  contributions at this
                        time. During the years ended December 31, 2005 and 2004,
                        the Company made no contributions to the Plan.

17.  Commitments and    Consulting Agreements
     Contingencies      On April 3, 2003, the Company  entered into a consulting
                        agreement with Kinexsys Corporation ("Kinexsys").  Under
                        the terms of the agreement,  Kinexsys through its Senior
                        Partner,  Timothy R. Forstrom,  was to prepare a capital
                        markets   plan   and   a   corporate   positioning   and
                        communications plan for the Company,  for which Kinexsys
                        was to receive warrants to purchase up to 200,000 shares
                        of the  Company's  common stock at an exercise  price of
                        $.16 per share. The capital markets plan is to include a
                        detailed   analysis  of  the  Company's  capital  market
                        structure  in  relation  to  current  investors,  market
                        trends   and    projected    equity    movements,    and
                        recommendations  on capital management  strategies.  The
                        corporate  positioning  and  communications  plan was to
                        include a  corporate  positioning  matrix  for  markets,
                        analysts,  customers and partners,  and a communications
                        plan.  The  agreement was for a one-year term but may be
                        renewed at the  option of both  parties.  The  Agreement
                        expired on April 3, 2004,  as the Company  elected no to
                        exercise its renewal option

                        During  the year ended  December  31,  1999 the  Company
                        entered a consulting  agreement with a former officer of
                        the Company,  which expired in 2004. Total payments made
                        on the consulting  agreement were $12,500 and $25,000 in
                        2004 and 2003, respectively

                        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.  The
                        action  is  based  upon  an   extension   of  a  written
                        employment  agreement.  The Company  disputes the amount
                        allegedly owed and intends to vigorously  defend against
                        the action.


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

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

17.  Commitments and    An action was brought  against the Company on  September
     Contingencies      11, 2000 by PhotoMed  International,  Inc. and Daniel M.
     Continued          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  has
                        been  appointed.  After  the  initial  meeting  with new
                        counsel the Company provided initial  disclosures to the
                        new counsel.


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

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

17.  Commitments and    On August 3, 2003,  a  complaint  was filed  against the
     Contingencies      Company by Corinne  Powell,  a former  employee,  in the
     Continued          Third Judicial District Court,  Salt Lake County,  State
                        of Utah (Civil No. 030918364). Defendants consist of the
                        Company and Randall A.  Mackey,  Dr. David M. Silver and
                        Keith D. Ignotz, directors of the Company. The complaint
                        alleges that at the time the Company laid off Ms. Powell
                        on March 25,  2003,  she was owed  $2,030  for  business
                        expenses, $11,063 for accrued vacation days, $12,818 for
                        unpaid  commissions,  the fair  market  value of  50,000
                        stock  options  exercisable  at $5.00 per share that she
                        claims she was  prevented  from  exercising,  attorney's
                        fees and a continuing  wage  penalty  under Utah law. On
                        March 29, 2005, the Company agreed to a settlement  with
                        Ms. Powell of her claims for unpaid  business  expenses,
                        accrued   vacation  days,  and  unpaid   commissions  by
                        agreeing to pay her the sum of $13,000. The Company made
                        payment to Ms.  Powell for the  agreed  upon  settlement
                        amount.  The Company  believes the remaining  claims are
                        without merit and intends to vigorously  defend  against
                        such claims.

                        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.

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

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

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


17.  Commitments and    share.  Mr. Smith  claims  unpaid wages in the amount of
     Contingencies      the fair market value of the stock  options he claims he
     Continued          was prevented from  exercising,  attorney's  fees, and a
                        continuing  wage  penalty  under Utah law.  The  Company
                        believes  the claims are  without  merit and  intends to
                        vigorously defend against such action.

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

                        On September  24, 2004,  the Company was issued a patent
                        entitled,  "Laser 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 is requesting  in his  complaint  that a court
                        order be entered  declaring  that he is the  inventor or
                        co-inventor of the patent and, as a result,  is entitled
                        to all or part of the  royalties  and  profits  that the
                        Company earned or will earn from the sale of any product
                        incorporating  or using  the  improved  handpiece,  plus
                        interest  and  attorney's  fees.  Formal  discovery  has
                        commenced.  The Company  disputes the claims made by Dr.
                        Spadafora and intends to vigorously  defend against such
                        action.

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

                        Completion  of  Settlement  of Federal  and State  Class
                        Action Lawsuits

                        On August 26, 2005,  the federal  court entered an order
                        and  final  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,

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

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

17.  Commitments and    the court  permanently  enjoined  class  members  in the
     Contingencies      lawsuit   and  their   successors   and   assigns   from
     Continued          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  Convertible  preferred  stock on or about July
                        11, 2001.

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

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

17.  Commitments and    The federal  court class  action  lawsuit was  initially
     Contingencies      filed on May 14, 2003 by Richard Meyer, individually and
     Continued          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.

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

                        The  Company  has  cancelled  a royalty  agreement  with
                        another  company that developed a promotional CD for the
                        Company.  Through the  promotion  of the CD, the Company
                        hopes to increase sales in the  Autoperimiter and assist
                        doctors currently using the unit with the interpretation
                        of visual fields. The royalty base is 50% each until the
                        Company's  share equals the production  costs related to
                        development of the disk. Thereafter,  the developer will
                        receive  70% and the  Company  will  receive  30% of the
                        royalty base. No royalties  were accrued nor paid during
                        the year relating to this agreement.

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

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


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

                        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.

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

                        In November  2004,  the FASB issued SFAS 151  "Inventory
                        Costs--an  amendment  of ARB  No.  43".  This  Statement
                        amends the guidance in ARB No. 43, Chapter 4, "Inventory
                        Pricing," to clarify the accounting for abnormal amounts
                        of idle facility expense,  freight,  handling costs, and
                        wasted  material  (spoilage).  Paragraph  5 of  ARB  43,
                        Chapter  4,  previously  stated  that ". . . under  some
                        circumstances,  items  such  as idle  facility  expense,
                        excessive  spoilage,  double  freight,  and  re-handling
                        costs may be so  abnormal  as to  require  treatment  as
                        current period charges.  . . ." This Statement  requires
                        that those items be recognized as current-period charges
                        regardless  of whether  they meet the  criterion  of "so
                        abnormal."  In addition,  this  Statement  requires that
                        allocation of fixed production overheads to the costs of
                        conversion  be  based  on  the  normal  capacity  of the
                        production facilities.  The provisions of this Statement


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

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

18.  Recent             shall be effective for inventory  costs incurred  during
     Accounting         fiscal years  beginning after June 15, 2005. The Company
     Pronounce-         does not  believe  adoption  of SFAS  151 will  have any
     ments              impact   on   the   Company's   consolidated   financial
     Continued          statements.

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

                        The  revised  Statement  requires  entities  to disclose
                        information about the nature of the share-based  payment
                        transactions  and the effects of those  transactions  on
                        the financial statements.  Statement 123(R) is effective
                        for public  companies that do not file as small business
                        issuers  as of the  beginning  of the first  interim  or
                        annual reporting period that begins after June 15, 2005.
                        For  public   companies  that  file  as  small  business
                        issuers,   Statement  123(R)  is  effective  as  of  the
                        beginning  of the  first  interim  or  annual  reporting
                        period that begins after December 15, 2005 (i.e.,  first
                        quarter 2006 for the Company). All public companies must


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

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


18.  Recent             use  either the  modified  prospective  or the  modified
     Accounting         retrospective  transition method. Early adoption of this
     Pronounce-         Statement  for  interim  or  annual  periods  for  which
     ments              financial  statements  or interim  reports have not been
     Continued          issued is  encouraged.  The  Company  believes  that the
                        adoption  of  this  pronouncement  may  have a  material
                        impact on the Company's financial statements.

                        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 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.

19.  Subsequent         Subsequent Events
     Events             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 callable secured  convertible  notes and (ii)warrants
                        to purchase  12,000,000  shares of its common stock. The
                        sale  of the  callable  secured  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:

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

                          o   $500,000   will  be   disbursed   after  filing  a
                              registration  statement  that registers the shares
                              of common stock  underlying  the callable  secured
                              convertible notes and the warrants; and

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

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

19.  Subsequent           o   $500,000 will be disbursed upon the  effectiveness
     Events                   of the  registration  statement that registers the
     Continued                shares of common  stock  underlying  the  callable
                              secured convertible notes and the warrants.

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

                          o   The  Company   delivered  to  the  investors  duly
                              executed  callable secured  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.

                        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  pro-rata  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.

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

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

19.  Subsequent         The callable secured  convertible notes bear interest at
     Events             8% per  annum  from the date of  issuance.  Interest  is
     Continued          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 callable secured  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 callable secured  convertible  notes
                        mature in three years from the date of issuance, and are
                        convertible   into  our  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 callable  secured  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  callable secured
                        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   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 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

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

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


19.  Subsequent         prepayments  occurring  after the 60th day following the
     Events             issue date of the notes.  The warrants  are  exercisable
     Continued          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 selling  stockholders  have agreed to restrict their
                        ability to convert their  callable  secured  convertible
                        notes or exercise  their  warrants and receive shares of
                        our  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.

                        The Company is  required  to register  the shares of its
                        common  stock   issuable  upon  the  conversion  of  the
                        callable secured  convertible  notes and the exercise of
                        the warrants.  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 callable  secured
                        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.

                        As of April 14, 2006, the Company had 160,959,428 shares
                        of  its  common   stock  issued  and   outstanding   and
                        $2,411,439    callable   secured    convertible    notes
                        outstanding  that  may be  converted  into an  estimated
                        335,000,000  shares of common  stock at  current  market
                        prices, and outstanding  warrants to purchase 20,534,392
                        shares of its common  stock.  Additionally,  the Company
                        has an obligation to sell  $1,000,000  callable  secured
                        convertible   notes  that  may  be  converted   into  an
                        estimated  139,000,000 shares of common stock at current
                        market prices and issue  warrants to purchase  8,000,000

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

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

19.  Subsequent         shares of common stock in the near future.  In addition,
     Events             the  number  of shares of  common  stock  issuable  upon
     Continued          conversion   of   the   outstanding   callable   secured
                        convertible  notes may  increase if the market  price of
                        our stock declines. All the shares, including all of the
                        shares  issuable  upon  conversion of the notes and upon
                        exercise   of  our   warrants,   may  be  sold   without
                        restriction.  The sale of these  shares may  depress the
                        market price of the Company's common stock.

                        The Company's obligation to issue shares upon conversion
                        of the callable secured convertible notes is essentially
                        limitless.  The following is an example of the amount of
                        shares of common stock that are issuable upon conversion
                        of  $3,411,439  principal  amount  of  callable  secured
                        convertible notes (excluding accrued interest), based on
                        market  prices 25%, 50%, and 75% below the market price,
                        as of April 13, 2006 of $.012.

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

     25%          $.009        $.0054             631,747,963            392.5%
     50%          $.006        $.0036             947,621,944            588.7%
     75%          $.003        $.0018           1,895,243,889          1,177.5%

                            *Based on 160,959,428 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.

                        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 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

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

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

19.  Subsequent         market in  anticipation  of  covering  the short sale by
     Events             converting  their  securities,  which  could  cause  the
     Continued          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.

                        The  issuance  of shares  upon  conversion  of  callable
                        secured  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.

                        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   callable   secured
                        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 callable secured  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 our common stock.
                        Although  the  Company   currently  has   $2,411,439  in
                        callable  secured  convertible  notes  outstanding,  the
                        noteholders   are   obligated  to  purchase   additional
                        callable  secured  convertible  notes  in the  aggregate
                        amount of  $1,000,000.  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

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

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

19.  Subsequent         agreement or related  convertible  notes, the assignment
     Events             or  appointment  of a receiver to control a  substantial
     Continued          part of our 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
                        callable secured 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 callable
                        secured  convertible notes will be converted into shares
                        of its common stock, in accordance with the terms of the
                        callable  secured  convertible  notes. If the Company is
                        required  to  repay  the  callable  secured  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.

                        Employment Agreement
                        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. Yoon shall
                        be  immediately  vested.  A change of  control  shall be
                        deemed to have  occurred if (i) a tender  offer shall be
                        made and  consummated for the ownership of more than 25%
                        of the Company's  outstanding  shares;  (ii) the Company
                        shall be merged or consolidated with another corporation
                        and, as  a  result, less  than  25%  of  the outstanding


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

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

19.  Subsequent         common  shares  of the  surviving  corporation  shall be
     Events             owned  in  the   aggregate  by  the   Company's   former
     Continued          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.

                        During the first quarter of 2006, a total of $127,000 in
                        callable secured  convertible  notes have been converted
                        into  64,371,200  shares of the  Company's  common stock
                        pursuant  to notices of  conversion  from The NIR Group.
                        The dates of these notices of conversion,  the amount of
                        the notes  converted,  the conversion price of the notes
                        converted, and the shares issued to the noteholders upon
                        conversion were as follows: (See 10-K page 28).


--------------------------------------------------------------------------------
                                                                            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, 2006, the Company's executive officers and directors,
their ages and their positions are set forth below:

     Name                           Age     Position
     ----                           ---     --------
     Raymond P.L. Cannefax           57     President and Chief Executive
                                            Officer
     Randall A. Mackey, Esq.         60     Chairman of the Board and Director
     David M. Silver, PhD.           64     Director
     Keith D. Ignotz                 59     Director
     John C. Pingree                 65     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

                                       38
<PAGE>

J.D. degree from Columbia Law School in 1975 and a B.C.L. degree from Oxford
University in 1977. Mr. Mackey has also served as Chairman of the Board from
June 2001 to May 2003, and as a director from 1998 to May 2003 of Cimetrix,
Incorporated, a software development company. Mr. Mackey has additionally served
as Chairman of the Board from July 2000 to July 2003 and as a trustee from 1993
to July 2003 of Salt Lake Community College.

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

         Keith D. Ignotz has been a director since November 2000. 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 and New Vice President of Sales and
Marketing

         On March 20, 2006, Luis A. Mostacero was appointed as the Company's
Vice President of Finance. Mr. Mostacero previously served as the Company's
Controller from June 2000 to August 2005. On April 10, 2006, Michael S. Austin
was appointed as the Company's Vice President of Sales and Marketing.

                                       39
<PAGE>

Board Meetings and Committees

         The Board of Directors held a total of four meetings during the fiscal
year ended December 31, 2005. No director attended fewer than 75% of all
meetings of the Board of Directors during the 2005 fiscal year. The Audit
Committee of the Board of Directors consists of directors Dr. David M. Silver,
Randall A. Mackey, Keith D. Ignotz and John C. Pingree. The Audit Committee met
one time during the fiscal year. The Audit Committee is primarily responsible
for reviewing the services performed by its independent public accountants and
internal audit department and evaluating its accounting principles and its
system of internal accounting controls. The Compensation Committee of the Board
of Directors consists of directors Dr. David M. Silver, Randall A. Mackey, Keith
D. Ignotz and John C. Pingree. The Compensation Committee met one time during
the fiscal year. The Compensation Committee is primarily responsible for
reviewing compensation of executive officers and overseeing the granting of
stock options.

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

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

Item 10.  Executive Compensation

         The following table sets forth, for each of the last three fiscal
years, the compensation received by John Y. Yoon, former 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, 2005, 2004 and 2003.

                              Summary Compensation Table

<TABLE>
<CAPTION>

                                                Annual Compensation                           Long Term Compensation

                                                                                   Awards               Payouts

                                                                Other                    Securities
                                                                Annual      Restricted   Underlying    Long-term    All Other
Name and                                                       Compen-       Stock        Options/     Incentive    Compensa-
Principal Position      Year       Salary$          Bonus($)   sation($)    Awards($)      SARs(#)      Payouts($)   tion($)
-------------------     ----       -------          -------    ---------    ----------   -----------   -----------  ---------

<S>                     <C>        <C>                  <C>    <C>             <C>     <C>                  <C>       <C>
John Y. Yoon            2005(1)    $165,881(5)          0      $ 2,257(5)      0               0            0         $5,927(8)
Former President and    2004(2)    $110,961(6)          0      $18,494(6)      0       1,000,000(7)         0              0
Chief Executive
Officer(4)

Aziz A. Mohabbat        2005(1)    $126,328             0            0         0               0            0         $2,113(11)
Former Vice President   2004(2)    $106,244             0            0         0         200,000(10)        0              0
of Operations and       2003(3)    $ 24,219             0            0         0               0            0         $9,634(12)
Chief Operating
Officer(9)
____________________
</TABLE>

         (1)  For the fiscal year ended December 31, 2005
         (2)  For the fiscal year ended December 31, 2004
         (3)  For the fiscal year ended December 31, 2003
         (4)  Mr. Yoon served as President and Chief Executive Officer from
              March 18, 2004 to December 31, 2005, at which time he resigned to
              pursue other opportunities.

                                       40
<PAGE>

         (5)  Of the salary payable to Mr. Yoon in 2005 pursuant to his
              employment agreement, $165,881 was paid to him during 2005 and the
              remaining amount of $2,257 was deferred until 2006. This deferred
              salary of $2,257 was paid to Mr. Yoon on January 17, 2006.
         (6)  Of the salary payable to Mr. Yoon pursuant to his employment
              agreement, $110,961 was paid to him during 2004 and the remaining
              amount of $18,494 payable in 2004 was deferred until the Company's
              Board of Directors determined that its financial condition had
              improved. The deferred salary of $18,494 was paid to Mr. Yoon in
              June and July of 2005.
         (7)  On March 18, 2004, the Company's Board of Directors granted Mr.
              Yoon options to purchase 1,000,000 shares of the Company's common
              stock at an exercise price of $.13 per share. Mr. Yoon resigned as
              the Company's President and Chief Executive Officer on December
              31, 2005 and, as a result, the options terminated on March 31,
              2006.
         (8)  The amounts under "All Other Compensation" for 2005 consist of
              payments to Mr. Yoon for accrued vacation days prior to his
              resignation from the Company on December 31, 2005.
         (9)  Mr. Mohabbat served a Vice President of Operations and Chief
              Operating Officer from March 22, 2004 to November 15, 2005, at
              which time he resigned to pursue other opportunities. Mr. Mohabbat
              also served as Chief Operating Officer from August 30, 2002 to
              March 2003. He was not an officer in prior years.
         (10) On September 30, 2004, the Board of Directors granted Mr. Mohabbat
              options to purchase 200,000 shares of the Company's common stock
              at an exercise price of $.12 per share, effective as of March 23,
              2004. Mr. Mohabbat resigned as the Company's Vice President of
              Operations and Chief Operating Officer on November 15, 2005 and,
              as a result, the options terminated on February 13, 2006.
         (11) The amounts under "All Other Compensation" for 2005 consist of a
              payment to Mr. Mohabbat for accrued vacation days prior to his
              resignation from the Company on November 15, 2005.
         (12) The amounts under "All Other Compensation" for 2004 consist of
              payments to Mr. Mohabbat for accrued vacation days prior to his
              resignation from the Company in March 2003.

Options

         The following table sets forth information regarding stock options
granted during the fiscal year ended December 31, 2005, to each named executive
officer.

                        Option Grants in Last Fiscal Year

<TABLE>
<CAPTION>
                                                            Individual  Grants
                                            -------------------------------------
                                            Percentage of Total
                    Number of Securities    Options Granted to     Exercise Price
                      UnderlyingOptions        Employees in           Per Share        Expiration
Name                     Granted (#)          Fiscal Year(%)           ($/Sh)              Date
----                --------------------    -------------------    --------------      -----------
<S>                             <C>                   <C>                 <C>               <C>
John Y. Yoon                    0                     0                   N/A               N/A
Aziz A. Mohabbat                0                     0                   N/A               N/A
</TABLE>


         The following table sets forth information regarding unexercised
options to acquire shares of the Company's common stock held as of December 31,
2005, by each named executive officer.

               Aggregated Option Exercises in Last Fiscal Year and
                         Fiscal Year-End Option Values
<TABLE>
<CAPTION>


                                                                      Number of Securities
                                                                           Underlying                    Value of Unexercised
                                                                       Unexercised Options               In-the-Money Options
                                                                     at December 31, 2005(#)            at December 31, 2004($)
                             Shares Acquired       Value          ------------------------------      -----------------------------
Name                           on Exercise      Realized($)       Exercisable      Unexercisable      Exercisable     Unexercisable
----                         ---------------    -----------       -----------      --------------     -----------     -------------
<S>                                 <C>              <C>             <C>                <C>                    <C>              <C>
John Y. Yoon                        0                0               583,338            416,662                0                0
Aziz A. Mohabbat                    0                0               105,564             94,436                0                0
</TABLE>

                                       41
<PAGE>

Director Compensation

         On April 19, 2004, John C. Pingree, a director of the Company, was
granted options to purchase 125,000 shares of its common stock at an exercise
price of $.12 per share. On September 30, 2004, Messrs. Randall A. Mackey, Dr.
David M. Silver and Keith D. Ignotz, directors of the Company, were each granted
options to purchase 125,000 shares of the Company's common stock at an exercise
price of $.13 per share. The directors were not granted any options to purchase
shares of common stock during 2005. In addition, outside directors are also
reimbursed for their expenses in attending board and committee meetings.
Directors are not precluded from serving the Company in any other capacity and
receiving compensation therefore. The options were not issued at a discount to
the then market price.

Employee 401(k) Plan

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

                                       42
<PAGE>

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

         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 terminate 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 are
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.

Consulting Agreement

         On April 3, 2003, the Company entered into a consultant agreement with
Kinexsys Corporation. Under the terms of the agreement, Kinexsys through its
Senior Partner, Timothy R. Forstrom, was to prepare a capital markets plan and a
corporate positioning and communications plan for the Company, for which
Kinexsys was to receive warrants to purchase up to 200,000 shares of the
Company's common stock at an exercise price of $.16 per share. The capital
markets plan was to include a detailed analysis of the Company's capital market
structure in relation to current investors, market trends and projected equity

                                       43
<PAGE>

movements, and recommendations on capital management strategies. The corporate
positioning and communications plan was to include a corporate positioning
matrix for markets, analysts, customers and partners, and a communications plan.
The agreement was for a one-year term but could be renewed at the option of both
parties. The agreement expired on April 3, 2004 as the Company elected not to
exercise its renewal option.

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, exerciseable for a period of five years, and warrants to purchase
75,000 shares of common stock at $7.50 per share, exerciseable for a period of
five years, but such warrants were not to be issued until Mr. Hemmer exercises
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.

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, 2006 for (i)
each executive officer (ii) each director, (iii) each person known to the
Company to be the beneficial owner of more than 5% of the outstanding shares,
and (iv) all directors and officers as a group.

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

        Raymond P.L. Cannefax (2)                  1,500,000               *
        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)               2,943,375            1.8%
        _________________
        *Less than 1%.

(1)      Unless otherwise indicated, the address of each listed stockholder is
         c/o Paradigm Medical Industries, Inc., 2355 South 1070 West, Salt Lake
         City, Utah, 84119.

(2)      The amounts shown include shares that may be acquired currently, or
         within 60 days after March 31, 2006 through the exercise of stock
         options are follows: Mr. Cannefax, 1,500,000 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, 2005 and 2004, totaled $220,000 and $100,000,
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, 2005, the Company owed this firm $93,000, which is
included in accounts payable.

                                       44
<PAGE>
                                     PART IV

Item 13. Exhibits and Reports on Form 8-K

        (a)  Exhibits

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

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)
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)

                                       45
<PAGE>

10.26         Security Agreement with Purchasers(18)
10.27         Intellectual Property Security Agreement with Purchasers(18)
10.28         Registration Rights Agreement with Purchasers(18)
31.1          Certification pursuant to 18 U.S.C. Section 1350, as enacted by
              Section 302 of the Sarbanes-Oxley Act of 2002
31.2          Certification pursuant to 18 U.S.C. Section 1350, as enacted by
              Section 302 of the Sarbanes-Oxley Act of 2002
32.1          Certification pursuant to 18 U.S.C. Section 1350, as adopted
              pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2          Certification pursuant to 18 U.S.C. Section 1350, as adopted
              pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
-----------------
(1)           Incorporated by reference from Registration Statement on Form
              SB-2, as filed on March 19, 1996.
(2)           Incorporated by reference from Amendment No. 1 to Registration
              Statement on Form SB-2, as filed on May 14, 1996.
(3)           Incorporated by reference from Amendment No. 2 to Registration
              Statement on Form SB-2, as filed on June 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.
(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.

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

         No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 2005.

Item 14. Principal Accountant Fees and Services

         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>

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

                                   SIGNATURES

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


                                       PARADIGM MEDICAL INDUSTRIES, INC.




Dated: April 14, 2006                  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     April 14, 2006
--------------------------      Officer (Principal
Raymond P.L. Cannefax           Executive Officer)



/s/ Randall A. Mackey           Chairman of the Board and         April 14, 2006
---------------------           Director
Randall A. Mackey



/s/ David M. Silver             Director                          April 14, 2006
-------------------
David M. Silver, Ph.D.



/s/ Keith D. Ignotz             Director                          April 14, 2006
-------------------
Keith D. Ignotz



/s/ John C. Pingree             Director                          April 14, 2006
-------------------
John C. Pingree



/s/ Luis A. Mostacero           Vice President of Finance         April 14, 2006
---------------------           (Principal Financial and
Luis A. Mostacero               Accounting Officer)

                                       47