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, 2004, or

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

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

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

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

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

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

                                      None

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


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

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

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

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

Registrant's  revenues  for  the  fiscal  year  ended  December  31,  2004  were
$3,062,000.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of the last business day of registrant's  most recently  completed
first fiscal quarter was  $2,499,000  based on the closing price on that date on
the OTC Bulletin Board.

As of March 31, 2005,  Registrant had  outstanding  27,764,868,shares  of common
stock,  5,627  shares  of Series A  preferred  stock,  8,986  shares of Series B
preferred  stock,  no  shares of Series C  preferred  stock and 5,000  shares of
Series D preferred  stock,  1,000 shares of Series E preferred  stock,  4,598.75
shares of Series F preferred  stock,  and 1,726,560 shares of Series G preferred
stock.

                      DOCUMENTS INCORPORATED BY REFERENCE:

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

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

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                                     PART I

Item 1. Description of Business

General

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

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

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

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

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

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

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

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

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

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

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

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

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

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<PAGE>

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

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

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

Background

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

Overview

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

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

         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.

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

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

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

Products

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

         Precisionist ThirtyThousand(TM): The Precisionist ThirtyThousand(TM) is
the Company's core phaco surgical  technology.  The  Precisionist(TM) was placed
into  production  and  offered  for sale in 1997.  As a phaco  cataract  surgery
system, the Company believes the Precisionist(TM) with its new fluidics panel is
equal or  superior  to the  present  competitive  systems in the United  States.
However,  due to the  lack  of  recent  sales,  the  majority  of the  Company's
inventory   associated  with  the  Precisionist  Thirty  Thousand(TM)  has  been
estimated to be obsolete  and  therefore a reserve for such  inventory  has been
recorded.  The system  features a graphic color  display and unique  proprietary
on-board computer and graphic user interface linked to a soft-key membrane panel
for flexible programmable operation.  The system provides real-time "on-the-fly"
adjustment   capabilities  for  each  surgical  parameter  during  the  surgical
procedure  for  high-volume  applications.  In  addition,  the  Precisionist(TM)
provides one hundred  pre-programmable  surgery set-ups,  with a second level of
sub-programmed custom modes within each major surgical screen (i.e.,  ultrasound
phaco  and  irrigation/aspiration  modes).  The  Precisionist(TM)  features  the
Company's  newly  developed  proprietary  fluidics  panel  which  is  completely
non-invasive for improved sterility and to provide a surgical environment in the
eye that  virtually  eliminates  fluidic  surge and solves  chamber  maintenance
problems  normally  associated  with phaco cataract  surgery.  This new fluidics
system provides greater control for the surgeon and allows the safe operation at
much higher  vacuum  settings by sampling  changes in  aspiration  100 times per
second.  Greater  vacuum in phaco  surgery means less use of ultrasound or laser
energy to fragment the cataract and less chance for  surrounding  tissue damage.
In addition to the full  complement of surgical  modalities  (e.g.,  irrigation,
aspiration,  bipolar  coagulation and anterior  vitrectomy),  system  automation
includes  "dimensional"  audio feedback of vacuum levels and voice  confirmation
for major system  functions,  providing an  intuitive  environment  in which the
advanced phaco surgeon can concentrate on the surgical technique rather than the
equipment.  Sales of the  Precisionist(TM)  and related  accessories  were 0% of
total revenues in both the fiscal years 2004 and 2003, respectively.

                                       5
<PAGE>

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

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

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

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

         The Company's  laser system is based upon the concept that pulsed laser
energy produced with the micro-processor controlled Nd:YAG laser system provides
ophthalmic  surgeons  with a more  precise  and less  traumatic  alternative  in
cataract surgery.  Although conventional ultrasonic surgical systems have proven
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

                                       6
<PAGE>

multiple laser  wavelengths  into one system or workstation that can be used for
multiple medical specialties. This approval represents only one of the potential
applications that could represent  substantial  growth  opportunities  including
additional sales of equipment, instruments, accessories and disposables.

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

         The SIStem(TM) and the Odyssey(TM):  The SIStem(TM) and the Odyssey(TM)
have been the Company's entry-level  phacoemulsification systems. The SIStem(TM)
and  the  Odyssey(TM)  were  designed  to  be a  full-featured,  cost-effective,
reliable phaco machines; however, due to the lack of sales in 2002, the products
were  determined to be obsolete.  Sales of the  SIStem(TM),  the Odyssey(TM) and
related  accessories  represented  approximately 4% and 0% of the total revenues
for fiscal years 2004 and 2003,  respectively.  On December 3, 2003, the Company
completed the sale of the SIStem(TM)  and the  Odyssey(TM),  including  patents,
trademarks,  software codes and programs,  supplies,  work in process,  finished
goods and molds, to American Optisurgical, Inc.

         Surgical  Instruments  and  Disposables:  In addition  to the  cataract
surgery  equipment,  the  Company's  surgical  systems  utilize or will  utilize
accessory  instruments  and  disposables,  some of which are  proprietary to us.
These include  replacement  ultrasound tips,  sleeves,  tubing sets and fluidics
packs, instrument drapes and laser cataract probes. The Company intend to expand
its disposable  accessories as it further penetrates the cataract surgery market
and expands the treatment  applications for its Workstation(TM).  These products
contributed  approximately  0%  of  total  revenues  for  both  2004  and  2003,
respectively.

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

         Blood  Flow  Analyzer(TM):  In June  1997,  the  Company  received  FDA
clearance  to market  the  Blood  Flow  Analyzer(TM)  for  early  detection  and
treatment  management of glaucoma and other retina related diseases.  The device
measures not only intraocular pressure but also pulsatile ocular blood flow, the
reduction of which may cause nerve fiber bundle death through oxygen deprivation
thus  resulting in visual field loss  associated  with  glaucoma.  The Company's
Blood Flow Analyzer(TM) is a portable  automated  in-office system that presents
an  affordable  method for ocular  blood flow  testing  for the  ophthalmic  and
optometric  practitioner.  This was its first  diagnostic  eye care device.  The
device is a portable  desktop  system that utilizes a  proprietary  and patented
pneumatic Air Membrane Applanation Probe(TM) or AMAP(TM),  which can be attached
to any model of  standard  examination  slit lamp,  which is then  placed on the
cornea of the patient's eye to measure the intraocular  pressure within the eye.
The device is unique in that it reads a series of  intraocular  pressure  pulses
over a short period of time  (approximately five to ten seconds) and generates a
waveform profile, which can be correlated to blood flow volume within the eye. A
proprietary  software  algorithm  developed by David M. Silver,  Ph.D., at Johns
Hopkins  University,  calculates  the blood flow volume.  The device  presents a
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.

                                       7
<PAGE>

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

         The manufacturing  activities for the Blood Flow Analyzer(TM) have been
moved to the Salt  Lake City  facility  from the  outsourced  plant  located  in
England.  On October 21, 2002,  the Company  received FDA approval on its 510(k)
application for additional  indications of use for the Blood Flow  Analyzer(TM).
The additional  indications  include  pulsatile  ocular blood flow and pulsatile
ocular  blood  volume.  These  are  diagnostic   measurements  that  assess  the
hemodynamic  and vascular health of the eye. Also, the Company is continuing its
aggressive  campaign  to  educate  the  insurance  payers  about the Blood  Flow
Analyzer(TM),  its purposes and the  significance  of its performance in patient
care in order to  achieve  reimbursements  to the  doctors  using its Blood Flow
Analyzer(TM).  Sales of the Blood  Flow  Analyzer(TM)  and  related  accessories
accounted  for  approximately  19% and 16% of total  sales for the fiscal  years
ended December 31, 2004 and 2003, respectively.

         Dicon(TM)  Perimeters:  Dicon(TM) perimeters consist of the LD 400, the
TKS 5000,  the SST(TM),  FieldLink(TM),  FieldView(TM)  and Advanced  FieldView.
Perimeters are used to determine retinal sensitivity testing the visual pathway.
Perimeters  have become a standard of care in the  detection  and  monitoring of
glaucoma  worldwide.   Perimetry  is  reimbursable   worldwide.   The  Dicon(TM)
perimeters  feature  patented  kinetic  fixation and voice  synthesis  now in 27
different languages. Software programs are sold to assist in the analysis of the
test  results.  Sales  of  the  perimeters  and  related  accessories  generated
approximately 27% of the total revenues for both 2004 and 2003, respectively.

         Dicon(TM) Corneal Topographers:  Dicon(TM) corneal topographers include
the CT 200(TM) and the CT 50.  Corneal  topographers  are used to determine  the
shape and  integrity of the cornea,  the anterior  surface of the eye.  Clinical
applications for corneal topographers include refractive surgery that eliminates
the need for  eyeglasses  and  optometric  applications  including  contact lens
fitting. Revenues from the topographer and related accessories were 6% and 9% of
the total revenues for 2004 and 2003,  respectively.  An enhanced version of the
CT 200(TM),  the CT 2000(TM),  is scheduled to be  introduced  during the fourth
quarter of 2003. The Company is completing the development of upgrades to the CT
200(TM)  and  the CT 50  Corneal  Topographer,  which  will  be  operating  upon
completion  of the  upgrades  with  Windows XP  software  rather than the former
Windows 95 operating systems.  The Company is also revising its upgrade to offer
the CT 200(TM) with Windows  2000  software  rather than the Windows XP software
that the Company announced in August 2003.

         P55  Pachymetric  Analyzer:  The  ultrasonic  pachymeter  is  used  for
measurement  of corneal  thickness.  The Model P55 is  positioned  as a standard
office pachymeter.  This device is targeted to the refractive surgery market and
contributed  approximately  3% of the  total  revenues  for both  2004 and 2003,
respectively.

         P20 A-Scan Biometric Ultrasonic  Analyzer:  The A-Scan has been removed
from the Company's  line of diagnostic  products.  The A-Scan is a  prerequisite
procedure reimbursed by Medicare and is performed before every cataract surgery.
Over  5,000  A-Scan  systems  have  been  installed  in  the  worldwide  market,
representing a substantial market opportunity for software upgrades and extended
warranty contract sales. A-Scan sales were approximately __% and 2% of the total
revenues for 2004 and 2003, respectively.

         P37 A/B  Scan  Ocular  Ultrasound  Diagnostic:  The A/B Scan is used by
retinal  sub-specialists  to identify foreign bodies in the posterior chamber of
the eye and to evaluate the structural  integrity of the retina. The A/B Scan is
attractive  to the general  ophthalmic  community at large  because of its lower
price point.  Sales from this product were  approximately 8% and 4% of the total
revenues for 2004 and 2003, respectively.

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

                                       8
<PAGE>

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

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

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

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

         Parts and Services:  The parts and service  revenue from the repair and
service of equipment  sold accounted for  approximately  8% of total revenues in
both 2004 and 2003, respectively.

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

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

<TABLE>
<CAPTION>


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

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

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

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

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

P45 UBM                  System, Imaging, Pulsed      Complete            Yes            13%         16%     FDA 510(K) K844299*
Ultrasound                   Echo Ultrasound                                                                 ISO 9001: 1994,
Biomicroscope,                 Diagnostic                                                                    EN ISO 9001**
Workstation Plus
BFA Ocular Blood            Tonometer, Manual         Complete            Yes****        16%         19%     FDA 510(K) K844299*
Flow Analyzer(TM) and             Diagnostic                                                                 ISO 9001: 1994,
Disposables                                                                                                  EN ISO 9001**
</TABLE>

                                       9
<PAGE>
<TABLE>

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

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

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

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

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

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

Parts and Services           Perimeter, BFA,          Complete            Yes             8%          9%     FDA 510(K) K844299*
                         Tonometer, Topographer,                                                             ISO 9001: 1994,
                        Ultrasound Workstations,                                                             EN ISO 9001**
                            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 the footnote  (1) of the table.  The  Company's  possible  future  efforts to
finalize  development  of the  Photon(TM)  and obtain the  necessary  regulatory
approvals  would depend on its economic  evaluations  and adequate  funding.  If
these efforts were  undertaken but proved to be  unsuccessful,  the impact would
include  the costs  associated  with these  efforts and the  anticipated  future
revenues  which  the  Company  would  not  receive  as  expected.   The  Company


                                       10
<PAGE>

anticipates  that a majority of the estimated costs for Research and Development
will be used for the enhancement and upgrading of its current products  approved
for sale.  The  Company  is unable to  provide  an  estimate  of the  details of
possible  liquidity  needs and  expected  source of funds  for  possible  future
efforts to  finalize  development  of the  Photon(TM)  and obtain the  necessary
regulatory   approvals   since  this   estimate   would  depend  on  a  possible
comprehensive economic evaluation.

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

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

Marketing and Sales

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

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

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

         Marketing    Organization:    The   Company    markets   its   products
internationally  through a network of dealers and  domestically  through  direct
sales representatives, independent sales representatives, and ophthalmic product
distributors.  As of December  31,  2003,  the Company had five direct  domestic
sales  representatives in the United States and 65 foreign dealers.  These sales
representatives  are  assigned  exclusive  territories  and  have  entered  into
contracts  with the Company  that contain  performance  quotas.  Domestic  sales
channels have been expanded to include  independent  sales  representatives  and
distributors who began training on its products in August 2003. The Company also
plans to  continue  to market its  products  by  identifying  customers  through
internal market research, trade shows and direct marketing programs. The Company
also utilizes a Clinical Advisory Board comprised of leading ophthalmic surgeons
in the United States and Europe who speak at conventions, train ophthalmologists
and visit foreign doctors and dealers to promote its products.

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

                                       11
<PAGE>

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

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

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

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

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

Research and Development

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

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

         Research,  development and service expenses (which includes  production
and  manufacturing  support and the service  department  expenses)  decreased by
$265,000,  or 26%, to $768,000 for the twelve  months  ended  December 31, 2004,
from  $1,033,000 for the same period in 2003.  None of the costs of research and
development activities during 2004 and 2003 was borne directly by customers.

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

                                       12
<PAGE>

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

Competition

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

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

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

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

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

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

         The  Company  believes  that its ability to compete  successfully  will
depend on its  capability to create and maintain  advanced  technology,  develop
proprietary products, attract and retain scientific personnel,  obtain patent or
other proprietary protection for its products and technologies,  obtain required
regulatory approvals and manufacture,  assemble and successfully market products
either alone or through third parties.

                                       13
<PAGE>

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

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

Intellectual Property Protection

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

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

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

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

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

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

                                       14
<PAGE>

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

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

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

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

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

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

Regulation

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

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

         There are two principal  methods by which FDA approval may be obtained.
One method is to seek FDA approval through a pre-marketing  notification  filing
under Section 510(k) of the Food,  Drug and Cosmetics Act. If a manufacturer  or
distributor  of a  medical  device  can  establish  that a  proposed  device  is
"substantially  equivalent"  to a legally  marketed  Class I or Class II medical
device or to a  pre-1976  Class  III  medical  device  for which the FDA has not

                                       15
<PAGE>

called for a pre- marketing  approval,  the manufacturer or distributor may seek
FDA Section  510(k)  pre-marketing  clearance for the device by filing a Section
510(k) pre-marketing notification. The Section 510(k) notification and the claim
of substantial  equivalence will likely have to be supported by various types of
data and materials,  possibly including clinical testing results, obtained under
an  Investigational  Device  Exemption  granted by the FDA. The  manufacturer or
distributor may not place the device into interstate  commerce until an order is
issued by the FDA granting pre-marketing  clearance for the device. There can be
no assurance that the Company will obtain Section 510(k) pre-marketing clearance
for any of the  future  devices  for  which the  Company  seeks  such  clearance
including the Photon(TM) laser system.

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

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

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

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

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

                                       16
<PAGE>

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

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

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

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

Regulatory Status of Products

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

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

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

         The Company  received a warning letter dated August 30, 2000,  from the
Office of Compliance, Center for Devices and Radiological Health of the Food and
Drug  Administration  relating  to certain  deficiencies  in the human  clinical
trials for its Photon(TM) Laser Cataract System. The warning letter concerns the

                                       17
<PAGE>

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

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

Employees

         As of March 31,  2005,  the Company had 27  full-time  employees.  This
number does not include its manufacturer's  representatives  who are independent
contractors  rather  than its  employees.  The  Company  also  utilizes  several
consultants  and  advisors.  There can be no assurance  that the Company will be
successful in recruiting or retaining key personnel. None of its employees are a
member of a labor  union and the  Company  has never  experienced  any  business
interruption as a result of any labor disputes.

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

Item 2. Description of Property

         The Company's  executive  offices are  currently  located at 2355 South
1070 West, Salt Lake City, Utah. This facility consists of approximately  23,238
square feet of leased  office space under a three-year  lease that was to expire
on March 1, 2003 with an additional  three-year renewal option. These facilities
are leased from Eden Roc, a  California  partnership,  at a base monthly rate of
$21,163 plus a $3,342 monthly common area  maintenance fee. In January 2003, the
Company  renegotiated  a  three-year  lease  with Eden Roc at a monthly  rate of
$9,295 plus a $1,859 common area  maintenance  fee for the year 2003,  with rate
increases to $9,574 for 2004 and to $9,861for 2005.  Pursuant to the lease,  the
Company pays all real estate and personal property taxes and the insurance costs
on the premises.

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

Item 3. Legal Proceedings

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

         An action was  brought  against the  Company on  September  11, 2000 by
PhotoMed  International,  Inc.  and  Daniel  M.  Eichenbaum,  M.D.  in the Third
District Court of Salt Lake County, State of Utah. The action involves an amount
of royalties  that are allegedly due and owing to PhotoMed  International,  Inc.
and Dr. Eichenbaum under a license agreement dated July 7, 1993, with respect to
the sale of certain equipment, plus costs and attorneys' fees. Certain discovery
has taken place and the Company has paid royalties of $15,717, which the Company

                                       18
<PAGE>

believes  brings all payments  current as of the date of last payment on January
7, 2005. The Company has been working with PhotoMed and Dr. Eichenbaum to ensure
that the calculations  have been correctly made on the royalties paid as well as
the proper method of calculation for the future.

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

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

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

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

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

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

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

                                       19
<PAGE>

by the second  order of $35 million in  equipment  to be  completed in the third
year. The press release  further stated that delivery would be made in traunches
of 25 complete  sets of the Company's  equipment,  beginning in 30 days from the
date of the purchase order.

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

         On June 2, 2003, a complaint  was filed in the United  States  District
Court,  captioned Michael Marrone v. Paradigm Medical  Industries,  Inc., Thomas
Motter,  Mark Miehle and John  Hemmer,  Case No. 2:03  CV00513  PGC. On July 11,
2003, a complaint was filed in the same United States District Court,  captioned
Lidia Milian v. Paradigm Medical  Industries,  Inc., Thomas Motter,  Mark Miehle
and John Hemmer,  Case No. 2:03  CV00617PGC.  Both  complaints seek class action
status.  These  cases are  substantially  similar  in nature to the Meyer  case,
including  the  contention  that  as a  result  of  allegedly  false  statements
regarding  the Blood Flow  Analyzer(TM)  and the  purchase  order from  Westland
Financial  Corporation and Valdespino Associates  Enterprises,  the price of the
Company's common stock was  artificially  inflated and the persons who purchased
the  Company's  common  shares  during  the class  period  suffered  substantial
damages.  In a press  release  dated July 11,  2003,  captioned  "Milberg  Weiss
announces the filing of a class action suit against Paradigm Medical Industries,
Inc. on behalf of  investors,"  the law firm of Milberg  Weiss  Bershad  Hynen &
Levach LLP, which represents purchasers of the Company's securities in the class
action  suit  filed  on  July  11,  2003,   stated  that  the  Company   alleged
misrepresentations  caused  the  market  price of the  stock to be  artificially
inflated  during the class  period.  As a result,  it is alleged that  investors
suffered   millions   of  dollars  in  damages   from  the   Company's   alleged
misstatements.

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

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

         The Company has paid $30,000 to U.S.  Fire toward  satisfaction  of the
$250,000 retention that is applicable to the consolidated cases. The Company has
advised U.S.  Fire that it cannot pay the $250,000  retention due to its current
financial  circumstances.  As a  consequence,  on January 8, 2004,  the  Company
entered into a non-waiver  agreement with U.S. Fire in which U.S. Fire agreed to
fund and advance the Company's  retention  obligation in consideration for which
the Company has agreed to reimburse  U.S. Fire the sum of $5,000 a month,  for a
period of six months,  with the first of such payments due on February 15, 2004.
Thereafter,  commencing on August 15, 2004, the Company is currently required to
reimburse  U.S.  Fire the sum of $10,000  per month  until the entire  amount of
$250,000 has been reimbursed to U.S. Fire. The Company has made payments to U.S.
Fire in the aggregate amount of $30,000 of which its last payment of $10,000 was
made on October 11, 2004.  These payments were for the $5,000  monthly  payments
due during the six month  period from  February 15 to July 15,  2004,  leaving a
remaining retention obligation to U.S. Fire of $220,000.

         In the event  U.S.  Fire  determines  that the  Company  or the  former
officers  and  directors  named in the  consolidated  cases are not  entitled to
coverage  under the policy,  or that it is  entitled  to rescind the policy,  or
should the Company be  declared in default  under the  non-waiver  agreement  on
account  of its  failure  to make the  monthly  payments  owed to U.S.  Fire for
funding the Company's retention obligation,  then the Company agrees to pay U.S.
Fire, on demand,  the full amount of all costs advanced by U.S. Fire, except for
those amounts that the Company may have  reimbursed to U.S. Fire pursuant to the
monthly  payments due under the  non-waiver  agreement.  Moreover,  if U.S. Fire
denies coverage for the  consolidated  cases under the policy,  the Cmpany would
owe its litigation counsel in the class action lawsuits,  for any legal fees not
paid by U.S. Fire. However, U.S. Fire has currently agreed to pay the legal fees
relating to the class action lawsuits.

                                       20
<PAGE>

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

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

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

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

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

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

                                       21
<PAGE>

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

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

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

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

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

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

         An action was filed in June, 2003 in the Third Judicial District Court,
Salt Lake County, State of Utah (Civil No. 030914719) by Franklin Funding,  Inc.
in which it alleges that the Company had entered into a lease  agreement for the
lease of certain equipment for which payment is due. It is claimed that there is
due  and  owing  approximately  $89,988  after  accruing  late  fees,  interest,
repossession  costs,  collection  costs and attorneys' fees. On August 28, 2003,
the Company agreed to a settlement of the case with Franklin Funding by agreeing
to make 24  monthly  payments  of $2,300  to  Franklin  Funding,  with the first
monthly  payment due on August 29, 2003.  As of March 31, 2005,  the Company has
made 19 monthly payments of $2,300 each to Franklin Funding.

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

                                       22
<PAGE>

         On August 3, 2003, a complaint was filed against the Company by Corinne
Powell,  a former  employee,  in the Third Judicial  District  Court,  Salt Lake
County,  State of Utah (Civil No. 030918364).  Defendants consist of the Company
and Randall A. Mackey, Dr. David M. Silver and Keith D. Ignotz, directors of the
Company.  The complaint alleges that at the time the Company laid off Ms. Powell
on March 25,  2003,  she was owed  $2,030 for  business  expenses,  $11,063  for
accrued vacation days, $12,818 for unpaid commissions,  the fair market value of
50,000  stock  options  exercisable  at $5.00 per share  that she claims she was
prevented from  exercising,  attorney's fees and a continuing wage penalty under
Utah law. On March 29, 2005, the Company agreed to a settlement  with Ms. Powell
of her claims for unpaid business  expenses,  accrued  vacation days, and unpaid
commissions by agreeing to pay her $13,000. The Company has not yet made payment
to Ms. Powell for the agreed upon settlement amount.

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

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

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

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

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

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

                                       23
<PAGE>

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

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

         No  matters  were  submitted  to a vote of the  Company's  shareholders
during the quarter ended December 31, 2004.


                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters

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

         The  Company's  common  stock  and  Class A  warrants  trade on the OTC
Bulletin Board under the respective  symbols of "PMED.OB" and "PMEDW.OB."  Prior
to July 22, 1996, there was no public market for the common stock. From July 22,
1996 to June 25, 2003,  its common stock and Class A warrants were listed on the
Nasdaq  SmallCap  Market.  Since June 25,  2003,  its  common  stock and Class A
warrants  have  traded on the OTC  Bulletin  Board.  As of April 26,  2005,  the
closing sale prices of the common stock and Class A warrants were $.07 per share
and $.01 per  warrant,  respectively.  The  following  are the high and low sale
prices for the  common  stock and Class A warrants  by  quarter as  reported  by
Nasdaq from January 1, 2000 to June 25, 2003 and by the OTC Bulletin Board since
June 25, 2003.
<TABLE>
<CAPTION>

                                                  Common Stock            Class A Warrants
                                                    Price Range              Price Range
         Period (Calendar Year)                  High          Low        High            Low
                                                 ----          ---        ----            ---
<S>                                              <C>           <C>        <C>             <C>
2000
    First Quarter............................    14.50         6.88       6.50            2.63
    Second Quarter...........................    10.50         4.19       3.63            1.19
    Third Quarter............................     6.19         3.38       2.00             .50
    Fourth Quarter...........................     4.94         1.31       1.25             .50

2001
    First Quarter............................     4.13         1.50       1.00             .19
    Second Quarter...........................     3.50         1.61        .74             .19
    Third Quarter............................     2.75         1.86        .45             .16
    Fourth Quarter...........................     3.08         1.94        .39             .17

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

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

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

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

                                       24
<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, 2004,  there were 717 record holders of common stock, six record
holders of Series A preferred  stock,  four record holders of Series B preferred
stock,  no record  holders of Series C  preferred  stock,  one record  holder of
Series D preferred  stock,  14 record  holders of Series E preferred  stock,  52
record holders of Series F preferred  stock,  and two record holders of Series G
preferred stock.

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

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

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

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

Critical Accounting Policies

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

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

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

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

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

                                       25
<PAGE>

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

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

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

General

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

         The Company is engaged in the design, development, manufacture and sale
of high technology  diagnostic and surgical eye care products.  Given the "going
concern" status of the Company, management has focused efforts on those products
and activities  that will, in its opinion,  achieve the most resource  efficient
short-term  cash  flow.  As seen in the  results  for the  twelve  months  ended
December  31,  2004,  diagnostic  products  have  been the  major  focus and the
Photon(TM) and other extensive  research and development  projects have been put
on  hold  pending  future  evaluation  when  the  Company's  financial  position
improves.  The  Company  does not  focus on a  specific  diagnostic  product  or
products but, instead, on this entire diagnostic product group.

         During  the year  ended  December  31,  2004,  the  Company  recorded a
reduction in the warranty accrual of approximately  $308,000. This reduction was
a result of a comprehensive analysis by management regarding historical warranty
costs.  Historically,  the Company has recorded a monthly  warranty  expense and
related increase to the warranty accrual.  However,  in recent periods the usage
of the warranty  accrual has  continued to decline.  After  reviewing the recent
historical  data,  management  determined  that the warranty  accrual  should be
reduced by approximately  $308,000.  Management will continue to closely monitor
the warranty  accrual  usage to ensure that the proper  amount has been accrued.
During 2004, the Company also recorded a reduction to the allowance for doubtful
accounts of approximately $369,000.

         During the twelve  months  ended  December 31,  2003,  management  made
certain  adjustments to the financial  statements,  including an increase in the
reserve  for  obsolete  or  estimated  non-recoverable  inventory  of  $484,000,
consisting  of an increase in the reserve of  $403,000,  offset by a decrease of
$887,000 due to the sale of the  SIStem(TM) and the  Odyssey(TM)  product lines,
which were fully  reserved.  The  Company  also  recorded a net  increase in the
allowance  for  doubtful   accounts   receivable  of  $123,000,   impairment  of
intangibles  of  $150,000,  and  increases  in  accruals  to settle  outstanding
disputes in the amount of $443,000.

         The Company's ultrasound  diagnostic products include a P55 pachymetric
analyzer,  a P37 Ultrasound A/B Scan, a P40 Ultrasound  BioMicroscope  and a P45
Plus UBM  Ultrasound  BioMicroscope,  the technology for which was acquired from
Humphrey  Systems in 1998.  The Company  introduced  the P45 Plus in the fall of
2000, which combines the A/B Scan, and the biomicroscope into one instrument. In
addition,  the  Company  markets  its Blood Flow  Analyzer(TM)  acquired  in the
purchase of Ocular Blood Flow Ltd. in June 2000. Other  diagnostic  products are
the  Dicon(TM)   LD400  Auto   Perimeter  and  the  Dicon  (TM)  CT200e  Corneal
Topographer,  which were  acquired in the  acquisition  of Vismed d/b/a Dicon in

                                       26
<PAGE>

June 2000. The Company purchased the inventory,  design and production rights of
the  SIStem(TM)  , the Odyssey and the  Surgetrol  from  Mentor  Corporation  in
October 1999, which was designed to perform minimally invasive cataract surgery.
In November  1999,  the Company  entered  into a Mutual  Release and  Settlement
Agreement with the manufacturer of the Precisionist ThirtyThousand(TM), in which
the Company  purchased the raw materials and finished  goods  inventory to bring
the manufacturing of this product  in-house.  During the fourth quarter of 2003,
the Company sold all inventory and rights  associated  with the  SIStem(TM)  and
Odyssey(TM) for $125,000. This transaction resulted in sales of $125,000 with no
cost of sales because a reserve for obsolete  inventory had been recorded on all
SIStem(TM) and Odyssey(TM) inventory.

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

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

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

         On  March  18,  2004,  the  Company  named a new  President  and  Chief
Executive  Officer,  John Y. Yoon.  On March 23, 2004,  the Company named as new
Vice President of Operations and Chief Operating Officer, Aziz A. Mohabbat.

         On May 7, 2002,  the Company  received a letter from the FDA requesting
further  clinical  information  regarding the Photon(TM).  The Company is in the
process of generating  the  additional  clinical  information in response to the
letter.  The Company  cannot market or sell the  Photon(TM) in the United States
until FDA  approval is granted.  On November 4, 2002,  the Company  received FDA
approval  for expanded  indications  of use of the Blood Flow  Analyzer(TM)  for
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

                                       27
<PAGE>

under this code,  and the time  consumed  by the Blood Flow  Analyzer(TM)  test,
which some payors may have believed was less than what is allowed under CPT code
number 92120.  This trend began shortly after  insurance  payors were  presented
with  reimbursement  requests  under this code,  and the Company  believes these
reasons were the basis for the initiation of non-payment.

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

         There were a number of factors  that  contributed  to the  decrease  in
sales of the Blood Flow  Analyzer (TM) and other  products.  September 11, 2001,
the ensuing Afghanistan  conflict,  and the Iraq war had a significant impact on
the Company's  international  sales.  The U.S.  recessionary  economic trend has
impacted its domestic sales.  Additionally,  the Company  restructured its sales
organization  and sales  channels by  decreasing  its direct sales force who are
full-time  employees from 10 direct sales  employees on January 1, 2003, to five
direct  sales  employees on December 31,  2004.  The  dependent  sales force was
reduced  because the Company  does not have  sufficient  revenues to justify the
larger  direct sales force.  One of the  challenges  for fiscal 2005 will be the
judicious reconstruction of the sales force in anticipation of increased sales.

         The  Company  intends to increase  its  efforts to sell its  diagnostic
products through  independent  sales  representatives  and ophthalmic  equipment
distributors,  which are paid  commissions  only for their sales. As of December
31,  2004,  the  Company  had  two  independent  sales  representatives  and two
ophthalmic  equipment  distributors  in the United States and 26 ophthalmic  and
medical  product  distributors  outside the United States.  The Company hopes to
benefit from these recently hired sales  representatives and distributors in the
United  States as they gain  familiarity,  through  training,  of the  Company's
diagnostic  products.  Due to concerns over the budget and the  effectiveness of
trade shows,  the Company  exhibited  at only two trade shows  during 2004.  The
Company  monitors trade show attendance to determine the extent to which it will
exhibit at future trade shows.

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

Results of Operations

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

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

                                       28
<PAGE>

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

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

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

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

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

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

         On a quarterly basis, 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. Such analysis resulted
in a material increase in the reserve for obsolete or estimated  non-recoverable
inventory in 2003.  There can be no assurance that the Company will not identify
further  obsolete  inventory  due to  significant  declines  in sales of certain
products or  technological  advances  of  products  in the  future.  The Company
intends to make efforts to sell many of these items at significantly  discounted
prices.  If items are sold, the cash received would be recorded as revenue,  but
there would be no cost of sales on such items due to the  reserve  that has been
recorded.  At the time of sale, the inventory would be reduced for the item sold
and the corresponding  inventory reserve would also be reduced. The Company does
not expect the sales of these items to be significant in the future.

         During 2003,  the Company sold all  inventory,  rights,  and technology
related to the SIStem(TM) and Odyssey(TM) product lines for $125,000. All of the
inventory  sold  in  this   transaction  had  previously  been  fully  reserved.
Therefore,  upon the sale,  the Company  reduced  inventory  by $887,000 for the
original  book value of the  inventory,  reduced the reserve for  $887,000,  and
recorded revenue for the cash received of $125,000.

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

                                       29
<PAGE>

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

         In addition,  during 2004, the Company collected approximately $369,000
in  receivables  that  were  previously  allowed  for the in the  allowance  for
doubtful accounts. During 2003, the Company increased the allowance for doubtful
accounts by $123,000.  General and administrative  expense for the twelve months
ended  December 31, 2003 also included  $259,000 for 1,562,000  shares of common
stock issued to settle potential litigation. The Company issued 1,262,000 common
shares to six  investors due to a dispute  arising from a private  offering that
was completed on January 22, 2003. The Company agreed to issue the shares to the
investors  in the  offering at $.25 per share  rather  than $.50 per share,  the
original offering price (or an additional 1,262,000 shares) to resolve a dispute
with the investors  concerning  certain  statements  made by a former officer in
connection  with the sale of said shares.  The  additional  300,000  shares were
issued to settle an  outstanding  dispute with a consultant  regarding  services
performed by such consultant.

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

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

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

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

Liquidity and Capital Resources

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

                                       30
<PAGE>

         The Company had working  capital  deficit of $84,000 as of December 31,
2004. In the past,  the Company has relied  heavily upon sales of its common and
preferred stock to fund  operations.  There can be no assurance that such equity
funding will be available on terms acceptable to the Company in the future.  The
Company will continue to seek funding to meet its working  capital  requirements
through  collaborative  arrangements and strategic alliances,  additional public
offerings  and  private  placements  of  the  Company's  securities;   and  bank
borrowings.  In July 2004,  the Company  sold its  investment  in  International
Bio-Immune  Systems,  Inc.  for net  proceeds of $505,000  cash.  The Company is
uncertain  whether or not the  combination of the cash received from the sale of
International  Bio-Immune Systems, Inc. stock and the benefits from sales of its
products will be sufficient to assure its operations  through December 31, 2005.
The  Company  will  continue  to seek  funding  through  the sale of common  and
preferred stock.

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

         As of December 31, 2004, the Company had accounts  payable of $752,000,
a  significant  portion  of which  was over 90 days past due.  The  Company  has
contacted  many of the vendors or  companies  that have  significant  amounts of
payables  past  due  in an  effort  to  delay  payment,  renegotiate  a  reduced
settlement  payment,  or  establish  a  longer-term  payment  plan.  While  some
companies have been willing to renegotiate the outstanding amounts,  others have
demanded payment in full. Under certain conditions, including but not limited to
judgments  rendered  against the Company in a court of law, a group of creditors
could  force  the  Company  into  bankruptcy  due to its  inability  to pay  the
liabilities  arising  out of such  judgments  at that time.  In  addition to the
accounts payable noted above, the Company also has non- cancelable capital lease
obligations  and  operating  lease  obligations  that  require  the  payment  of
approximately $194,000 in 2005, and $14,000 in 2006.

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

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

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

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

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

         The  Company has taken  measures to reduce the amount of  uncollectible
accounts  receivable  such as  more  thorough  and  stringent  credit  approval,
improved  training and  instruction  by sales  personnel,  and  frequent  direct
communication  with the  customer  subsequent  to delivery  of the  system.  The
allowance for doubtful accounts was 14% of total  outstanding  receivables as of
December 31, 2004 and 40% as of December 31, 2003.  The  allowance  for doubtful
accounts  has  decreased  from  $470,000  at  December  31,  2003 to $101,000 at
December 31, 2004.  The decrease in the allowance for doubtful  accounts was the
result of the  collection of  approximately  $369,000 of  receivables  that were
previously allowed as part of the allowance for doubtful accounts.  The downturn
in the economy  worldwide  has resulted in increased  difficulty  in  collecting
certain accounts.  Certain  international dealers have some aged unpaid invoices
that have not been resolved. The Company has addressed its credit procedures and
collection efforts and have instituted changes that require more payments at the
time of sale through letters of credit and not on a credit term basis.

         The Company intends to continue its efforts to reduce the allowance for
doubtful  accounts  as a  percentage  of  accounts  receivable.  The Company has
ongoing  efforts to collect a significant  portion of the sales price in advance
of  the  sale  or in a  timely  manner  after  delivery.  The  majority  of  the
receivables  included in the  allowance  for  doubtful  accounts are a result of
sales  before the  Company  implemented  the  various  changes  to  improve  the


                                       31
<PAGE>


collectibility  of the  Company's  receivables.  During the twelve  months ended
December 31,  2004,  the Company had a net  recovery of  receivables  previously
allowed for of $369,000,  and during the twelve months ended  December 31, 2003,
the Company added a net of $123,000 to the allowance for doubtful accounts.  The
Company believes that by requiring a large portion of payment prior to shipment,
it has greatly improved the collectibility of its receivables.

         The  Company   carried  an   allowance   for   obsolete  or   estimated
non-recoverable  inventory of $1,418,000 at December 31, 2004 and  $1,642,000 at
December  31,  2003,  or   approximately   66%  and  62%  of  total   inventory,
respectively. This inventory reserve was increased by $224,000 during the twelve
months ended December 31, 2004 due to direct write-off of inventory  against the
reserve. Therefore, this decrease in the reserve did not impact costs of sales..
The  Company's  means of expansion and  development  of product has been largely
from  acquisition of  businesses,  product lines,  existing  inventory,  and the
rights to specific products. Through such acquisitions, the Company has acquired
substantial  inventory,  some of which the eventual use and  recoverability  was
uncertain.  In  addition,  the Company  has a  significant  amount of  inventory
relating to the Photon(TM) laser system, which does not yet have FDA approval in
order to sell the product domestically.  Therefore,  the allowance for inventory
was established to reserve for these potential eventualities.

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

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

Effect of Inflation and Foreign Currency Exchange

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

Impact of New Accounting Pronouncements

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

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


                                       32
<PAGE>

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

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

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

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

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

Item 8. Financial Statements and Supplementary Data


                                       33

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


<PAGE>


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Index to Financial Statements

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








                                                                          Page
                                                                          ----


Report of Chisholm, Bierwolf & Nilson                                     F-2


Report of Tanner LC                                                       F-3


Balance Sheet                                                             F-4


Statements of Operations                                                  F-5


Statements of Stockholders' Equity                                        F-6


Statements of Cash Flows                                                  F-7


Notes to Financial Statements                                             F-8



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




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of Paradigm Medical  Industries,
Inc. as of December 31, 2004, and the results of their operations and their cash
flows  for the  year  then  ended,  in  conformity  with  accounting  principles
generally accepted in the United States of America.

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

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


                                                                             F-2

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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

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

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

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

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


Tanner LC
Salt Lake City, Utah
March 5, 2004

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

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

              Assets
              ------

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

                  Total current assets                                1,573,000

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

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

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

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

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

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

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

Commitments and contingencies                                                 -

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

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

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

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

See accompanying notes to financial statements.                              F-4

<PAGE>
<TABLE>
<CAPTION>

                                                                PARADIGM MEDICAL INDUSTRIES, INC.
                                                                         Statements of Operations

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


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

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

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

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

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

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

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

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

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

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


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

See accompanying notes to financial statements.                                               F-5

</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                                                                                       PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                      Statements of Stockholders' Equity

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

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

<S>                                     <C>        <C>         <C>        <C>            <C>               <C>
Balance at January 1, 2003              $     -    21,954,238  $ 22,000   $ 56,775,000   $ (294,000)       $ (53,656,000)

Conversion of preferred stock                 -       115,998         -              -            -                    -

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

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

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

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

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

Balance at December 31, 2003              2,000    25,372,794    25,000    57,470,0000            -          (56,817,000)

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

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

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

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

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

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

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

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


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

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

               Gain on sale of investment                                       (505,000)                 -

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

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

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

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

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

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

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

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

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

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


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

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

                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements

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

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

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

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

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

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

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


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


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


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

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

                        Intangible  assets  determined to have indefinite useful
                        lives  are  not   amortized.   The  Company  tests  such
                        intangible  assets  with  indefinite  useful  lives  for
                        impairment  annually  or more  frequently  if  events or
                        circumstances  indicate that an asset might be impaired.
                        Intangible  assets determined to have definite lives are
                        amortized  on a  straight-line  basis over their  useful
                        lives.  Product  rights,  capitalized  engineering,  and
                        patents  were fully  amortized  as of December 31, 2004.
                        The Company reviews such intangible assets with definite
                        lives for  impairment  to ensure they are  appropriately
                        valued  if  conditions   exist  that  may  indicate  the
                        carrying value may not be  recoverable.  Such conditions
                        may include an economic  downturn in a geographic market
                        or a change in the assessment of future operations.

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

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


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


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



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

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

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

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

                        The following table illustrates the effect on net income
                        and  earnings  per share if the  company had applied the
                        fair value recognition  provisions of FASB Statement No.

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


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



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

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

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

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

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

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

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

    Expected dividend yield            $                 - $               -
    Expected stock price
      Volatility                               112% - 173%         110%-117%
    Risk-free interest rate                             4%                4%
    Expected life of options                     2-7 years         2-7 years


                        The  weighted  average  fair  value of  options  granted
                        during 2004 and 2003 are $0.09 and $0.16, respectively.

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


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


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


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

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

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

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

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


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


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

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


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


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



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

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

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

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

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

                        During the years ended  December  31, 2004 and 2003,  no
                        single  customer  represented  more than 10  percent  of
                        total net sales.

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


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


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

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

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

                        Reclassifications
                        Certain  amounts in the 2003 financial  statements  have
                        been  reclassified to conform to the presentation of the
                        current year financial statements.

                        Series G Preferred Stock Dividends

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


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


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



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

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

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

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



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


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


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

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

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

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

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


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

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

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



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


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



4.   Intangible         Amortization  expense for the years ended  December  31,
     Assets             2004 and 2003 was $3,000 and $79,000, respectively.
     Continued
                        During the year ended  December  31,  2003,  the Company
                        evaluated  the  carrying  value of its  unissued  patent
                        costs   and   product   and   technology    rights   for
                        recoverability.  This  analysis,  based on the estimated
                        future cash flows associated with such assets,  resulted
                        in an impairment  expense of $81,000  related to patents
                        and product and technology rights.

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


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

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

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

6.   Lease              During the years ended  December 31, 2004 and 2003,  the
     Obligations        Company leased certain  equipment  under  noncancellable
                        capital  leases.  These  leases  provide the Company the
                        option to purchase  the leased  assets at the end of the
                        initial lease term. Assets under capital leases included
                        in fixed assets and are as follows:

                        Computer and other equipment              $     291,000

                        Less accumulated amortization                  (212,000)
                                                                  -------------

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

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


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


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



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

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

                                                                         68,000

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

                        Present value of future minimum
                           lease payments                                61,000

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

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

                        The Company  leases office and warehouse  space under an
                        operating   lease   agreement.   Future  minimum  rental
                        payments under the noncancellable  operating lease as of
                        December 31, 2004 are approximately as follows:

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

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

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

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


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


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


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

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

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

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

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

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

                                                                 18,721,000

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

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

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


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


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


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

8.   Capital            The Company has  established a series of preferred stock
     Stock              with a total of  5,000,000  authorized  shares and a par
                        value of $.001,  and one  series of common  stock with a
                        par value of $.001 and a total of 80,000,000  authorized
                        shares.

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

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

                        2.   Upon the liquidation of the Company, the holders of
                             the  Series  A  Preferred  Stock  are  entitled  to
                             receive, prior to any distribution of any assets or
                             surplus  funds to the  holders  of shares of common
                             stock or any other stock,  an amount equal to $1.00
                             per share,  plus any accrued  and unpaid  dividends
                             related   to  the   fiscal   year  in  which   such
                             liquidation occurs. Total liquidation preference at
                             December 31, 2004 was $6,000.

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

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


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


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



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

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

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

                        2.   Upon the liquidation of the Company, the holders of
                             the  Series  B  Preferred  Stock  are  entitled  to
                             receive, prior to any distribution of any assets or
                             surplus  funds to the  holders  of shares of common
                             stock or any other stock,  an amount equal to $4.00
                             per share,  plus any accrued  and unpaid  dividends
                             related   to  the   fiscal   year  in  which   such
                             liquidation   occurs.   Such  right,   however,  is
                             subordinate  to the rights of the holders of Series
                             A  Preferred  Stock to  receive a  distribution  of
                             $1.00 per share plus accrued and unpaid  dividends.
                             Total  liquidation  preference at December 31, 2004
                             was $36,000.

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

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

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


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


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




8.   Capital            Series C Preferred Stock
     Stock              In January 1998, the Company  authorized the issuance of
     Continued          a total of 30,000  shares of Series C  Preferred  Stock,
                        $.001 par value,  $100 stated value.  As of December 31,
                        2004 there were no Series C Preferred  Stock  issued and
                        outstanding.  The  Series  C  Preferred  Stock  have the
                        following rights and privileges:

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

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

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

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

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

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

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


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


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




8.   Capital            Series D Preferred Stock - Continued
     Stock              an amount  per  share  equal to the  greater  of (a) the
     Continued          amount they would have  received had they  converted the
                        shares  into  Common  Stock  immediately  prior  to such
                        liquidation plus all declared but unpaid  dividends;  or
                        (b) the  stated  value,  subject  to  adjustment.  Total
                        liquidation preference at December 31, 2004 was $9,000.

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

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

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

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

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


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


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



8.   Capital            Series E Preferred Stock - Continued
     Stock              dividends;   or  (b)  the  stated   value,   subject  to
     Continued          adjustment. Total liquidation preference at December 31,
                        2004 was $100,000.

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

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

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

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

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

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


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



8.   Capital            Series F Preferred Stock - Continued
     Stock              2.  Upon the liquidation of the Company,  the holders of
     Continued              the Series F Preferred Stock are entitled to receive
                            an amount per share  equal to the greater of (a) the
                            amount they would have  received had they  converted
                            the shares into Common  Stock  immediately  prior to
                            such   liquidation  plus  all  declared  but  unpaid
                            dividends;  or (b)  the  stated  value,  subject  to
                            adjustment. Total liquidation preference at December
                            31, 2004 was $245,000.

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

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

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

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


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


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



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

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

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


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


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



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

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

Issuance of
 Series G
 preferred
 stock for
 cash              -        -      -         -       -     -         -       -       -        -         -        - 1,764,706 $ 2,000
Issuance of
 Series G
 preferred
 stock for
 commissions       -        -      -         -       -     -         -       -       -        -         -        -   216,854 $     -
Conversion of
 preferred
 stock             -        -      -         -       -     -         -       -    (500)       -    (1,675)       -         -       -
             -----------------------------------------------------------------------------------------------------------------------
Balance at
 December
 31, 2003      5,627        -  8,986         -       -     -     5,000       -   1,000        -     4,597        - 1,981,560   2,000

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

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

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

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

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

</TABLE>


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


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


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

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

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

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

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

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

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

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



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


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



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



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

Outstanding at
   January 1, 2003                2,486,535         2,565,022 $    2.00 - 12.98
     Granted                      2,150,000         1,404,986       0.16 - 0.25
     Exercised                            -                 -                 -

     Expired                              -        (1,162,025)      5.06 - 8.12
     Forfeited                   (1,008,079)                -       0.21 - 6.00
                              --------------------------------------------------
Outstanding at
  December 31, 2003               3,628,456         2,807,983
     Granted                      1,775,000                 -       0.10 - 0.14

     Exercised                            -                 -                 -

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

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

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

  $  0.16 - 0.75    3,724,986        2.76 $     0.20      2,236,653  $    0.34
     2.00 - 5.00    2,267,301        2.27       3.62      2,350,676       3.73
     6.00 - 8.13      275,000        1.00       3.27        275,000       6.55
           12.98       25,883         N/A      12.98         25,883      12.98
-----------------------------------------------------   -----------------------

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

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


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



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

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

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

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

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

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

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


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


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


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

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

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

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

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

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


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

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

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

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



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


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



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

16.  Commitments and    Consulting Agreements
     Contingencies      On April 3, 2003, the Company  entered into a consulting
                        agreement with Kinexsys Corporation ("Kinexsys").  Under
                        the terms of the agreement,  Kinexsys through its Senior
                        Partner,  Timothy R.  Forstrom,  is to prepare a capital
                        markets   plan   and   a   corporate   positioning   and
                        communications plan for the Company,  for which Kinexsys
                        is to receive  warrants to purchase up to 200,000 shares
                        of the  Company's  common stock at an exercise  price of
                        $.16 per share. The capital markets plan is to include a
                        detailed   analysis  of  the  Company's  capital  market
                        structure  in  relation  to  current  investors,  market
                        trends   and    projected    equity    movements,    and
                        recommendations  on capital management  strategies.  The
                        corporate  positioning  and  communications  plan  is to
                        include a  corporate  positioning  matrix  for  markets,
                        analysts,  customers and partners,  and a communications
                        plan.  The  agreement is for a one-year  term but may be
                        renewed at the  option of both  parties.  The  Agreement
                        expired on April 3, 2004.

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

                        During the year ended  December 31, 2000,  in connection
                        with the  acquisition  of OBF,  the  Company  entered  a
                        consulting agreement with the former owner of OBF, which
                        required  monthly  payments of $6,000 through June 2003.
                        As of December 31, 2003,  this  agreement was settled in
                        conjunction  with the  royalty  agreement  for the Blood
                        Flow Analyzer (see Royalty Agreements in Note 14).



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


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


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

                        An action was brought  against the Company on  September
                        11, 2000 by PhotoMed  International,  Inc. and Daniel M.
                        Eichenbaum,  M.D.  in the Third  District  Court of Salt
                        Lake  County,  State of Utah.  The  action  involves  an
                        amount of royalties  that are allegedly due and owing to
                        PhotoMed International,  Inc. and Dr. Eichenbaum under a
                        license  agreement  dated July 7, 1993,  with respect to
                        the sale of certain equipment, plus costs and attorneys'
                        fees.  Certain discovery has taken place and the Company
                        has  paid  royalties  of  $16,000,   which  the  Company
                        believes  brings all payments  current as of the date of
                        last  payment on January 7, 2005.  The  Company has been
                        working with PhotoMed and Dr.  Eichenbaum to ensure that
                        the  calculations   have  been  correctly  made  on  the
                        royalties   paid  as  well  as  the  proper   method  of
                        calculation for the future.

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

                        On May 14,  2003,  a  complaint  was filed in the United
                        States  District  Court,  District  of  Utah,  captioned
                        Richard Meyer,  individually and on behalf of all others
                        similarly suited v. Paradigm Medical  Industries,  Inc.,
                        Thomas  Motter,  Mark Miehle and John  Hemmer,  Case No.
                        2:03 CV00448TC.  The complaint also indicates that it is
                        a "Class  Action  Complaint  for  Violations  of Federal


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


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



16.  Commitments and    Litigation - Continued
     Contingencies      Securities Law and  Plaintiffs  Demand a Trial by Jury."
     Continued          The Company  has  retained  legal  counsel to review the
                        complaint,  which appears to be focused on alleged false
                        and misleading  statements  pertaining to the Blood Flow
                        Analyzer(TM)   and  concerning  a  purchase  order  from
                        Valdespino Associates Enterprises and Westland Financial
                        Corporation.

                        More  specifically,   the  complaint  alleges  that  the
                        Company  falsely  stated in its  Securities and Exchange
                        Commission  filings  and  press  releases  that  it  had
                        received authorization to use an insurance reimbursement
                        CPT  code  from the CPT Code  Research  and  Development
                        Division of the  American  Medical 16.  Commitments  and
                        Association for  reimbursement  to doctors in connection
                        with the Blood Flow Contingencies  Analyzer(TM),  adding
                        that  the  CPT  code  provides  for a  reimbursement  to
                        doctors  Continued  of $57.00 per patient for use of the
                        Blood Flow Analyzer(TM). According to the complaint, the
                        CPT code was  critical.  Without a  reimbursement  code,
                        physicians   would   not   purchase   the   Blood   Flow
                        Analyzer(TM) because they could not receive compensation
                        for performance of medical  procedures using the medical
                        device.  The complaint further contends that the Company
                        never  received the CPT code from the  American  Medical
                        Association  at any time.  Nevertheless,  it is  alleged
                        that the Company  continued to  misrepresent  in its SEC
                        filings and press  releases that it had received the CPT
                        code. It is also alleged that the Company has never made
                        a  full,  corrective  disclosure  with  respect  to this
                        alleged misstatement.

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



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


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



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

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

                        On July 11,  2002,  the Company  issued a press  release
                        that stated it received a purchase order from Valdespino
                        Associates    Enterprises    and   Westland    Financial
                        Corporation  for  200  complete  sets  of the  Company's
                        entire  product  portfolio  of  diagnostic  and surgical
                        equipment for Mexican  ophthalmic  practitioners,  to be
                        followed by a second order of 100 sets of equipment. The
                        press  release was based on a purchase  order dated July
                        10, 2002 that the  Company  entered  into with  Westland
                        Financial  Corporation for the sale of 200 complete sets
                        of the Company's  surgical and  diagnostic  equipment to
                        Mexican ophthalmic practitioners. The press release also
                        stated that the initial order was for $70 million of the


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


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


16.  Commitments and    Litigation - Continued
     Contingencies      Company's  equipment to be filled over a two-year period
     Continued          followed by the second order of $35 million in equipment
                        to be  completed  in the third year.  The press  release
                        further  stated that delivery would be made in traunches
                        of  25  complete  sets  of  the   Company's   equipment,
                        beginning  in 30 days  from  the  date  of the  purchase
                        order.

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

                        On June 2,  2003,  a  complaint  was filed in the United
                        States  District  Court,  captioned  Michael  Marrone v.
                        Paradigm Medical  Industries,  Inc., Thomas Motter, Mark
                        Miehle and John  Hemmer,  Case No. 2:03  CV00513 PGC. On
                        July 11, 2003, a complaint  was filed in the same United
                        States  District   Court,   captioned  Lidia  Milian  v.
                        Paradigm Medical  Industries,  Inc., Thomas Motter, Mark
                        Miehle and John Hemmer,  Case No. 2:03 CV00617PGC.  Both
                        complaints  seek class  action  status.  These cases are
                        substantially  similar  in  nature  to the  Meyer  case,
                        including the  contention  that as a result of allegedly
                        false statements regarding the Blood Flow AnalyzerTM and
                        the purchase order from Westland  Financial  Corporation
                        and Valdespino Associates Enterprises,  the price of the
                        Company's common stock was artificially inflated and the
                        persons who purchased the Company's common shares during
                        the class  period  suffered  substantial  damages.  In a
                        press  release dated July 11, 2003,  captioned  "Milberg


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


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


16.  Commitments and    Litigation - Continued
     Contingencies      Weiss  announces  the  filing  of a  class  action  suit
     Continued          against Paradigm Medical  Industries,  Inc. on behalf of
                        investors,"  the law firm of Milberg Weiss Bershad Hynen
                        &  Levach  LLP,  which  represents   purchasers  of  the
                        Company's  securities  in the class action suit filed on
                        July  11,   2003,   stated  that  the  Company   alleged
                        misrepresentations  caused the market price of the stock
                        to be artificially  inflated during the class period. As
                        a result, it is alleged that investors suffered millions
                        of  dollars  in  damages  from  the  Company's   alleged
                        misstatements.

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

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



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


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


16.  Commitments and    Litigation - Continued
     Contingencies      The  Company  has  paid  $30,000  to  U.S.  Fire  toward
     Continued          satisfaction   of  the   $250,000   retention   that  is
                        applicable to the  consolidated  cases.  The Company has
                        advised  U.S.  Fire  that it  cannot  pay  the  $250,000
                        retention due to its current financial circumstances. As
                        a consequence,  on January 8, 2004, the Company  entered
                        into a non-waiver agreement with U.S. Fire in which U.S.
                        Fire agreed to fund and advance the Company's  retention
                        obligation  in  consideration  for which the Company has
                        agreed to reimburse U.S. Fire the sum of $5,000 a month,
                        for a  period  of six  months,  with  the  first of such
                        payments   due  on  February   15,   2004.   Thereafter,
                        commencing on August 15, 2004,  the Company is currently
                        required to reimburse  U.S.  Fire the sum of $10,000 per
                        month  until  the  entire  amount of  $250,000  has been
                        reimbursed to U.S.  Fire.  The Company has made payments
                        to U.S. Fire in the aggregate amount of $30,000 of which
                        its last  payment  of $10,000  was made on  October  11,
                        2004.   These  payments  were  for  the  $5,000  monthly
                        payments due during the six month  period from  February
                        15 to July  15,  2004,  leaving  a  remaining  retention
                        obligation to U.S. Fire of $220,000.

                        In the event U.S.  Fire  determines  that the Company or
                        the  former   officers  and   directors   named  in  the
                        consolidated  cases are not  entitled to coverage  under
                        the  policy,  or  that it is  entitled  to  rescind  the
                        policy,  or should the  Company be  declared  in default
                        under the non-waiver agreement on account of its failure
                        to make  the  monthly  payments  owed to U.S.  Fire  for
                        funding the  Company's  retention  obligation,  then the
                        Company  agrees to pay U.S.  Fire,  on demand,  the full
                        amount of all costs  advanced by U.S.  Fire,  except for
                        those  amounts that the Company may have  reimbursed  to
                        U.S. Fire pursuant to the monthly payments due under the
                        non-waiver  agreement.  Moreover,  if U.S.  Fire  denies
                        coverage  for the  consolidated  cases under the policy,
                        the  Company  would owe its  litigation  counsel  in the
                        class  action  lawsuits,  for any legal fees not paid by
                        U.S. Fire.  However,  U.S. Fire has currently  agreed to
                        pay  the  legal  fees   relating  to  the  class  action
                        lawsuits.

                        The  Company  will be in  default  under the  non-waiver
                        agreement  if it fails to make any  payment  due to U.S.
                        Fire  thereunder  when such payment is due, or institute
                        proceedings  to be adjudicated as bankrupt or insolvent.
                        U.S.  Fire's  obligation to advance  defense costs under
                        the  agreement  will  terminate  in the  event  that the
                        $5,000,000  policy limit of liability is  exhausted.  If



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


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



16.  Commitments and    Litigation - Continued
     Contingencies      U.S.  Fire denies  coverage for the  consolidated  cases
     Continued          under the policy and the  Company is not  successful  in
                        defending  and  protecting  its  interests in the cases,
                        resulting   in  a  judgment   against  the  Company  for
                        substantial  damages,  the Company  would not be able to
                        pay such liability and, as a result,  would be forced to
                        seek bankruptcy protection.

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

                        The complaint  also claims that 491,250 of the shares to
                        be  issued   to   Innovative   in  the  asset   purchase
                        transaction  were not  issued on a timely  basis and the
                        Company also did not file a registration  statement with
                        the  Securities  and  Exchange  Commission  within  five
                        months  of  the  closing  date  of  the  asset  purchase
                        transaction. As a result, the complaint alleges that the
                        value of the shares of the Company's common stock issued
                        to  Innovative   in  the   transaction   declined,   and


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


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


16.  Commitments and    Litigation - Continued
     Contingencies      Innovative and Barton  suffered  damages in an amount to
     Continued          be proven at trial.  The Company  filed an answer to the
                        complaint   and   also   filed   counterclaims   against
                        Innovative  and  Barton  for  breach  of  contract.  The
                        Company  believes  the  complaint  is without  merit and
                        intends to  vigorously  defend and protect its interests
                        in the  action.  If the  Company  is not  successful  in
                        defending and  protecting  its interests in this action,
                        resulting   in  a  judgment   against  the  Company  for
                        substantial  damages,  and U.S. Fire denies  coverage in
                        the   litigation   under  the   Directors  and  Officers
                        Liability and Company  Reimbursement Policy, the Company
                        would  not be  able  to pay  such  liability  and,  as a
                        result, would be forced to seek bankruptcy protection.

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

                        The  purpose  of  these  statements,  according  to  the
                        complaint, was to induce investors to purchase shares of
                        the  Company's  Series E  preferred  stock in a  private
                        placement  transaction at artificially  inflated prices.
                        The  complaint  contends  that  as  a  result  of  these
                        statements,  the investors that purchased  shares of its
                        Series  E  preferred  stock  in  the  private   offering
                        suffered  substantial damages to be proven at trial. The
                        complaint  also  alleges  that the Company sold Series E
                        preferred  shares without  registering  the sale of such
                        shares or obtaining an exemption from registration.  The
                        complaint requests rescission,  compensatory damages and
                        treble damages,  including interest and attorneys' fees.


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


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



16.  Commitments and    Litigation - Continued
     Contingencies      The  Company  filed  an  answer  to the  complaint.  The
     Continued          Company  believes  the  complaint  is without  merit and
                        intends  to  vigorously  defend  its  interests  in  the
                        action.  If the Company is not  successful  in defending
                        and protecting its interests in the action, resulting in
                        a judgment against it for substantial  damages, and U.S.
                        Fire  denies  coverage  in  the  litigation   under  the
                        Directors    and   Officers    Liability   and   Company
                        Reimbursement  Policy,  the Company would not be able to
                        pay such liability and, as a result,  would be forced to
                        seek bankruptcy protection.

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

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

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


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


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


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

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

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

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

                        An  action  was  filed on June 20,  2003,  in the  Third
                        Judicial District Court, Salt Lake County, State of Utah
                        (Civil No. 030914195) by CitiCorp Vendor Finance,  Inc.,
                        formerly  known as Copelco  Capital,  Inc. The complaint
                        claims that $50,000 plus interest is due for the leasing
                        of  three  copy  machines  that  were  delivered  to the
                        Company's Salt Lake City facilities on or about April of



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


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


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

                        An action was filed in June,  2003 in the Third Judicial
                        District Court,  Salt Lake County,  State of Utah (Civil
                        No.  030914719)  by Franklin  Funding,  Inc. in which it
                        alleges  that  the  Company  had  entered  into a  lease
                        agreement  for the lease of certain  equipment for which
                        payment  is due.  It is  claimed  that  there is due and
                        owing  approximately  $89,988 after  accruing late fees,
                        interest,   repossession  costs,  collection  costs  and
                        attorneys'  fees. On August 28, 2003, the Company agreed
                        to a  settlement  of the case with  Franklin  Funding by
                        agreeing  to make  24  monthly  payments  of  $2,000  to
                        Franklin Funding,  with the first monthly payment due on
                        August 29, 2003.  As of March 31, 2005,  the Company has
                        made 19  monthly  payments  of $2,000  each to  Franklin
                        Funding.

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



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


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


16.  Commitments and    Litigation - Continued
     Contingencies      intends to  vigorously  defend  against any legal action
     Continued          that Dr. MacLeod may bring.

                        On August 3, 2003,  a  complaint  was filed  against the
                        Company by Corinne  Powell,  a former  employee,  in the
                        Third Judicial District Court,  Salt Lake County,  State
                        of Utah (Civil No. 030918364). Defendants consist of the
                        Company and Randall A.  Mackey,  Dr. David M. Silver and
                        Keith D. Ignotz, directors of the Company. The complaint
                        alleges that at the time the Company laid off Ms. Powell
                        on March 25,  2003,  she was owed  $2,000  for  business
                        expenses, $11,000 for accrued vacation days, $13,000 for
                        unpaid  commissions,  the fair  market  value of  50,000
                        stock  options  exercisable  at $5.00 per share that she
                        claims she was  prevented  from  exercising,  attorney's
                        fees and a continuing  wage  penalty  under Utah law. On
                        March 29, 2005, the Company agreed to a settlement  with
                        Ms. Powell of her claims for unpaid  business  expenses,
                        accrued   vacation  days,  and  unpaid   commissions  by
                        agreeing  to pay her  $13,000.  The  Company has not yet
                        made   payment  to  Ms.   Powell  for  the  agreed  upon
                        settlement amount.

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

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


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


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


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

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

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


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


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


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

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

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

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

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


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


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


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

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

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

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

18.  Recent             In December 2003, the FASB issued  Interpretation No. 46
     Accounting         ("FIN 46R") (revised  December 2003),  Consolidation  of
     Pronounce-         Variable   Interest   Entities,   an  Interpretation  of
     ments              Accounting  Research  Bulletin No. 51 ("ARB 51"),  which
                        addresses  how a  business  enterprise  should  evaluate
                        whether  it  has a  controlling  interest  in an  entity
                        though  means other than voting  rights and  accordingly
                        should  consolidate  the entity.  FIN 46R replaces  FASB
                        Interpretation  No.  46 (FIN 46),  which  was  issued in
                        January 2003.  Before  concluding that it is appropriate
                        to apply ARB 51 voting interest  consolidation  model to
                        an entity,  an enterprise  must first determine that the
                        entity is not a variable  interest  entity (VIE).  As of
                        the effective date of FIN 46R, an enterprise must


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


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


18.  Recent             evaluate  its  involvement  with all  entities  or legal
     Accounting         structures created before February 1, 2003, to determine
     Pronounce-         whether  consolidation  requirements of FIN 46R apply to
     ments              those entities.  There is no  grandfathering of existing
                        entities.  Public  companies must apply either FIN 46 or
                        FIN 46R immediately to entities  Continued created after
                        January  31, 2003 and no later than the end of the first
                        reporting  period that ends after December 15, 2004. The
                        adoption  of  FIN  46 had  no  effect  on the  Company's
                        consolidated  financial position,  results of operations
                        or cash flows.

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

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



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


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



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







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

<PAGE>

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

         None.

Item 8A.  Controls and Procedures

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

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


                                    PART III

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

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

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

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

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

         Aziz A. Mohabbat has served as Chief  Operating  Officer of the Company
since March 23, 2004 and from August 2002 to March 2003,  and as Vice  President
of  Operations  since March 23,  2004 and from 2001 to March 2003.  From 2000 to
2001,  he served as Managing  Director of the San Diego  Division of the Company
and from 1999 to 2000 as its Regulatory  Affairs and Quality Assurance  Manager.
From March 2003 to March 2004, Mr.  Mohabbat  served as Division  Manager of the

                                       34
<PAGE>

Medical  Division of TUV Rheilland of North America,  a medical  products safety
and compliance services company.  From 1997 to 1999, he served as Operations and
Regulatory  Affairs and Quality Assurance Manager of Codan U.S., a subsidiary of
Codan  GmbH,  a  manufacturer  of  disposable  sterile and  non-sterile  medical
devices.  Prior to 1989, Mr. Mohabbat held various management and bioengineering
positions in the medical laboratory and diagnostics field in the Eye Care Clinic
of the  University  Hospital-Eppendorf  and the  General  Hospital of Barmbek in
Hamburg,  Germany.  Mr. Mohabbat  received a B.S.  degree in Medical  Laboratory
Technology in 1986 from St. George Hospital College in Hamburg, Germany. He is a
member of the American Society for Quality Assurance.

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

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

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

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

Appointment of New President and Chief Executive Officer

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

Appointment of New Chief Operating Officer

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

                                       35
<PAGE>

Mohabbat had previously  served as the Company's  Chief  Operating  Officer from
August 2002 to March 2003,  and as Vice  President  of  Operations  from 2001 to
March 2003.

Board Meetings and Committees

         The Board of Directors  held a total of six meetings  during the fiscal
year  ended  December  31,  2004.  No  director  attended  fewer than 75% of all
meetings  of the Board of  Directors  during  the 2004  fiscal  year.  The Audit
Committee of the Board of Directors  consists of directors  Dr. David M. Silver,
Randall A. Mackey,  Keith D. Ignotz and John C. Pingree. The Audit Committee met
one time during the fiscal year.  The Audit  Committee is primarily  responsible
for reviewing the services  performed by its independent  public accountants and
internal audit  department  and  evaluating  its  accounting  principles and its
system of internal accounting controls.  The Compensation Committee of the Board
of Directors consists of directors Dr. David M. Silver, Randall A. Mackey, Keith
D. Ignotz and John C. Pingree.  The  Compensation  Committee met one time during
the fiscal  year.  The  Compensation  Committee  is  primarily  responsible  for
reviewing  compensation  of executive  officers and  overseeing  the granting of
stock options.

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

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

Item 10.  Executive Compensation

         The  following  table sets  forth,  for each of the last  three  fiscal
years,  the  compensation  received by Thomas F. Motter,  former Chairman of the
Board and Chief Executive Officer, and other executive officers whose salary and
bonus for all services in all  capacities  exceed  $100,000 for the fiscal years
ended December 31, 2004, 2003 and 2002.
<TABLE>
<CAPTION>

                           Summary Compensation Table


                                                   Annual Compensation                              Long Term Compensation
                                                                                   Awards                 Payouts
                                                               Other                      Securities
                                                               Annual     Restricted      Underlying    Long-term   All Other
Name and                                                       Compen-    Stock            Options/     Incentive   Compensa-
Principal Position      Year        Salary$       Bonus($)     sation($)  Awards($)        SARs(#)      Payouts($)   tion($)
------------------      ----        -------       --------     ---------  ---------       -------      ----------    -------
<S>                     <C>         <C>              <C>      <C>              <C>      <C>                 <C>    <C>
John Y. Yoon            2004(1)     $110,961(4)      0        $18,494(4)       0        1,000,000(5)        0             0
President and Chief
Executive Officer

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

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

                                       36
<PAGE>

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

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

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

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

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

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

(1)      For the fiscal year ended December 31, 2004
(2)      For the fiscal year ended December 31, 2003
(3)      For the fiscal year ended December 31, 2002
(4)      Of the salary payable to Mr. Yoon pursuant to his employment agreement,
         $110,961  was paid to him  during  2004  and the  remaining  amount  of
         $18,494  payable  in 2004 was  deferred  until the  Company's  board of
         directors has determined that its financial condition is improved.
(5)      On March 18, 2004,  the Company's  board of directors  granted Mr. Yoon
         options to purchase  1,000,000  shares of the Company's common stock at
         an exercise price of $.13 per share.
(6)      Mr.  Mohabbat  has  served a Vice  President  of  Operations  and Chief
         Operating  Officer since March 22, 2004 and as Chief Operating  Officer
         from  August  30,  2002 to March  2003.  He was not an officer in prior
         years.
(7)      The amounts under "All Other Compensation" for 2004 consist of payments
         to Mr. Mohabbat for accrued vacation days prior to his resignation from
         the Company in March 2003.
(8)      On March 19, 2003, the Company's  board of directors  granted Mr. Poore
         options to purchase 1,000,000 shares of its common stock at an exercise
         price of $.16 per share.  These  options were  terminated  on March 18,
         2003 when the  Company's  board of  directors  terminated  Mr.  Poore's
         employment for cause as defined in the employment agreement.
(9)      the  Company  paid  A-Mech  Engineering,  Inc. a total of  $16,616  and
         $18,059 for  consulting  services  during 2003 and 2004,  respectively.
         From 1982 to March 2004,  Mr.  Cullumber  served as President of A-Mech
         Engineering, Inc.
(10)     On November  6, 2003,  the  Company's  board of  directors  granted Mr.
         Cullumber  options to purchase  150,000 shares of the Company's  common
         stock at an  exercise  price  of $.21 per  share.  These  options  were
         terminated  on June 20, 2003, 90 days after Mr.  Cullumber  resigned as
         the Company's Chief Operating Officer and Chief Technical Officer.
(11)     Although Mr. Motter resigned as Chairman and Chief Executive Officer on
         August 30, 2002,  he continued to receive his salary under the terms of
         his employment agreement through December 16, 2002.
(12)     The  amounts  under "All Other  Compensation"  for 2004,  2003 and 2002
         include  payments  related  to  the  operation  of  automobiles  and/or
         automobiles and insurance by the named executives.
(13)     The amounts under "All Other  Compensation"  for 2002 include  payments
         related to the  residential  housing  accommodations  for the Company's
         employees,  living  outside  of Utah  while  they were  working  at its
         corporate  headquarters  in Salt Lake City,  leased from Mr.  Motter at
         $2,500 per month.

                                       37
<PAGE>

(14)     On January 29,  2002,  the  Company's  Board of  Directors  granted Mr.
         Miehle  options to purchase the 55,000  shares of the  Companys  common
         stock at an  exercise  price of $2.75 per  share.  These  options  were
         terminated  on  February  28,  2004,  one year  after  expiration  of a
         six-month  consulting  agreement  with the  Company,  which  expired on
         February 28, 2003.
(15)     On September 3, 2002, the Company  entered into a consulting  agreement
         with Mr.  Miehle in which the  Company is  required  to pay him monthly
         consulting fees of $5,000 over a period of six months. The Company paid
         him a total of $15,000  for  consulting  services  during the months of
         September, October and November of 2002.
(16)     Mr. Maughan served as Interim Chief  Executive  Officer from August 30,
         2002 to March  19,  2003.  He  served  as Vice  President  of  Finance,
         Treasurer  and Chief  Financial  Officer from October 1, 2001 until his
         resignation on May 31, 2003.
(17)     On May 13, 2003, the Company's  Board of Directors  granted Mr. Maughan
         options to purchase  150,000  shares of its common stock at an exercise
         price of $.16 per share.  These  options were  terminated on August 29,
         2003, 90 days after Mr.  Maughan  resigned as Vice President of Finance
         and Chief Financial Officer.

Options

         The  following  table sets forth  information  regarding  stock options
granted during the fiscal year ended December 31, 2004, to each named  executive
officer.
<TABLE>
<CAPTION>
                        Option Grants in Last Fiscal Year


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

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

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

<TABLE>
<CAPTION>

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


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


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


                                       38
<PAGE>

Director Compensation

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

Employee 401(k) Plan

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

1995 Stock Option Plan

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

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

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

                                       39
<PAGE>

Employment Agreements

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

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

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

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

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

         The Company entered into an employment  agreement with Aziz A. Mohabbat
on October 5, 2004, which is effective as of April 1, 2004, and expires on March
18, 2006.  However,  the term shall be extended an additional one year period to
March 18, 2007 in the event Mr.  Mohabbat  moves from San Diego,  California  to

                                       40
<PAGE>

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

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

Severance Agreement

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

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

Consulting Agreement

         On April 3, 2003, the Company entered into a consultant  agreement with
Kinexsys Corporation  ("Kinexsys").  Under the terms of the agreement,  Kinexsys
through its Senior Partner, Timothy R. Forstrom, is to prepare a capital markets
plan and a corporate  positioning and communications  plan for the Company,  for
which  Kinexsys is to receive  warrants to purchase up to 200,000  shares of the
Company's  common  stock at an  exercise  price of $.16 per share.  The  capital
markets plan is to include a detailed  analysis of the Company's  capital market
structure in relation to current  investors,  market trends and projected equity
movements,  and recommendations on capital management strategies.  The corporate
positioning and communications plan is to include a corporate positioning matrix
for markets,  analysts,  customers and partners,  and a communications plan. The
agreement  is for a  one-year  term but may be  renewed  at the  option  of both
parties. The Agreement expired on April 3, 2004.

Item 11. Security Ownership of Certain Beneficial Owners and Management

         The  following  table sets forth  certain  information  with respect to
beneficial  ownership of the Company's common stock as of March 31, 2005 for (i)
each  executive  officer  (ii) each  director,  (iii) each  person  known to the
Company to be the beneficial  owner of more than 5% of the  outstanding  shares,
and (iv) all directors and officers as a group.

                                       41
<PAGE>

                                                                  Percent of
Name and Address(1)                   Number of Shares             Ownership
-------------------                   ----------------             ---------
Douglas A. MacLeod, M.D. (2)               3,068,451                 11.1%
    502 South M Street
    Tacoma Washington 98405
Dr. David M. Silver (3)                      761,166                  2.7%
Randall A. Mackey (3)                        725,000                  2.6%
Keith D. Ignotz (3)                          454,560                  1.6%
John Y. Yoon (3)                             222,224                     *
John C. Pingree (3)                          231,500                     *
Aziz A. Mohabbat (3)                          44,448                     *
                                         -----------
Executive officers and directors
   as a group (six persons)                2,438,898                  8.8%
              -----------------
              *Less than 1%.

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

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

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

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

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

         Randall  A.  Mackey,  a  director  since  January  21,  2000,  and from
September  1995 to  September 3, 1998 and chairman of the board since August 30,
2002, is President and a shareholder of the law firm of Mackey Price & Thompson,
which  rendered  legal services in connection  with various  corporate  matters.
Legal fees and  expenses  paid to Mackey  Price & Thompson  for the fiscal years
ended December 31, 2004 and 2003, totaled $100,000 and $97,000, respectively. As
of December 31, 2004, the Company owed this firm $197,727,  which is included in
accounts payable.


                                       42
<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(10)

3.3      Bylaws(1)

4.1      Warrant  Agency  Agreement  with  Continental  Stock  Transfer  & Trust
         Company(3)

4.2      Specimen Common Stock Certificate (2)

4.3      Specimen Class A Warrant Certificate(2)

4.4      Form of Class A Warrant Agreement(2)

4.5      Underwriter's Warrant with Kenneth Jerome & Co., Inc.(3)

4.6      Warrant to Purchase Common Stock with Note Holders re bridge  financing
         (1)

4.7      Specimen Series C Convertible Preferred Stock Certificate(4)

4.8      Certificate of the Designations,  Powers, Preferences and Rights of the
         Series C Convertible Preferred Stock(4)

4.9      Specimen Series D Convertible Preferred Stock Certificate (6)

4.10     Certificate of the Designations,  Powers, Preferences and Rights of the
         Series D Convertible Preferred Stock (7)

4.11     Warrant to Purchase Common Stock with Cyndel & Co. (6)

4.12     Warrant to Purchase Common Stock with R.F. Lafferty & Co., Inc. (6)

4.13     Warrant to Purchase Common Stock with Dr. Michael B. Limberg (7)

4.14     Warrant to Purchase Common Stock with John W. Hemmer (7)

4.15     Stock Purchase Warrant with Triton West Group, Inc.(9)

4.16     Warrant to Purchase Common Stock with KSH Investment Group, Inc.(9)

4.17     Warrant to Purchase Common Stock with Consulting for Strategic  Growth,
         Ltd.(9)

4.18     Certificate  of  Designations,  Powers,  Preferences  and Rights of the
         Series G Convertible Preferred Stock (14)

10.1     Exclusive Patent License Agreement with PhotoMed(1)

10.2     Consulting Agreement with Dr. Daniel M. Eichenbaum(1)

10.3     1995 Stock Option Plan (1)

10.4     Employment Agreement with Thomas F. Motter (5)

10.5     Stock  Purchase  Agreement  with Ocular  Blood Flow,  Ltd.  and Malcolm
         Redman (7)

10.6     Consulting Agreement with Malcolm Redman (7)

10.7     Royalty Agreement with Malcolm Redman (7)

10.8     Registration Rights with Malcolm Redman (7)

10.9     Employment Agreement with Mark R. Miehle (8)

10.10    Agreements with Steven J. Bayern and Patrick M. Kolenik (8)

10.11    Private Equity Line of Credit  Agreement  with Triton West Group,  Inc.
         (9)

10.12    Asset  Purchase  Agreement  with  Innovative  Optics,  Inc.  and Barton
         Dietrich Investments, L.P.(10)

10.13    Escrow  Agreement  with  Innovative   Optics,   Inc.,  Barton  Dietrich
         Investments, L.P. (10)

10.14    Assignment and Assumption Agreement with Innovative Optics, Inc.(10)

10.15    General Assignment and Bill of Sale with Innovative Optics, Inc.(10)

10.16    Non-Competition and Confidentiality Agreement with Mario F. Barton(10)

10.17    Termination of Employment Agreement with Mark R. Miehle(12)

10.18    Consulting Agreement with Mark R. Miehle(12)

10.19    Employment Agreement with Jeffrey F. Poore (13)

10.20    License Agreement with Sunnybrook Health Science Center(15)

10.21    Major Account Facilitator Contract(15)

                                       43
<PAGE>

10.22    Mutual Release with Douglas A. MacLeod, M.D. and Others(15)

10.23    Purchase Agreement with American Optisurgical, Inc.(15)

10.24    Purchase Order with Westland Financial Corporation(16)

10.25    Non-Waiver Agreement with United States Fire Insurance Company(16)

10.26    Employment Agreement with John Y. Yoon(17)

10.27    Consulting Agreement with Dr. John Charles Casebeer(18)

10.28    Consulting Agreement with Kinexsys Corporation(18)

10.29    Stock Purchase and Sale Agreement with William Ungar (19)

10.30    Employment Agreement with Aziz A. Mohabbat (20)

10.31    Investment Banking Agreement with Alpha Advisory Services, Inc. (21)

10.32    Manufacturing and Distribution Agreement with E-Technologies, Inc. (21)

10.33    Settlement  Agreement with  Innovative  Optics,  Inc.,  Barton Dietrich
         Investments, L.P. and United States Fire Insurance Company (22)

31.1     Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section
         302 of the Sarbanes-Oxley Act of 2002

31.2     Certification pursuant to 18 U.S.C. Section 1350, as enacted by Section
         302 of the Sarbanes-Oxley Act of 2002

32.1     Certification  pursuant to 18 U.S.C.  Section 1350, as adopted pursuant
         to Section 906 of the Sarbanes-Oxley Act of 2002

32.2     Certification  pursuant to 18 U.S.C.  Section 1350, as adopted pursuant
         to Section 906 of the Sarbanes-Oxley Act of 2002

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

(1)      Incorporated by reference from Registration  Statement on Form SB-2, as
         filed on March 19, 1996.

(2)      Incorporated   by  reference  from  Amendment  No.  1  to  Registration
         Statement on Form SB-2, as filed on May 14, 1996.

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

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

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

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

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

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

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

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

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

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

(13)     Incorporated by reference from Registration  Statement on Form SB-2, as
         filed on July 7, 2003.

(14)     Incorporated  by  reference  from  Report on Form  10-QSB,  as filed on
         November 14, 2003.

(15)     Incorporated   by  reference  from  Amendment  No.  2  to  Registration
         Statement on Form SB-2, as filed on December 15, 2003.

(16)     Incorporated   by  reference  from  Amendment  No.  3  to  Registration
         Statement on Form SB-2, as filed on February 27, 2004.

(17)     Incorporated  by reference from Current Report on Form 8-K, as filed on
         March 23, 2004.

(18)     Incorporated by reference from Report in Form 10-KSB, as filed on April
         14, 2004.

(19)     Incorporated  by reference  from  Quarterly  Report on Form 10-QSB,  as
         filed on August 16, 2004.

(20)     Incorporated   by  reference  from  Amendment  No.  6  to  Registration
         Statement on Form SB-2, as filed on October 20, 2004.

(21)     Incorporated  by  reference  from  Report on Form  10-QSB,  as filed on
         November 15, 2004.

(22)     Incorporated  by reference from Current Report on Form 8-K, as filed on
         January 26, 2005.

                                       44
<PAGE>


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

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

Item 14. Principal Accountant- Fees and Services

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

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

                                       45
<PAGE>


                                   SIGNATURES

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


                                    PARADIGM MEDICAL INDUSTRIES, INC.




Dated: April 27, 2005               By: /s/ John Y. Yoon
                                       -------------------------------------
                                       John Y. Yoon,
                                       President and Chief Executive Officer

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

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


/s/ John Y. Yoon        President and Chief Executive Officer     April 27, 2005
---------------------   (Principal Executive Officer)
John Y. Yoon



/s/ Randall A. Mackey   Chairman of the Board and Director        April 27, 2005
---------------------
Randall A. Mackey



/s/ David M. Silver     Director                                  April 27, 2005
---------------------
David M. Silver, Ph.D.



/s/ Keith D. Ignotz     Director                                  April 27, 2005
---------------------
Keith D. Ignotz



/s/ John C. Pingree     Director                                  April 27, 2005
---------------------
John C. Pingree



/s/ Luis A. Mostacero   Controller (Principal Financial and       April 27, 2005
---------------------   Accounting Officer)
Luis A. Mostacero



                                       46