Edgar Filing: PARADIGM MEDICAL INDUSTRIES INC

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-KSB

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006, or

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE:

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

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

PART I

Item 1. Description of Business

General

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Background

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

Overview

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

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

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

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

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

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

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

Products

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

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

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

greater control for the surgeon and allows the safe operation at much higher
vacuum settings by sampling changes in aspiration 100 times per second. Greater
vacuum in phaco surgery means less use of ultrasound or laser energy to fragment
the cataract and less chance for surrounding tissue damage. In addition to the
full complement of surgical modalities (e.g., irrigation, aspiration, bipolar
coagulation and anterior vitrectomy), system automation includes "dimensional"
audio feedback of vacuum levels and voice confirmation for major system
functions, providing an intuitive environment in which the advanced phaco
surgeon can concentrate on the surgical technique rather than the equipment.
Sales of the PrecisionistTM and related accessories were 0% of total revenues in
both the fiscal years 2006 and 2005, respectively.

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

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

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

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

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

surgery. In contrast, the Company's laser system, which utilizes short
centralized energy bursts, should permit the delivery of the laser beam with
less trauma to adjacent tissue. Therefore, unlike ultrasonic systems, whose
vibrations and shock waves affect (and can damage) non-cataracts tissues within
the eye, the Company's PhotonTM laser cataract system should only affect tissues
with which it comes into direct contact.

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

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

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

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

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

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

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

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

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

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

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

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

Dicon(TM) Perimeters: DiconTM perimeters consist of the LD 400, the TKS
5000, and software consisting of FieldLinkTM, FieldViewTM and Advanced
FieldView. Perimeters are used to determine retinal sensitivity testing the
visual pathway. Perimeters have become a standard of care in the detection and

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Commercial Reimbursement % 2005 %2006 Regulatory
Product (1) Product Class Development Status Sales Sales Approvals
-----------------------------------------------------------------------------------------------------------------------------------

P55, P2200 and System, Imaging, Pulsed Complete Yes 2% 3% FDA 510(K) K844299*
P2500 Pachymetric Echo Diagnostic ISO 9001: 1994, EN ISO
Analyzer 9001**

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Marketing and Sales

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

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

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

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

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

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

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

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

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

Research and Development

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

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

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

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

Competition

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

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

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

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

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

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

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

regulatory approvals and manufacture, assemble and successfully market products
either alone or through third parties.

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

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

Intellectual Property Protection

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Regulation

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

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

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

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

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

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

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

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

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

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

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

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

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

Regulatory Status of Products

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

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

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

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

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

Employees

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

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

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

Item 2. Description of Property

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

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

Item 3. Legal Proceedings

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

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

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

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

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

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

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

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

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

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

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

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

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

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

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

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

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

2007
First Quarter .032 .003

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

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

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

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

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

Critical Accounting Policies

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

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

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

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

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

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

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

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

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

General

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Outstanding Commitments to Issue Shares

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

Underlying Shares
Security of Common Stock

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

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

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

Convertible Notes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Simple Conversion Calculation

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

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

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

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

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

*Based on 201,956,394 shares outstanding.

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

Adjustable Conversion Price of Convertible Notes

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

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

Possible Dilution to Stockholders

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

Failure to Repay Convertible Notes May Require Company Operations to Cease

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

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

Results of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Effect of Inflation and Foreign Currency Exchange

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

Impact of New Accounting Pronouncements

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

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

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

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

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

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

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

Item 7. Financial Statements

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

PARADIGM MEDICAL INDUSTRIES, INC.
INDEX TO FINANCIAL STATEMENTS

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

PAGE
----

Report of Independent Registered Public Accounting Firm F-2

Balance Sheet F-3

Statements of Operations F-4

Statements of Stockholders' Equity F-5

Statements of Cash Flows F-6

Notes to Financial Statements F-7

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

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

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

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

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

F-2

PARADIGM MEDICAL INDUSTRIES, INC.
BALANCE SHEET

DECEMBER 31, 2006
----------------------------------------------------------------------------------

ASSETS
------

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

Total current assets 1,572,000

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

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

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

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

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

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

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

Commitments and contingencies -

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

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

Total liabilities and stockholders' (deficit) $ 1,932,000
=============

--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
F-3

PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF OPERATIONS

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

2006 2005
---------------------------

Sales $ 2,195,000 $ 2,201,000
Cost of sales 1,277,000 1,599,000
---------------------------

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

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

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

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

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

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

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

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

--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
F-4

PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY

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

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

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

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

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

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

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

Conversion of preferred stock
- 39,999 - - -

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

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

--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
F-5

PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS

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

2006 2005
--------------------------

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

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

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

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

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

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

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

CASH, END OF YEAR $ 206,000 $ 66,000
==========================

--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
F-6

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

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

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED

trade receivables previously written off are recorded when received.

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

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

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

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

PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation on property and equipment is determined using the straight-line
method over the estimated useful lives of the assets or terms of the lease.
Expenditures for maintenance and repairs are expensed when incurred and
betterments are capitalized. Gains and losses on sale of property and equipment
are reflected in operations. Leasehold improvements are depreciated over the
lesser of the term of the lease or the useful life of the related asset. During

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED

STOCK - BASED COMPENSATION - CONTINUED
granted. The Company calculates the fair value of options and warrants granted
by use of the Black-Scholes pricing model.

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

YEARS ENDED DECEMBER 31,
-----------------------------
2006 2005
-----------------------------

Net income (loss) applicable to common
shareholders- as reported $ (1,820,000) $ (5,390,000)

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

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

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

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,
-------------------------
2006 2005
-------------------------

Expected dividend yield $ - $ -
Expected stock price
Volatility 216%-210% 189%-215%
Risk-free interest rate 4.30%-5.18% 4%
Expected life of options 3-5 years 2-7 years

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED

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

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

FOR THE YEAR ENDED DECEMBER 31, 2005

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED

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

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

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

YEARS ENDED DECEMBER 31,
-------------------------
2006 2005
-------------------------

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

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

- -
-------------------------
Per share amount (0.01) (0.13)
=========================

REVENUE RECOGNITION
Revenues for sales of products that require specific installation and acceptance
by the customer are recognized upon such installation and acceptance by the
customer. Revenues for sales of other

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED

REVENUE RECOGNITION - CONTINUED
surgical systems, ultrasound diagnostic devices, and disposable products are
recognized when the product is shipped. A signed purchase agreement and a
deposit or payment in full from customers is required before a product leaves
the premises. Title passes at time of shipment (F.O.B. shipping point).

RESEARCH AND DEVELOPMENT
Costs incurred in connection with research and development activities are
expensed as incurred. These costs consist of direct and indirect costs
associated with specific projects as well as fees paid to various entities that
perform certain research on behalf of the Company. The total research and
development expenses for the years ended December 2006 and 2005 was $250,000 and
855,000, respectively.

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

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

The nature of the Company's business exposes it to risk from product liability
claims. The Company maintains product liability insurance providing coverage up
to $2 million per claim with an aggregate policy limit of $2 million. Any
losses that the Company may suffer from any product liability litigation could
have a material adverse effect on the Company. As of December 31, 2006, the
company maintained the policy in placed.

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED

CONCENTRATION OF RISK - CONTINUED
countries may affect the ability of medical personnel to purchase the Company's
products and the ability of the customers to pay for the procedures for which
the Company's products are used. Such circumstances could cause a possible loss
of sales, which would affect operating results adversely.

During the years ended December 31, 2006 and 2005, one single customer
represented more than 10 percent of total net sales. Accounts receivable are
due from medical distributors, surgery centers, hospitals, optometrists and
ophthalmologists located throughout the U.S. and a number of foreign countries.
The receivables are generally due within thirty days for domestic customers with
extended terms offered for some international customers. The Company maintains
an allowance for estimated potentially uncollectible amounts.

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

Less: Reductions for payments (10,000)

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED

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

2. GOING CONCERN

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

Receivables
Trade receivables $ 482,000
Allowance for doubtful accounts (72,000)
------------

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

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

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

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

$ 802,000
============

4. INTANGIBLE ASSETS

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

4. INTANGIBLE ASSETS CONTINUED

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

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

5. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

Machinery and equipment $ 765,000
Computer equipment and software 663,000
Furniture and fixtures 252,000
Leasehold improvements 166,000
------------

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

$ 21,000
============

6. LEASE OBLIGATIONS

During the years ended December 31, 2006 and 2005, the Company leased certain
equipment under noncancellable capital leases. These leases provide the Company
the option to purchase the leased assets at the end of the initial lease term.
Assets under capital leases included in fixed assets and are as follows:

Computer and other equipment $ 291,000

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

$ 4,000
==========

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

6. LEASE OBLIGATIONS CONTINUED

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

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

2006 $ 14,000

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

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

Present value of future minimum lease payments 13,000

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

Long-term portion $ -
=========

The Company leases office and warehouse space under an operating lease
agreement. Future minimum rental payments under the noncancellable operating
lease as of December 31, 2006 are approximately as follows:

YEAR ENDING DECEMBER 31, AMOUNT
------------------------ --------

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

Total future minimum rental payments $218,000
========

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

7. INCOME TAXES

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

YEARS ENDED
DECEMBER 31,
------------------------
2006 2005
------------------------

Income tax (provision) benefit at
statutory rate $ 619,000 $ 2,101,000
NOL adjustment - 893,000
Taxable temporary differences 22,000 57,000
Deductible temporary differences (38,000) (156,000)
Non-deductible expenses (351,000) (1,064,000)
Change in valuation allowance (252,000) (1,831,000)
------------------------

$ - $ -
========================

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

----------------------------
2006 2005
----------------------------

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

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

$ - $ -
============================

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

7. INCOME TAXES CONTINUED

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

8. CAPITAL STOCK

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

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

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

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

2. Upon the liquidation of the Company, the holders of the Series A Preferred
Stock are entitled to receive, prior to any distribution of any assets or
surplus funds to the holders of shares of common stock or any other stock,
an amount equal to $1.00 per share, plus any accrued and unpaid dividends
related to the fiscal year in which such liquidation occurs. Total
liquidation preference at December 31, 2006 was $6,000.

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

8. CAPITAL STOCK - CONTINUED

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

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

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

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

Upon the liquidation of the Company, the holders of the Series B Preferred Stock
are entitled to receive, prior to any distribution of any assets or surplus
funds to the holders of shares of common stock or any other stock, an amount
equal to $4.00 per share, plus any accrued and unpaid dividends related to the
fiscal year in which such liquidation occurs. Such right, however, is
subordinate to the rights of the holders of Series A Preferred Stock to receive
a distribution of $1.00 per share plus accrued and unpaid dividends. Total
liquidation preference at December 31, 2006 was $36,000.

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

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

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

--------------------------------------------------------------------------------
F-22

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

8. CAPITAL STOCK CONTINUED

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

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

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

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

8. CAPITAL STOCK CONTINUED

to the greater of (a) the amount they would have received had they
converted the shares into Common Stock immediately prior to such
liquidation plus all declared but unpaid dividends; or (b) the stated
value, subject to adjustment. Total liquidation preference at December 31,
2006 was $9,000.

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

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

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

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

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

--------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
F-24

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

8. CAPITAL STOCK CONTINUED

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

8. CAPITAL STOCK CONTINUED

2. Upon the liquidation of the Company, the holders of the Series F Preferred
Stock are entitled to receive an amount per share equal to the greater of
(a) the amount they would have received had they converted the shares into
Common Stock immediately prior to such liquidation plus all declared but
unpaid dividends; or (b) the stated value, subject to adjustment. Total
liquidation preference at December 31, 2006 was $245,000.

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

8. CAPITAL STOCK CONTINUED

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

8. CAPITAL STOCK CONTINUED

The following table summarizes preferred stock activity during the years ended
December 31, 2006 and 2005:

SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT

Balance at
January 1,
2005 5,627 $ - 8,986 $ - - $ - 5,000 $ - 1,000 $ - 4,598.75 $ -

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

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

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

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

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

SERIES G
SHARES AMOUNT

Balance at
January 1,
2005 1,726,560 $ 2,000

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

Issuance of
Series G
preferred
stock
for cash - -

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

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

Liquidation
preference $147,000
======================

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

9. CONVERTIBLE NOTES

CONVERTIBLE NOTES

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

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

9. CONVERTIBLE NOTES CONTINUED

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

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

The warrants are exercisable until five years from the date of

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

9. CONVERTIBLE NOTES CONTINUED

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

9. CONVERTIBLE NOTES CONTINUED

conversion of the convertible notes.

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

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

9. CONVERTIBLE NOTES CONTINUED

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

9. CONVERTIBLE NOTES CONTINUED

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

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

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

10. STOCK OPTION PLAN AND WARRANTS

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

10. STOCK OPTION PLAN AND WARRANTS CONTINUED

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

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

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

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

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

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

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

A schedule of the options and warrants is as follows:

NUMBER OF EXERCISE
------------------------ PRICE PER
OPTIONS WARRANTS SHARE
---------------------------------------

Outstanding at
January 1, 2005 3,846,206 2,446,964 $0.10 - 12.98
Granted 1,250,000 16,734,392 0.09 - 0.20
Exercised - - -
Expired (274,603) (10,048) 0.50 - 7.50
Forfeited (889,103) 410,882 0.22 - 12.98
---------------------------------------
Outstanding at
December 31, 2005 3,932,500 19,582,190 0.10 - 12.98
----------- ----------- -------------
Granted 4,700,000 8,000,000 0.01 - 0.10
Exercised - - -
Expired (225,000) (2,522,798) 0.50 - 7.50
Forfeited (1,402,500) - 0.10 - 2.75
---------------------------------------
Outstanding at
December 31, 2006 7,005,000 25,059,392 $ 0.01 - 6.75
=======================================

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

10. STOCK OPTION PLAN AND WARRANTS CONTINUED

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

OUTSTANDING EXERCISABLE
----------------------------------- ----------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE NUMBER LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
--------------------------------------------------- ----------------------

$0.01 - 0.75 30,989,392 0.52 $ 0.01 2,759,339 $ 0.17
2.00 - 5.00 1,025,000 2.80 3.11 1,027,500 3.14
6.00 - 8.13 50,000 3.42 6.75 50,000 6.75
12.98 - - 12.98 - 12.98
--------------------------------------------------- ----------------------

$0.01 - 12.98 32,064,392 0.60 $ 3.80 3,836,839 $ 1.14
=================================================== ======================

11. GAIN ON SETTLEMENT OF LIABILITIES

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

12. RELATED PARTY TRANSACTIONS

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

13. SUPPLEMENTAL CASH FLOW INFORMATION

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

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

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

YEARS ENDED
DECEMBER 31,
----------------
2006 2005
----------------

Interest 7,000 $ 15,000
================

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

14. EXPORT SALES

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

YEARS ENDED
DECEMBER 31,
----------------------
GEOGRAPHIC AREA 2006 2005
--------------- ----------------------

Far East $ 535,000 $ 500,000
South America 42,000 27,000
Middle East 98,000 162,000
Europe 511,000 817,000
Canada 100,000 62,000
Mexico 7,000 1,000
Africa - 1,000
----------------------

$1,293,000 $1,570,000
======================

15. SAVINGS PLAN

In November 1996, the Company established a 401(k) Retirement Savings Plan for
the Company's officers and employees. The Plan provisions include eligibility
after six months of service, a three year vesting provision and
nondiscriminatory no matching contributions at this time. During the years ended
December 31, 2006 and 2005, the Company made no contributions to the Plan.

16. COMMITMENTS AND CONTINGENCIES CONTINUED

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

16. COMMITMENTS AND CONTINGENCIES CONTINUED

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

16. COMMITMENTS AND CONTINGENCIES CONTINUED

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

16. COMMITMENTS AND CONTINGENCIES CONTINUED

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

16. COMMITMENTS AND CONTINGENCIES CONTINUED

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

16. COMMITMENTS AND CONTINGENCIES CONTINUED

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

16. COMMITMENTS AND CONTINGENCIES CONTINUED

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

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

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

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

--------------------------------------------------------------------------------
F-44

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

16. COMMITMENTS AND CONTINGENCIES CONTINUED

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

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

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

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

--------------------------------------------------------------------------------
F-45

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

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

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

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

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

17. RECENT ACCOUNTING PRONOUNCEMENTS

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

--------------------------------------------------------------------------------
F-46

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

17. RECENT ACCOUNTING PRONOUNCEMENTS CONTINUED

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

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

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

--------------------------------------------------------------------------------
F-47

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

17. RECENT ACCOUNTING PRONOUNCEMENTS CONTINUED

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

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

--------------------------------------------------------------------------------
F-48

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

17. RECENT ACCOUNTING PRONOUNCEMENTS CONTINUED

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

17. RECENT ACCOUNTING PRONOUNCEMENTS CONTINUED

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

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

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

18. SUBSEQUENT EVENTS

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

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

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

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

--------------------------------------------------------------------------------
F-50

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
CONTINUED
--------------------------------------------------------------------------------

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

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

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

None.

Item 8A. Controls and Procedures

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

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

PART III

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

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

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

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

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

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

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

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

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

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

Appointment of New President and Chief Executive Officer

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

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

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

Board Meetings and Committees

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

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

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

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

Item 10. Executive Compensation

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

Summary Compensation Table

Change in
Pension
Value and
Non-Equity Non-qualified
Incentive Deferred
Plan Compen- All Other
Name and Stock Option Compen- sation Compen-
Principal Position Year Salary$ Bonus($) Awards Awards($) sation Earnings sation Total
------------------ ---- ------- -------- ------ --------- ---------- ------------- --------- ---------

Raymond P.L. 2006 127,940 - - - - - - $ 127,940
Cannefax President 2005 64,285 - - - - - - 64,285
and Chief Executive 2004 0 - - - - - - 0
Officer(1)
----------------------
(1) Mr. Cannefax has served as President and Chief Executive Officer since January 5, 2006.

Supplemental All Other Compensation Table

Registrant
Contribu- Dividends
Perks tions to or
and Payments/ Defined Earnings
Other Tax Discounted Accruals Contribu- on Stock
Personal Reimburse- Securities on Termin- tion Insurance or Option
Name Benefits ments Purchases ation Plans Plans Premiums Awards Other
------------ -------- ---------- ---------- ----------- ---------- --------- ---------- -----

Raymond P.L. - - - - - - - -
Cannefax

Grants of Plan-Based Awards

Estimated Future Payouts Under Estimated Future Payouts
Non-Equity Incentive Plan Under Equity Incentive Plan
Awards Awards
------------------------------- -------------------------------
All Other
All Other Option
Stock Awards:
Awards: Number of Exercise
Number of Securities or Base
Shares of Under- Price of
Stock or lying Option
Grant Threshold Target Maximum Threshold Target Maximum Units Options Awards
Name Date ($) ($) ($) (#) (#) ($) (#) (#) ($/Sh)
------------ ------ --------- -------- ------- --------- ------ ------- ---------- ---------- --------

Raymond P.L. 1/5/06 - - - - - - - 4,500,000 $.01
Cannefax

Outstanding Equity Awards At Fiscal Year End

Equity
Equity Incentive
Incentive Plan
Plan Awards:
Awards Market or
Equity Number of Payout
Incentive Market Unearned Value of
Number of Pan Awards Number Value of Shares, Unearned
Number of Securities Number of of Shares or Units or Shares,
Securities Underlying Securities Shares or Units of Other Units or
Underlying Unexercised Underlying Units of Stock Rights Other
Unexercised Options: Unexercised Option Stock That Have That Have Rights That
Options (#) Unearned Exercise Option Held That Not Not Have Not
(#) Unexer- Options Price Expiration Have Not Vested Vested Vested
Name Exercisable cisable (#) ($) Date Vested(#) ($) (#) ($)
------------ ----------- ----------- ----------- -------- ---------- --------- --------- ---------- ----------

Raymond P.L. 0 0 - - - - - - -
Cannefax

Option Exercises and Stock Vested for Fiscal 2006

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

Raymond P.L. Cannefax 0 - 0 -

Pension Benefits for Fiscal 2006

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

Director Compensation

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

Director Compensation for Fiscal 2006

Change in
Pension Value
Fees and
Earned or Non-Equity Nonqualified
Paid In Stock Option Incentive Plan Deferred All Other
Cash Awards Awards Compensation Compensation Compensation Total
Name ($) ($) ($) ($) Earnings ($) ($)
--------------------- --------- ------ ------ -------------- -------------- ------------ -----

Keith D. Ignotz 0 - - - - - 0
Randall A. Mackey 0 - - - - - 0
John C. Pingree 0 - - - - - 0
David M. Silver, PhD. 0 - - - - - 0

Employee 401(k) Plan

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

1995 Stock Option Plan

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

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

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

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

Employment Agreements

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

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

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

Retirement Agreement

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

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

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

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

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

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

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

Item 12. Certain Relationships and Related Transactions

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

Randall A. Mackey, a director since January 21, 2000, and from September
1995 to September 3, 1998 and chairman of the board since August 30, 2002, is
president and a shareholder of the law firm of Mackey Price Thompson & Ostler,
which rendered legal services in connection with various corporate matters.
Legal fees and expenses paid to Mackey Price Thompson & Ostler for the fiscal
years ended December 31, 2006 and 2005, totaled $148,000 and $220,000,
respectively. In addition, on April 7, 2005 the Company issued 250,000 shares of
common stock to Mackey Price Thompson & Ostler in payment of $22,500 in legal
services. As of December 31, 2006, the Company owed this firm $133,850, which is
included in accounts payable.

PART IV

Item 13. Exhibits and Reports on Form 8-K

(a) Exhibits

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

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

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

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

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

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

(b) Reports on Form 8-K

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

Item 14. Principal Accountant Fees and Services

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

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

SIGNATURES

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

PARADIGM MEDICAL INDUSTRIES, INC.

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

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

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

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

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

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

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

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

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

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