Edgar Filing: PARADIGM MEDICAL INDUSTRIES INC

As filed with the Securities and Exchange Commission on July __, 2003
Commission File No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

PARADIGM MEDICAL INDUSTRIES, INC.
(Name of small business issuer in its charter)

Delaware 3841 87-0459536
(State of jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)

2355 South 1070 West
Salt Lake City, Utah 84119
(801) 977-8970
(Address and telephone number of registrant's principal
executive offices and principal place of business)

Jeffrey F. Poore, President and Chief Executive Officer,
2355 South 1070 West
Salt Lake City, Utah 84119
(801) 977-8970
(Name, address and telephone number of agent for service)
----------------------

Copies to:

Randall A. Mackey, Esq.
Mackey Price & Thompson
350 American Plaza II
57 West 200 South
Salt Lake City, Utah 84101-3663
Telephone: (801) 575-5000

Approximate date of proposed sale to the
public: As soon as practicable after this Registration
Statement becomes effective.

If any of the securities being registered on this Form are being
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 (the "Securities Act"), check the following box. |X|

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

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

CALCULATION OF REGISTRATION FEE

Title of each Proposed Proposed
class of Amount maximum maximum Amount of
securities to be to be offering price aggregate registration
registered registered per Share(1) offering price fee
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Common Stock, $.001 par value per share (2) 8,000,000 $.50 $4,000,000 $368.00

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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Reflects the maximum offering proposed hereunder.

The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

PROSPECTUS

SUBJECT TO COMPLETION DATED JULY ___, 2003

8,000,000 Shares of Common Stock

PARADIGM MEDICAL INDUSTRIES, INC.

Under this prospectus, we may offer up to 8,000,000 shares of our
common stock, par value $.001 per share, utilizing a self-underwritten, best
efforts offering of our shares, through the efforts of officers and directors.
This means we are offering our shares of common stock directly to qualified
investors. In the event that we retain a broker-dealer to assist in the offer
and sale of our shares, we will file a post-effective amendment to our
registration statement. We will provide a prospectus supplement or amendment, if
necessary, to add, update, or change the information contained in this
prospectus.

We are offering our shares in one or more transactions at an estimated
offering price of $.50 per share. There is no minimum offering of shares that
must be sold.

Our common stock and Class A warrants trade on the OTC Bulletin Board
under the symbols "PMED.OB" and "PMEDW.OB." On July 2, 2003, the last reported
sale price of our common stock was $.245 per share and the last sale price of
our Class A Warrants was $.10 per warrant.

We have registered for secondary sales an aggregate of 12,250,167
shares of our common stock currently issued and outstanding through a
registration statement the Securities and Exchange Commission declared effective
on February 14, 2003.

Investing in the common stock involves risks that are described in the
"Risk Factors" section beginning on page 3 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

The date of this prospectus is July ___, 2003.

PROSPECTUS SUMMARY

This summary highlights some information from this prospectus. It may
not contain all of the information that is important to you. To understand this
offering fully, you should read the entire prospectus carefully, including the
risk factors and the financial statements.

The Company

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

We market three cataract surgery systems with related accessories and
disposable products. Our flagship cataract removal system, the Photon(TM) laser
system, is a laser cataract surgery system marketed as the next generation of
cataract removal. The Photon(TM) product is currently under review by the Food
Drug and Administration ("FDA"). The Photon(TM) is available for sale in many
markets outside of the United States. Both the Photon(TM) and the Precisionist
ThirtyThousand (TM) are manufactured as an Ocular Surgery Workstation(TM). We
plan to market the Ocular Surgery Workstation(TM) as a plug-in module for the
Photon(TM) and other lasers for use in eye care and other medical specialties.
We also offer the SIStem(TM), a mid-range priced ultrasonic phaco, and competes
in the market segment that only desires an ultrasonic phaco.

Our diagnostic products include a pachymeter, an A-Scan, an A/B Scan,
an UBM biomicroscope, a perimeter, a corneal topographer and the Blood flow
Analyzer (TM). The diagnostic ultrasonic products, including the pachymeter, the
A-Scan, the A/B Scan and the UBM biomicroscope were acquired from Humphrey
Systems, a division of Carl Zeiss, Inc. in 1998. We developed and offered for
sale in the fall of 2000 the P45 which combines the A/B scope and the UBM in one
machine. The perimeter and the corneal topographer were added when we acquired
the outstanding shares of the stock of Vismed, Inc. d/b/a/ Dicon(TM) in June
2000. We acquired Ocular Blood Flow, Ltd. in June of 2000, whose principal
product is the Blood Flow Analyzer(TM). This product is designed for the
measurement of intraocular pressure and pulsatile ocular blood flow volume for
detection and treatment of glaucoma. We are currently developing additional
applications for all of our diagnostic products.

We rely upon several products for revenues. For the three months ended
March 31, 2003, 36% of our revenues were derived from the Dicon (TM) diagnostic
products sales (the perimeter and corneal topographer), 22% of revenues from
Blood Flow Analyzer(TM) sales, 6% of revenues from UBM biomicroscope sales, 13%
of revenues from Humphrey Systems diagnostic product sales (the pachymeter, the
A-Scan and the A/B Scan), 4% of revenues from cataract removal surgery sales and
disposables, and 19% of revenues from service and other sales. For the fiscal
year ended December 31, 2002, 27% of our revenues were derived from the
Dicon(TM) diagnostic products sales (the perimeter and the corneal topographer),
9% of revenues from Blood Flow Analyzer(TM) sales, 25% of revenues from UBM
biomicroscope sales, 11% of revenues from Humphrey systems diagnostic products
sales (the pachymeter, the A-Scan and the A/B Scan), 11% of revenues from
cataract removal surgery sales, and 17% of revenues from services, disposables
and other sales. For the fiscal year ended December 31, 2001, 26% of our
revenues were derived from the Dicon(TM) diagnostic products sales (the
perimeter and the corneal topographer), 25% of revenues from Blood Flow
Analyzer(TM) sales, 22% of revenues from UBM biomicroscope sales, 8% of revenues
from Humphrey Systems diagnostic products sales (the pachymeter, the A-Scan and
the A/B Scan), 8% of revenues from cataract removal surgery sales and
disposables, and 11% of revenues from service and other sales. Our principal
executive offices are located at 2355 South 1070 West, Salt Lake city, Utah
84119 and our telephone number is (801) 977-8970.

Unaudited revenues for the three months ended March 31, 2003, were
$727,000 as compared to $1,537,000 for the comparable period for 2002, and
audited revenues for the fiscal year ended December 31, 2002 were $5,368,000 as
compared to $7,919,000 for the comparable period for fiscal 2001.

On March 23, 2003, our board of directors appointed Dr. Jeffrey F.
Poore as President and Chief Executive Officer of the company, replacing Thomas
F. Motter, who resigned as Chairman of the Board and Chief Executive Officer on
August 30, 2002. On June 23, 2003, our board of directors appointed Gregory Hill
as Vice President of Finance, Treasurer and Chief Financial Officer of the
company, replacing Heber C. Maughan, who resigned as Vice President of Finance,
Treasurer and Chief Financial Officer.

The Offering

Common stock offered ................ 8,000,000 shares

Common stock outstanding prior
to the offering (1).................. 24,147,744 shares

Common stock outstanding after
the offering (1)..................... 32,147,744 shares.

Use of proceeds...................... The net proceeds of the offering will be
used for sales and marketing, research
and development, acquisition of capital
equipment, repayment of debt, and working
capital.

Risk factors......................... The offering involves a high degree of
risk.

OTC Bulletin Board
Common stock................ PMED.OB
Class A warrants............ PMEDW.OB

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(1) Does not include 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 the conversion of
5,000 shares of Series D preferred stock, 80,000 shares of common stock
issuable upon the conversion of 1,500 shares of Series E preferred
stock, 298,867 shares of common stock issuable upon conversion of 5,
603.75 shares of Series F preferred stock, options to purchase a total
of 3,895,132 shares of common stock issuable upon the exercise of stock
options at prices ranging from $.16 to $6.00 per share, and warrants to
purchase 3,719,659 shares of common stock issuable upon the exercise of
warrants at prices ranging from $.16 to $8.125 per share.

Summary Financial Information

For the year ended For three months ended
December 31, March 31,
2001 2002 2002 2003
------------- -------------- ------------- --------------
Statement of Operations Data: (Unaudited) (Unaudited)
-----------------------------

Net Sales................................. $ 7,919,000 $ 5,368,000 $ 1,537,000 $ 727,000
Net cost of sales......................... 4,370,000 4,210,000 841,000 346,000
Operating expenses........................ 12,834,000 12,277,000 2,763,000 1,080,000
Operating loss............................ (9,285,000) (11,119,000) (2,067,000) (699,000)
Other income (expense).................... (858,000) (36,000) (6,000) (4,000)
Net loss ................................. (10,143,000) (11,155,000) (2,073,000) (703,000)
Net loss per common share................. (.98) (.63) (.13) (.03)
Shares used in computing net loss per share 13,245,000 17,736,000 15,775,000 21,976,000

As of As of As adjusted(1) as
Balance Sheet Data: December 31, 2002 March 31, 2003 of March 31, 2003
------------------ ----------------- -------------- -----------------

Current assets..................................... $ 3,868,000 $ 3,444,000 $ 6,998,000
Current liabilities................................ 2,362,000 2,519,000 2,119,000
Working capital ................................... 1,506,000 925,000 4,879,000
Total assets....................................... 5,289,000 4,744,000 8,298,000
Accumulated deficit................................ (53,656,000) (54,359,000) (54,359,000)
Stockholder's equity .............................. 2,847,000 2,145,000 6,099,000

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(1) The columns "As Adjusted" give effect to the net proceeds received from
the sale of 8,000,000 shares of Common Stock offered hereby at an
estimated offering price of $.50 per share and the application of the
proceeds therefrom, as set forth in the Use of Proceeds, including
repayment of $400,000 of debt.

RISK FACTORS

Before you invest in our common stock, you should be aware of the risks
described below which constitute all material risks to potential investors. You
should consider carefully these risk factors together with all of the other
information included in this prospectus before you decide to invest in our
common stock. If any of the following risks actually occurs, our business,
financial condition and results of operations could suffer, in which case the
trading price of our common stock could decline. No investment should be made by
any person who is not in a position to lose the entire amount of his investment.

Special Note Regarding Forward-Looking Statements

Some of the information in this prospectus may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. These statements discuss future expectations,
contain projections of results of operations or of financial condition or state
other "forward-looking" information. When considering such forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this Prospectus. The risk factors noted in this section and other
factors noted throughout this prospectus, including certain risks and
uncertainties, could cause our actual results to differ materially from those
contained in any forward-looking statement.

We have limited working capital, a limited operating history, have accumulated
significant losses, and expect our losses to continue.

As of December 31, 2002, we had limited working capital of $1,506,000.
As of March 31, 2003, our working capital was $925,000. Our company and its
predecessors have only been in operation since 1989. Our accumulated deficit was
$42,501,000 as of December 31, 2001,$53,656,000 as of December 31, 2002, and
$54,359,000 as of March 31, 2003. Our net loss was $10,143,000 for the fiscal
year ended December 31, 2001, $11,155,000 for the fiscal year ended December 31,
2002, and $703,000 for the three months ended March 31, 2003. Such losses have
resulted principally from costs incurred in connection with research and
development, including clinical trials, of the laser surgery system. Medical
products were not sold by us until late 1992. Our ability to become profitable
largely depends on successfully developing clinical applications and obtain
regulatory approvals for our laser surgery products, including the Photon(TM)
laser system, and to effectively market such products. The problems and expenses
frequently encountered in developing new products and the competitive industry
in which we operate will impact whether we are successful. We may never achieve
profitability. Furthermore, we may encounter substantial delays and unexpected
expenses related to research, development, production, marketing, regulatory
matters or other unforeseen difficulties.

Our securities have been delisted from the Nasdaq SmallCap Market and currently
trade on the OTC Bulletin Board

As of June 26, 2003, our shares trade on the OTC Bulletin Board. As a
result, it may be more difficult for an investor to dispose of our securities,
or to obtain accurate quotations on their market value. Furthermore, the prices
for our securities may be lower than might otherwise be obtained. On October 8,
2002, we received a notice from Nasdaq's Listing Qualifications staff that for
the previous 30 consecutive trading days, the price of our common stock closed
below the minimum $1.00 per share requirement for continued inclusion on Nasdaq
under Marketplace Rule 4310(c)(4). The notice further provided that if at
anytime before April 7, 2003, the bid price of our common stock closed at $1.00
or more for a minimum of 10 consecutive trading days, we would be notified by
the staff that we comply with such rule.

On April 15, 2003, we received notice of a determination by Nasdaq's
Listing Qualifications staff that we failed to comply with the minimum bid price
rules for continued listing set forth in Marketplace Rule 4310(c)(4) and do not
meet the Rule 4310(c)(2)(A) inclusion requirements. Specifically, the notice
stated that we have not regained compliance with the minimum $1.00 closing bid
price per share requirement (noting that pursuant to the October 8, 2002, notice
from the Nasdaq Listing Qualifications staff, we were provided 180 calendar
days, or until April 7, 2003, to regain compliance with this requirement) and we
do not qualify with the $5,000,000 shareholders equity, $50,000,000 market value
of listed securities or $750,000 net income from continuing operations
requirement for an additional 180 calendar day compliance period to comply with
Marketplace Rule 4310(c)(4). The April 15, 2003, notice further stated that as
of December 31, 2002, we reported stockholders' equity of $2,847,000 and net
losses from continuing operations of approximately $11,155,000, and as of April
14, 2003, the market value of our listed securities was $4,208,108. Accordingly,
our common stock would be delisted from the Nasdaq SmallCap Market at the
opening of business on April 24,2003. Separately, Nasdaq informed us that
listing fees of $22,500 and $18,000 under Rule 4310(c)(13) are owed to the
Nasdaq SmallCap Market.

We requested an oral hearing before a Nasdaq Listing Qualifications
Panel to review the staff's determination. The request automatically stayed the
delisting of our common stock. On April 23, 2003, we received formal notice from
Nasdaq that a hearing to consider our appeal would be held on May 29, 2003. On
May 29, 2003, Dr. Jeffrey F. Poore, our President and Chief Executive Officer;
Randall A. Mackey, our Chairman of the Board; and Dr. David M. Silver, a
director of the company, attended an oral hearing before a Nasdaq Listing
Qualifications Panel in Washington, D.C. At the hearing Dr. Poore presented to
the panel a definitive plan both for regaining compliance with the particular

deficiencies cited in the April 15, 2003, letter from the Nasdaq Listing
Qualifications staff and sustaining long term compliance with the Nasdaq
Marketplace Rules, including all applicable maintenance criteria. On June 24,
2003 we received notification from the Nasdaq Listing Qualifications Panel that
we were to be delisted from the Nasdaq Stock Market effective June 26, 2003. Our
securities trade on the OTC Bulletin Board effective June 26, 2003. Because our
securities are delisted from the Nasdaq SmallCap Market and now trade on the OTC
Bulletin Board, additional sales requirements on broker-dealers would adversely
effect the ability of purchasers to sell our securities and the trading price of
our securities could decline.

Because our securities currently trade on the OTC Bulletin Board, they
are subject to Rule 15g-9 promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), which imposes additional sales practice
requirements on broker-dealers that sell securities governed by Rule 15g-9 to
persons other than established customers and "accredited investors" (generally,
individuals with a net worth in excess of $1,000,000 or annual individual income
exceeding $200,000 or $300,000 jointly with their spouses). For transactions
covered by Rule 15g-9, the broker-dealer must determine whether such persons
that are not established customers or accredited investors qualify under the
rule for purchasing such securities and must receive that person's written
consent to the transaction prior to sale. Consequently, Rule 15g-9 may adversely
effect the ability of purchasers to sell our securities and otherwise affect the
trading market in our securities.

The Commission has adopted regulations which generally define a "penny
stock" to be any non-Nasdaq equity security that has a market price (as therein
defined) less than $5.00 per share or with an exercise price of less than $5.00
per share, subject to certain exceptions. For any transactions by broker-dealers
involving a penny stock (unless exempt), rules promulgated under the Exchange
Act require delivery, prior to a transaction in a penny stock, of a risk
disclosure document relating to the penny stock market. Disclosure is also
required to be made about compensation payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information
for the penny stocks.

We are offering our shares on a best efforts basis and there is no guarantee
that we will sell the maximum shares offered.

No underwriter has been retained to purchase the shares offered in
connection with this prospectus. There can be no assurance that all of the
shares offered will be sold and that we will receive all of the estimated net
proceeds generated from such a sale of all of the common stock. If all of the
8,000,000 shares offered are not sold, we may be unable to fund all of the
intended uses for the net proceeds anticipated from this offering without
obtaining funds from alternative sources. Alternative sources of funds may not
be available to us at a reasonable cost.

If the litigants in the class action lawsuits succeed on any of their claims, it
could adversely effect our financial condition and operations.

On May 14, 2003, a complaint was filed in the United States District
Court, District of Utah, captioned Richard Meyer, individually and on behalf of
all others similarly suited v. Paradigm Medical Industries, Inc., Thomas Motter,
Mark Miehle and John Hemmer, Case No. 2:03CV00448TC. The complaint also
indicates that it is a "Class Action Complaint for Violations of Federal
Securities Law and Plaintiffs Demand a Trial by Jury." We have been in the
process of reviewing the complaint, which appears to be focused on alleged false
and misleading statements pertaining to the Blood Flow Analyzer(TM) and
concerning a purchase order from Valdespino Associates Enterprises and Westland
Corp. On June 2, 2003, a complaint was filed in the same United States District
Court captioned Michael Monroe v. Paradigm Medical Industries, Inc., Thomas
Motter and John Hemmer, Case No. 2:03 CV00513 PGC. It too indicates that it is a
"class action complaint." It is similar in nature to the Meyer case and is also
under review. We intend to vigorously defend and protect our interests in these
cases. If the litigants in the class action lawsuits succeed on any of their
claims, it could adversely affect our financial condition and operations.

If we are unable to obtain additional capital, we would be required to eliminate
certain activities that would adversely effect our operations.

We may require substantial funds for various purposes, including
continuing research and development, expanding clinical trials, completing the
FDA approval process for our products (including the Photon(TM) laser system),
and manufacturing and marketing our existing products. We will need to seek
additional capital, possibly through public or private sales of our securities,
in order to fund our activities on a long-term basis. Adequate funds may not be
available when needed or on terms acceptable to us. Insufficient funds may
require us to delay, scale back or eliminate certain or all of our research and
development programs or to license third parties to commercialize products or
technologies that we would otherwise seek to develop ourself, which may
materially adversely affect our continued operations.

The recent loss of members of senior management could adversely affect our
operations.

Our success largely depends on a number of key employees. The loss of
one or more of these employees could have a material adverse effect on us,
including the development and sale of eye surgery systems. On August 30, 2002,
Thomas F. Motter resigned as our Chairman of the Board and Chief Executive
Officer, and Mark R. Miehle was terminated as our President and Chief Operating
Officer. On June 3, 2003, Heber C. Maughan resigned as our Vice President of
Finance, Treasurer and Chief Financial Officer. The recent loss of these members
of senior management could have a significant adverse effect on us and our
operations and prospects. We had no key man insurance on either Mr. Motter, Mr.
Miehle or Mr. Maughan.

Our research activities may not result in any commercially profitable products.

The science and technology of medical products, including lasers, is
rapidly evolving. Our medical systems may require significant further research,
development, testing and regulatory clearances. They are also subject to the
risks of failure inherent in the development of products based on innovative
technologies. These risks include the possibility that any or all of the
proposed products will prove to be ineffective or unsafe; that they fail to
receive necessary regulatory clearances; that the proposed products are
uneconomical; that others hold proprietary rights which preclude us from
marketing such products; or that others market better products. Accordingly, we
are unable to predict whether our research and development activities will
result in any commercially profitable products. Further, due to the extended
testing and regulatory review process required, we may be unable to sell our
current and proposed products. There is also no guarantee that we will be able
to develop and sell a glaucoma surgery system.

We are uncertain of obtaining FDA approval for our Photon(TM) laser system.

We are subject to substantial regulation by the FDA and other federal
and state regulatory agencies. FDA regulations require us to obtain either
510(k) clearance or pre-marketing approval prior to marketing a product in the
United States. We are also subject to foreign regulation and must receive
various types of approvals from foreign government agencies prior to selling our
products in some countries. The clearance and approval processes for both the
FDA and foreign regulatory authorities are costly, time consuming and uncertain.
In addition, we are required to obtain FDA approval before exporting a device
which has not received FDA marketing clearance or approval. We may never be able
to obtain these required government approvals. Delays or failure to obtain such
approvals would materially and adversely effect us, as would changes in existing
requirements. We have received 510(k) clearance from the FDA for our ultrasonic
surgery systems allowing us to sell both devices in the United States. We have
also received 510(k) clearance to market our Blood Flow Analyzer(TM).

In May 1995, we were granted an investigational device exemption for
our Photon(TM) laser system allowing us to conduct clinical studies in support
of our application with the FDA to obtain approval to market the system. During
the clinical trials, we discovered that the Photon(TM) laser system may not
effectively remove hard (dense or impacted) cataracts. In May, 1998, we received
FDA clearance to conduct clinical tests on soft cataracts. We believe the FDA
will approve our 510(k) predicate device application for the Photon(TM) laser
system since in the United States most cataracts are removed before tissue
hardens. We have completed the authorized clinical studies and, in October 2001,
made a supplemental submission to the FDA regarding the 510(k) application. We
received a preliminary review from the FDA of our supplemental submission in
December 2001 and submitted additional clinical information to the FDA on
February 6, 2002.

On May 7, 2002, we received a letter from the FDA requesting further
clinical information. We are in the process of generating the additional
clinical information in response to the letter and expect to make a submission
to the FDA with the additional clinical information within the first quarter of
2004. We received an FDA warning letter in August 2000 concerning Phase I
clinical trials, but believe all items in the warning letter have been satisfied
and the clinical trials and their data are in good standing. We have also
received FDA approval to manufacture and export the Photon(TM) laser system
internationally. However, we have not yet obtained approval from some foreign
countries to market the laser product where approval is necessary. We anticipate
that many contemplated applications of our currently existing and planned
products will be subject to the lengthy regulatory approval process, including
preclinical studies, clinical trials and extensive regulatory review. This
process could take many years and require the expenditure of substantial
resources.

Our executives lack operating experience.

Our executives rely on their experience and skill from their
professional occupations. None of our executives has direct experience in
managing a company that utilizes research and product development activities and
technology to such a high degree.

Our Photon(TM) laser system may not receive FDA approval.

We are developing a laser cataract surgery system for inclusion in our
Workstation(TM). Phase I clinical trials have concluded for FDA approval for the
Photon(TM) laser system. During the clinical trials, we discovered that the
Photon(TM) laser system may not effectively remove hard (dense or impacted)
cataracts. In May, 1998, we received FDA clearance to conduct clinical tests on
soft cataracts. We believe the FDA will approve our 510(k) predicate device
application for the Photon(TM) laser system since in the United States most
cataracts are removed before tissue hardens. While we rely upon several products
for revenues, we are dependent on FDA approval of our Photon(TM) laser system to
generate future revenues. On October 2001, we made a supplemental submission to
the FDA for the existing 510(k) application. We received a preliminary review
from the FDA of our supplemental submission in December 2002 and submitted
additional clinical information to the FDA on February 6, 2002. On May 7, 2002,

we received a letter from the FDA requesting further clinical information. We
are in the process of generating the additional clinical information in response
to the letter and expect to make a submission to the FDA with the additional
clinical information within the first quarter of 2004. We received an FDA
warning letter in August 2000 concerning Phase I clinical trials, but believe
all items in the warning letter have been satisfied and the clinical trials and
their data are in good standing.

Purchasers of our common shares could experience dilution from our tendering
puts under a private equity line of credit agreement with Triton West.

On June 30, 2000, we entered into a private equity line of credit
agreement with Triton West Group, Inc., in which Triton agreed to provide an
amount up to $20,000,000 to us in order to purchase put common shares pursuant
to the terms and conditions of the agreement. Under the agreement, we may elect
for a period of three years from the effective date of December 8, 2000 (the
date on which the Securities and Exchange Commission declared effective a
registration statement registering shares to be purchased by Triton on put
transactions with us) to exercise our right to tender a put notice to Triton.
The put notice requires Triton to purchase shares of our common stock at 88% of
the market price on the trading day immediately following the valuation period,
which is a period of five trading days beginning two days before the trading day
on which the put notice is deemed to be delivered and two trading days after
such date. Under certain conditions, the purchase price will be reduced to 85%
of the market price of our common stock. The agreement provides certain
restrictions on the tendering of puts. The maximum amount of each put (which may
vary from $750,000 to $2,000,000) is to be determined according to a schedule
based on the trading price of our common stock at the time and the average 30
day volume of such shares. There must be a minimum of 15 business days between
puts. Moreover, a registration statement must be in effect registering the
shares of common stock covered by the put. There may be significant dilution
associated with tendering put notices under the agreement. There is currently no
registration in effect registering any shares of common stock issuable pursuant
to the tendering of a put notice to Triton.

Our products may become obsolete due to rapid technological change.

Our market is subject to rapid technological change. Development by
others of new or improved products, processes or technologies may make our
products obsolete or less competitive. Accordingly, we must continue investing
in research and development on our existing products and to develop new
products. Despite such investment, our current or proposed products may be
unsuccessful.

Our Photon(TM) laser system could receive competition from other laser systems
that are well financed with well recognized trade names.

Our Photon(TM) laser system will potentially receive competition from
other laser systems, such as excimer, holmium (Ho:YAG), Erbium (Er:YAG), Nd:YLF
(Neodymium:Yttium-Lithium-Fluoride) or lasers of other wave lengths. Competition
may also come from other medical devices and other surgical techniques. Further,
the cataract surgical device industry is dominated by a small number of large
competitors that are well established in the marketplace, have experienced
management, are well financed and have a well recognized trade name related to
their product lines. We may be unable to penetrate the existing market and
acquire a sufficient market share to be profitable. Significant competitive
factors which will affect future sales include regulatory approvals,
performance, pricing, timely product shipment, safety, customer support,
convenience of use and patient and general market acceptance.

Our new products may incur unexpected production problems, which would impact
our sales and profits.

New ventures, particularly those involved in a highly technical
industry such as the medical industry, have substantial inherent risks. These
risks are in three general areas: technical, mechanical and human.
Notwithstanding any pre-production planning, new products can incur unexpected
problems in full scale production, which cannot always be foreseen or accurately
predicted. Designs can become unworkable, for unpredicted reasons. Quality
control and component sourcing failures can also be expected from time to time.
Any business, including ours, is substantially dependent upon the capabilities
and performance of both management and sales personnel. Mistakes in judgment or
performance can be costly and, in certain instances, disabling. Therefore,
management skill, experience, character and reliability are of significant
importance.

Mistakes may occur in the design and manufacture of our products, which could
prevent or limit the sales of our products.

The high-technology product line requires us to deal with suppliers and
subcontractors supplying highly specialized parts, operating highly
sophisticated and narrow tolerance equipment and performing highly technical
calculations. Components must be custom designed and manufactured, which is not
only complicated and expensive, but can also require a number of months to
accomplish. Slight mistakes in either the design or manufacture can result in
unsatisfactory parts that may not be correctable. Because our business requires
the talents of various professions, mistakes from very slight oversights or
miscommunications can occur, resulting not only in costly delays and lost
orders, but also in disagreements regarding liability and, in any event,
extended delays in production. Moreover, we rely on suppliers that are related
to each other for parts and equipment. When dealing with related suppliers the
terms on which parts and equipment are purchased may not be as favorable as
could be obtained from unrelated third-party suppliers.

No independent marketing studies have been made to confirm the commercial demand
for the Photon(TM) laser system and the Blood Flow Analyzer(TM).

We believe that there is substantial commercial demand for our
Photon(TM) laser system and our Blood Flow Analyzer(TM) for the eyes at a
profitable price. However, this belief is solely based on our management's
experience and judgment. At this time, there have been no independent marketing
studies by independent professional marketing firms to reliably confirm the
extent of this demand, the price ranges within which it exists and the amount of
promotion necessary to exploit whatever demand does exist.

Our Photon(TM) laser system may not be accepted in the marketplace because it
does not remove hard cataracts.

Our products may not be accepted in the marketplace. Such acceptance
will depend on a number of factors including receiving regulatory approvals,
demonstrating the safety, and advantages of our products over existing systems
and techniques. Our Photon(TM) laser system may never gain market acceptance
since the system does not effectively remove hard (dense or impacted) cataracts.
Further, we may be unable to successfully market our products even if they
perform successfully in clinical applications. Our Precisionist
ThirtyThousand(TM) Workstation(TM) may not gain acceptance unless we can reduce
or eliminate the vacuum surge and develop additional, complementary surgical
devices for installation in that host system. Vacuum surge is a phenomenon that
occurs when the tip of the ultrasonic needle is obstructed by target tissue,
allowing pressure to build up and, if the pressure is not released, a rush of
fluid goes from the chamber of the eye into the needle to equalize the pressure.
The result can be complications to the eye such as posterior capsule rupture,
iris capture and chamber collapse. We believe this phenomenon affects all other
ultrasonic cataract removal systems currently on the market.

Our pending patents may not be perfected and our present or future patents may
infringe upon the patents of others, which could restrict or prevent the
manufacture and sale of our products.

We depend on our ability to license and obtain patents and on the
adherence to confidentiality agreements executed by employees, consultants and
third-parties to maintain the proprietary nature of our technology and to
operate without infringing on the proprietary rights of others. Our laser probe
is protected by a United States patent issued in 1987 to Daniel M. Eichenbaum,
M.D. Patents have been granted to the Blood Flow Analyzer(TM) in the United
States and the United Kingdom, to the Dicon(TM) Topographer in the United
States, and to the Dicon(TM) Perimeter in the United States, the United Kingdom,
Germany and Switzerland. The pending patents may not be perfected. Also, our
present or future products may be found to infringe upon the patents of others.
If our products are found to infringe on the patents, or otherwise impermissibly
utilize the intellectual property of others, our development, manufacture and
sale of such products could be severely restricted or prohibited. We may be
required to obtain licenses to utilize such patents or proprietary rights of
others and acceptable terms may be unavailable. If we do not obtain such
licenses, the development, manufacture or sale of products requiring such
licenses would be materially adversely affected. In addition, we could incur
substantial costs in defending ourself against challenges to our patents or
infringement claims made by third parties or in enforcing any patents we may
obtain.

Because patents only provide limited protection, others could produce and
distribute products similar to the Photon(TM) laser system, the Mentor systems
and the Blood Flow Analyzer(TM).

We rely on the protections for our products that we hope to realize
under the United States and foreign patent laws. However, patents provide
limited protections. We have a United States and Japanese patent on the
hand-held probe design and applications for various foreign patents are either
pending or planned, and the patents for the Blood Flow Analyzer(TM) for the eyes
are reported by Occular Blood Flow, Ltd. to have been approved in the United
States and the United Kingdom. Similar devices, however, could be designed that
do not infringe on our patent rights, but that are similar enough to compete
against our patented products. Moreover, it is possible that an unpatented but
prior existing device or design may exist that has never been made public and
therefore is not known to us or the industry in general. Such a device could be
introduced into the market without infringing on our current patent. If any such
competing non-infringing devices are produced and distributed, our profit
potential would be seriously limited, which would seriously impair our
viability.

Some of our products may be denied reimbursement by third-party payors, such as
government programs and private insurance plans.

We anticipate that our medical devices will generally be purchased by
ophthalmologists and hospitals that will then bill various third-party payors,
such as government programs and private insurance plans, for the health care
services provided to their patients. Government agencies generally reimburse at
a fixed rate based on the procedure performed. Some of the potential procedures
for which our medical devices may be used, however, may be denied reimbursement
as elective. In addition, third-party payors may deny reimbursement if they
determine that the use of our products was unnecessary, inappropriate, not
cost-effective, experimental or used for a non-approved indication. Certain
purchasers of our Blood Flow Analyzer,(TM), for example, have had difficulty in
obtaining reimbursement from insurance carriers. Even if we receive FDA
clearances for our products, third-party payors may nevertheless deny
reimbursement. Furthermore, third-party payors increasingly challenge the prices
charged for medical products and services. Reimbursement from third-party payors
may be unavailable or if available, that reimbursement may be limited when
compared with reimbursement for competitive procedures, thereby materially
adversely affecting our ability to profitably sell products. The market for our
products could also be adversely affected by recent federal legislation that
reduces reimbursements under the capital cost pass- through system utilized in
connection with the Medicare program. Failure by hospitals and other users of
our products to obtain reimbursement from third-party payors or changes in
government and private third-party payors' policies toward reimbursement for
procedures employing our products would have a material adverse effect on us.

Congress may introduce legislation that could result in price limits and
utilization controls on our products.

Members of Congress have introduced legislation to change aspects of
the delivery and financing of health care services. Such legislation to control
or reduce public (Medicare and Medicaid) and private spending on health care, to
reform the methods of payment for health care goods and services by both the
public and private sectors, and to provide universal access to health care may
be passed. We cannot predict what form this legislation may take or the effect
of such legislation on our business. It is possible that the legislation
ultimately enacted by Congress will contain provisions resulting in price limits
and utilization controls which may reduce the rate of increase in the growth of
the ophthalmic laser market or otherwise adversely affect our business. It is
also possible that future legislation could result in modifications to the
nation's public and private health care insurance systems which will affect
reimbursement policies in a manner adverse to us. We also cannot predict what
other legislation relating to our business or the health care industry may be
enacted, including legislation relating to third-party reimbursement, or what
effect legislation may have on the results of our operations.

Our Precisionist Thirty Thousand(TM) Workstation(TM) may experience circuiting
problems or component failures which, if not corrected, could impact our sales.

Our Precisionist Thirty Thousand(TM) Workstation(TM) is a new
computer-based product that has been marketed since 1997. However, its current
installment base is not large enough to be considered proven by day to day use
in the marketplace. As is common with other new computer-based products, we have
discovered certain circuitry problems and component failures with the first
Workstation(TM) that we manufactured. We believe that we have corrected most if
not all of these problems. However, there is no assurance that all of these
problems have been detected or corrected. If customers were to experience
significant problems with the Workstation(TM), if we could not fix or correct
the problems, or if our customers were dissatisfied with the functionality or
performance of the Workstation(TM), or product support provided by us, we would
be materially adversely effected.

Because we have minimal direct sales experience, our sales program may be
unsuccessful.

We commenced a direct sales program in July 1993 with three sales
representatives to market our products. In July 2000, four additional sales
representative were hired. In August 2001, 15 additional sales representatives
were hired, bringing the total number of sales representatives to 22. The number
of sales representatives has been reduced to five as a result of our downsizing
program and absence of the anticipated FDA approval of the Photon(TM) laser
system. However, we have minimal direct sales experience and may need to recruit
additional qualified personnel for this purpose. Our sales program may be
unsuccessful or we may be unable to attract and retain qualified distributors on
favorable terms.

Our product liability insurance could be inadequate to cover liabilities if we
face significant product liability claims against us.

The nature of our business exposes it to risk from product liability
claims and there can be no assurance that we can avoid significant product
liability exposure. We maintain product liability insurance providing coverage
up to $2,000,000 per claim with an aggregate policy limit of $2,000,000. There
is substantial doubt that this amount of insurance would be adequate to cover
liabilities should we face significant claims. A successful products liability
claim brought against us could have a material adverse effect on our business,
operating results and financial condition. Further, product liability insurance
is becoming increasingly expensive, and there can be no assurance that we will
successfully maintain adequate product liability insurance at acceptable rates,
or at all. Should we be unable to maintain adequate product liability insurance,
our ability to market our products would be significantly impaired. Any losses
that we may suffer from future liability claims or a voluntary or involuntary
recall of our products and the damage that any product liability litigation or
voluntary or involuntary recall may do to the reputation and marketability of
our products would have a material adverse effect on our business, operating
results and financial condition.

Our future products sales in foreign countries could be adversely effected by a
significant increase in value of the U.S. dollar against local currencies, and
economic and political instability.

We anticipate that a significant portion of our future product sales
will be in foreign countries. Because we quote prices for our products and
accept payment on sales principally in U.S. dollars, any significant increase in
the value of the U.S. dollar against local currencies may make our products less
competitive with foreign products. The economic and political instability of
some foreign countries also may affect the ability of ophthalmologists and
others to purchase our products, or the ability of potential customers to pay
for the procedures for which our products are used.

The market price of our securities could fluctuate significantly.

Our common stock and Class A warrants were delisted on The Nasdaq
SmallCap Market effective June 26, 2003 and currently trade on the OTC Bulletin
Board. Factors such as announcements by us of the regulatory status of products,
quarterly variations in our financial results, the gain or loss of material
contracts, changes in management, regulatory changes, trends in the industry or
stock market and announcements by competitors, among other things, could cause
the market price of such securities to fluctuate significantly.

We may issue preferred shares with preferences in an equal or prior rank to
existing preferred shares.

Our certificate of incorporation authorizes the issuance of shares of
"blank check" preferred stock, which will have such designations, rights and
preferences as may be determined from time to time by our board of directors.
Accordingly, our Board of Directors is empowered, without stockholder approval
(but subject to applicable government regulatory restrictions), to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders of
our common stock. Those terms and conditions may include preferences on an equal
or prior rank to existing preferred stock. Those shares may be issued on such
terms and for such consideration as the board then deems reasonable and such
stock shall then rank equally in all aspects of the series and on the
preferences and conditions so provided, regardless of when issued. In the event
of such issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of our company. As of June 30, 2003, the following preferred shares were
issued and outstanding: 5,627 shares of Series A preferred stock convertible
into 6,753 common shares; 8,986 shares of Series B preferred stock convertible
into 10,783 common shares; no shares of Series C preferred stock; 5,000 shares
of Series D preferred stock convertible into 8,750 common shares; 1,500 shares
of Series E preferred stock convertible into 80,000 common shares; and 5,603.75
shares of Series F preferred stock convertible into 307,933 common shares.

We do not expect to pay any cash dividends in the foreseeable future.

We issued a stock dividend on our Series A preferred stock and Series B
preferred stock on January 8, 1996, to stockholders of record as of December 31,
1994. We have not paid any cash dividends on our common shares and do not expect
to declare or pay any cash or other dividends in the foreseeable future so that
we may reinvest earnings, if any, into the development of the business. The
holders of our Series A preferred stock, Series B preferred stock, Series C
preferred stock, Series D preferred stock, Series E preferred stock and Series F
preferred stock are entitled to non-cumulative cash dividends paid out of
surplus earnings.

We have sole discretion in allocating the proceeds from the offering.

All of the net proceeds of the offering, if any, have been allocated to
working capital (and not otherwise allocated for a specific purpose) and will be
used for such purposes as management may determine in its sole discretion
without the need for stockholder approval with respect to any such allocations.

We have indemnification agreements with certain officers and directors that may
require us to indemnify them in a civil or criminal action.

Our certificate of incorporation eliminates in certain circumstances
the liability of directors for monetary damages for breach of their fiduciary
duty as directors. We have entered into indemnification agreements with certain
directors and officers. Each such indemnification agreement provides that we
will indemnify the indemnitee against expenses, including reasonable attorneys'
fees, judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any civil or criminal action or
administrative proceeding arising out of his performance of his duties as a
director or officer, other than an action instituted by the director or officer.
The indemnification agreements will also require that we indemnify the director
or other party thereto in all cases to the fullest extent permitted by
applicable law. Each indemnification agreement will permit the director or
officer that is party thereto to bring suit to seek recovery of amounts due
under the indemnification agreement and to recover the expenses of such a suit
if he or she is successful.

Our Board of Directors has the right to issue additional shares of common stock
and to create a new series of preferred stock which could dilute holders of
common stock.

Our board of directors has the inherent right under applicable Delaware
law, for whatever value the board deems adequate, to issue additional common
shares up to the limit of shares authorized by the certificate of incorporation,
and, upon such issuance, all holders of shares of common stock, regardless of
when they are issued, thereafter generally rank equally in all aspects of that
class of stock, regardless of when issued. Our board of directors likewise has
the inherent right, limited only by applicable Delaware law and provisions of
the Certificate of Incorporation to increase the number of preferred shares in a
series, to create a new series of preferred shares and to establish preferences
and all other terms and conditions in regard to such newly-created series. Any
of those actions will dilute the holders of common shares and also affect the
relative position of the holders of any series of any class. Current
stockholders have no rights to prohibit such issuances nor inherent "preemptive"
rights to purchase any such stock when offered.

USE OF PROCEEDS

Our net proceeds from the sale of the 8,000,000 shares of common stock
being offered hereby at an estimated offering price of $.50 per share are
estimated to be $3,954,000, after deducting estimated offering expenses, which
are estimated to be approximately $46,000. The net proceeds are intended to be
used over the next 12 months as follows:

Application of Proceeds Amount Percentage
----------------------- ------ ----------

Sales and Marketing(1)...................... $ 500,000 12.6%
Research and Development(2)................. 600,000 15.2
Acquisition of Capital Equipment(3)......... 50,000 1.3
Repayment of Debt(4)........................ 400,000 10.1
Working Capital(5).......................... 2,404,000 60.8
---------- -----
Total.................................. $3,954,000 100.0%
=====
-------------------------------

(1) Represents funds required for the implementation of our direct sales
force, attendance at trade shows and production and dissemination of
promotional materials.

(2) A majority of these funds will be used for the enhancement and
upgrading of our current products approved for sale. These funds will
also pay expenses associated with conducting and evaluating the
clinical trials and seeking government approvals for our products and
developing new products and patents. Included in this estimate are
costs associated with the development of the Photon(TM) laser system,
including completion of the clinical trials.

(3) Represents funds required to expand in-house manufacturing capabilities
to reduce product costs.

(4) These funds will be used to pay our obligations to suppliers and
vendors as well as royalty obligations.

(5) Working capital will be available for use as a reserve for
contingencies. In the event cash generated from operations is
insufficient to fund corporate overhead, working capital may be used to
cover such deficiency.

The allocation of the net proceeds set forth above represents our
estimates based upon our current operating plans and upon certain assumptions
regarding the progress of the development of our products, technological
advances and changing competitive conditions, and assumptions regarding industry
and general economic conditions and other conditions. Future events, including
problems, delays, expenses and complications frequently encountered by companies
developing new products, as well as changes in competitive conditions and the
success or lack thereof of our research and development or marketing efforts,
may make it necessary or advisable for us to reallocate the net proceeds among
the above users or use portions of the net proceeds for other purposes. Any
reallocation of the net proceeds other than as provided above, will be at the
discretion of our board of directors. We estimate that the net proceeds will be
sufficient to fund our proposed business and operations for a period of 12
months from the closing of the offering. If our estimates prove incorrect, we
will have to seek alternative sources of financing during such period, including
debt and equity financing and the reduction of operating cost and projected
growth plans. No assurance can be given that such financing could be obtained by
us on favorable terms, if at all, and if we are unable to obtain needed
financing, our business would be materially adversely affected. The timing and
amount of expenditures of the net proceeds of this offering may vary depending
upon the pace of our growth.

Pending application, the net proceeds of the offering will be invested
in short-term, high-grade interest-bearing savings accounts, certificates of
deposit, United States government obligations, money market accounts or
short-term interest bearing obligations.

DIVIDEND POLICY

We have never paid any cash dividends on our common stock and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. Dividends paid in cash pursuant to outstanding shares of our Series A,
Series C, Series D, Series E and Series F preferred stock are only payable from
our surplus earnings and are non-cumulative and therefore, no deficiencies in
dividend payments from one year will be carried forward to the next. We
currently intend to retain future earnings, if any, to fund the development and
growth of our proposed business and operations. Any payment of cash dividends in
the future on the common stock will be dependent upon our 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 our board of directors deems relevant.

CAPITALIZATION

The following table sets forth our the capitalization (i) at March 31,
2003, and (ii) as adjusted to give effect to the sale of 8,000,000 shares of
common stock offered hereby at a minimum price of $.50 per share and the initial
application of the proceeds therefrom as set forth in the Use of Proceeds.

March 31, 2003
-------------------------------
Actual As Adjusted(1)
------ -----------

Long-term obligations(2)............................................. $ 80,000 -

Stockholders' Equity:

Series A Preferred Stock, $.001 par value per share;
500,000 shares authorized, 5,627 issued and outstanding......... - -

Series B Preferred Stock, $.001 par value per share; 500,000
shares authorized, 8,986 issued and outstanding................. - -

Series C Preferred Stock, $.001 par value per share;
30,000 shares authorized, 0 issued and outstanding............. - -

Series D Preferred Stock, $.001 par value per share;
1,140,000 shares authorized, 5,000 issued and outstanding....... - -

Series E Preferred Stock, $.001 par value per share;
50,000 shares authorized, 1,500 issued and outstanding.......... - -

Series F Preferred Stock, $.001 par value per share;
50,000 shares authorized, 5,774 issued and outstanding.......... - -

Common Stock, $.001 par value per share; 40,000,000 shares
authorized, 21,986,874 issued and outstanding (29,986,874
issued and outstanding, as adjusted)............................ 22,000 30,000

Additional paid-in-capital, common stock........................ 56,776,000 60,722,000

Stock subscription receivable................................... (294,000) (294,000)

Accumulated deficit............................................. (54,359,000) (54,359,000)

Total stockholders' equity .......................................... 2,145,000 6,099,000

Total Capitalization................................................. 2,225,000 6,099,000

(1) Adjusted to give effect to the net proceeds received from the sale of
8,000,000 shares of common stock offered hereby at a minimum price of
$.50 per share and the application of proceeds therefrom as set forth
in the Use of Proceeds.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our authorized capital stock consists of 80,000,000 shares of common
stock, $.001 par value per share, and 5,000,000 shares of preferred stock, $.001
par value per share. We have created six classes of preferred stock, designated
as Series A preferred stock, Series B preferred stock, Series C preferred stock
, Series D preferred stock, Series E preferred stock and Series F preferred
stock.

Our common stock and Class A warrants trade on the OTC Bulletin Board
under the respective symbols of "PMED.OB" and "PMEDW.OB." Prior to July 22,
1996, there was no public market for the common stock. From July 22, 1996 to
June 25, 2003, our common stock and Class A warrants were listed on the Nasdaq
SmallCap Market. As of July 2, 2003, the closing sale prices of the common stock
and Class A warrants were $.245 per share and $.10 per warrant, respectively.
The following are the high and low sale prices for the common stock and Class A
warrants by quarter as reported by Nasdaq since January 1, 2000.

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

2000
First Quarter........................ 14.50 6.88 6.50 2.63
Second Quarter....................... 10.50 4.19 3.63 1.19
Third Quarter........................ 6.19 3.38 2.00 .50
Fourth Quarter....................... 4.94 1.31 1.25 .50

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

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

2003
First Quarter........................ .42 .14 .12 .01
Second Quarter....................... .74 .14 .44 .01

Our Series A preferred stock, Series B preferred stock, Series C
preferred stock, Series D preferred stock, Series E preferred stock and Series F
preferred stock are not publicly traded. As of December 31, 2002, there were 717
record holders of common stock, six record holders of Series A preferred stock,
four record holders of Series B preferred stock, no record holders of Series C
preferred stock, one record holder of Series D preferred stock, 14 record
holders of Series E preferred stock and 52 record holders of Series F preferred
stock.

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

We currently intend to retain future earnings, if any, to fund the
development and growth of our proposed business and operations. Any payment of
cash dividends in the future on the common stock will be dependent upon our
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 our board of directors deems
relevant. We issued 6,764 shares of our Series A preferred and 6,017 shares of
our 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.

SELECTED FINANCIAL DATA

The following table sets forth our selected financial data for the
years ended December 31, 2001 and 2002, and the three months ended March 31,
2002 and 2003. The selected financial data as of and for the years ended
December 31, 2000 and 2001 are derived from our financial statements which have
been audited by Tanner & Co. The selected financial data as of and for the three
months ended March 31, 2002 and 2003 are derived from our unaudited quarterly
financial statements. The following financial information should be read in
conjunction with the Financial Statements, and related notes thereto, included
at Exhibit "A" attached hereto.

For the year ended For three months ended
December 31, March 31,
2001 2002 2002 2003
------------- -------------- ------------- -------------
Statement of Operations Data: (Unaudited) (Unaudited)
-----------------------------

As of As of
Balance Sheet Data: December 31, 2002 March 31, 2003
------------------ ----------------- --------------

Current assets.................................... $ 3,868,000 $ 3,444,000
Current liabilities............................... 2,362,000 2,519,000
Working capital .................................. 1,506,000 925,000
Total assets...................................... 5,289,000 4,744,000
Accumulated deficit............................... (53,656,000) (54,359,000)
Stockholder's equity ............................. 2,847,000 2,145,000

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

MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION

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

General

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

Our ultrasound diagnostic products include a pachymeter, an A-Scan, an
A/B Scan and a biomicroscope, the technology for which was acquired from
Humphrey Systems in 1998. We introduced the P45 in the fall of 2000, which
combines the A/B Scan, and the biomicroscope in one machine. In addition, we
market our Blood Flow Analyzer(TM) acquired in the purchase of Ocular Blood Flow
Ltd. in June 2000. Other diagnostic products are the Dicon(TM) Perimeter and the
Dicon (TM) Corneal Topographer which were acquired in the acquisition of Vismed
d/b/a Dicon in June 2000. We purchased the inventory, design and production
rights of the SIStem(TM) from Mentor Corporation in October 1999 which was
designed to perform minimally invasive cataract surgery. In November 1999, we
entered into a Mutual Release and Settlement Agreement with the manufacturer of
the Precisionist ThirtyThousand(TM) in which we purchased the raw material and
finished goods inventory to bring the manufacturing of this product in-house.
FDA approval for our Photon(TM) laser system for cataract removal is in process.

Activities for the twelve months ended December 31, 2002 included sales
of our products and related accessories and disposable products. On May 7, 2002,
we received a letter from the FDA requesting further clinical information. We
are in the process of generating the additional clinical information in response
to the letter. We cannot market or sell the Photon(TM) in the United States
until FDA approval is granted. On November 4, 2002, we 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, we are continuing
our aggressive campaign to educate the payers of Medicare claims throughout the
country about the Blood Flow Analyzer(TM), its purposes and the significance of
our performance in patient care in order to achieve reimbursements to the
providers. These efforts should lead to a more positive effect on sales.

In April 2002, We announced the closure of our San Diego facility in
anticipation of the termination of the lease for that location. The operations
were transferred to the Salt Lake City facility. We incurred a reduction of
force of 28 San Diego personnel. The consolidation was intended to save costs
and to eliminate duplicities in functions and facilities that occurred with the
acquisition of Dicon. The cost of the consolidation was approximately $80,000.

In January 2002, we purchased certain assets and lease obligations of
Innovative Optics, Inc. ("Innovative Optics") by issuing an aggregate of
1,272,825 shares of our common stock (636,412 shares are held in escrow pending
the result of a project to reduce the cost of the disposable razor blades
utilized by the microkeratome, which was acquired in the transaction), warrants
to purchase 250,000 shares of our common stock at $5.00 per share, exercisable
over a period of three years from the closing date, and $100,000 in cash. The
transaction was accounted for as a purchase in accordance with Statement of
Financial Accounting Standards No. 141 ("SFAS No. 141").

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

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

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

Results of Operations

Three Months Ended March 31, 2003, Compared to Three Months Ended March 31, 2002

Net sales for the three months ended March 31, 2003 were $727,000 as
compared to $1,537,000 for the same period of 2002 due principally to the
decrease in sales of the Blood Flow Analyzer(TM) and the UBM biomicroscope.
Sales of the Blood Flow Analyzer(TM) decreased by $107,000 to $163,000, or 22%
of total revenues for the three months ended March 31, 2003, compared to
$270,000, or 18% of total revenues for the same period in 2002. We believe that
the decline in sales of the Blood Flow Analyzer(TM) is due to difficulties some
users of the Blood Flow Analyzer(TM) have had in obtaining reimbursement from
insurance carriers. Certain payers have elected not to reimburse the doctors per
the common procedure terminology ("CPT") code assigned to us by the American
Medical Association. We are continuing our aggressive campaign to educate the
payers about the Blood Flow Analyzer(TM), its purposes and the significance of
its performance in patient care in order to achieve reimbursements to the
providers. Sales of the ultrasonicbiomicroscope were $43,000 during the first
quarter 2003, or 6% of total quarterly revenues, compared to $194,000, or 13% of
total revenues for the same period last year. The decline in sales of the UBM
biomicroscope was a result of our reduced sales and marketing force. Due to the
limited number of sales and marketing personnel, we have recently been unable to
continue the marketing efforts that have been sustained in the past. Sales from
the other ultrasonic products were $94,000, or 13% of total revenues for the
quarter ended March 31, 2003, compared to $200,000, or 13% of total quarterly
revenues for the same period last year. Sales of the Dicon products, the
perimeter and corneal topographer, were $258,000, or 36% of the total revenues
for the current quarter, compared to $284,000, or 18% of the total revenues for
the same quarter of 2002. Sales from the surgical line totaled $31,000, or 4% of
total revenues for the three months ended March 31, 2003, compared to $75,000,
or 5% of total revenues for the corresponding period of 2002.

Gross profit for the three months ended March 31, 2003 was 52% of total
revenues, and 45% of total revenues for the comparable period of 2002. Cost of
goods sold for the three months ended March 31, 2003 and 2002, respectively, did
not include significant write downs of inventory. The increase in gross margin
percentage was mainly due to efficiencies gained through the reduction of
employees.

Marketing and selling expenses decreased by approximately $693,000 to
$322,000, for the three months ended March 31, 2003, from $1,015,000 for the
comparable period in 2002 due mainly to less personnel related expenses and
travel reimbursements. We had fewer salespersons during the first quarter of
2003, compared to the number of sales persons employed during the first quarter
of 2002. Payroll related expenses and travel reimbursements were $220,000 in
2003, compared to $592,000 for the same period in 2002. The first quarter of
2002 also included additional marketing and advertising expenses including
tradeshow expenses of $327,000, compared to $12,000 for the three months ended
March 31, 2003.

General and administrative expenses decreased by $521,000 to $477,000
for the three months ended March 31, 2003, from $998,000 for the comparable
period in 2002 due principally to the cost reductions implemented by us during
2002, which included the closure of our San Diego facility. For the period
ending March 31, 2003, personnel costs decreased by $190,000, travel related
costs decreased by $50,000 and consulting and legal costs decreased by $234,000.

Research, development and service expenses were $281,000 for the three
months ended March 31, 2003, compared to $750,000 recorded in the same period of
2002, a decrease of $469,000. Service department expenses decreased in the first
quarter of 2003 from the same period of 2002 by $32,000 due principally to the
reduction of personnel in this department. Production development and support
expenses, which includes indirect manufacturing costs of purchasing, shipping
and supervisory personnel, decreased by $354,000 in the first quarter of 2003,
compared to the same period a year ago due mainly to decreased personnel
resulting from the San Diego facility closure in 2002.

Other expense decreased by $2,000 for the three months ended March 31,
2003 to $4,000, from $6,000 for the same period in 2002 as a result of a
decrease in interest expense from capital leases.

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

Consolidated sales for the twelve months ended December 31, 2002 were
$5,368,000 compared to $7,919,000 for the same period for 2001, approximately a
32% decrease due principally to a decline in sales of the Blood Flow
Analyzer(TM). We have experienced a general decline in sales during 2002. The
reduction of our domestic sales force, competition and the downturn in the
economy are all factors contributing to the decline in sales. Additionally,
certain payers have elected not to reimburse the doctors per the common
procedure terminology ("CPT") code assigned to us by the American Medical
Association, which has caused decreased sales of the Blood Flow Analyzer(TM) in
2002. The revenues generated from sales of the Blood Flow Analyzer(TM) were
$459,000 and slightly less than $2,000,000, or 9% and 25% of total revenues for
2002 and 2001, respectively. On November 4, 2002, we 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, we are continuing
our aggressive campaign to educate the payers about the Blood Flow Analyzer(TM),
its purposes and the significance of its performance in patient care in order to
achieve reimbursements to the providers. This effort should have a positive
effect on sales.

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

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

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

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

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

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

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

We recognized impairment expenses of $2,961,000 during the year ended
December 31, 2002 principally due to the requirements of SFAS No. 142, which
requires impairment of intangible assets if the valuation cannot support the
asset value recorded. We acquired the assets of Innovative Optics, Inc. in
January 2002. The principal product was a microkeratome with the corresponding
disposable blades. This acquisition resulted in goodwill of $1,949,000. We were
unsuccessful in producing the blades for the user base at a cost that was
economically feasible. The original process proved unworkable and unprofitable.
We decided not to continue supporting the product, thus creating an event that
resulted in impairing the intangible asset as recorded at the time of purchase
of $2,082,000. In addition, we impaired the fixed assets acquired from
Innovative Optics, Inc. in the amount of $30,000.

our common stock to IBS and its counsel. The issuance of 736,945 shares were
valued based on the market price of our common stock on the date of the
transaction and resulted in an investment in IBS, when combined with a cash
investment of $65,000 made in 2000, of $879,000. The 300,000 shares were also
valued at the market price on the date of issuance and were recorded as a stock
subscription receivable of $294,000 because such shares will either be paid for
or returned in the future. IBS is a privately held biotechnology based, cancer
diagnostic and immunotherapy company with potential clinically effective
products for the diagnosis, treatment and imaging of patients with major tumor
types (e.g. colon, lung, cervix, pancreas and breast). IBS is located in Great
Neck, New York. IBS does not produce significant revenues as its products have
not received FDA approval. Due to the uncertainty of future cash flows and the
fact that the products have not been approved by the FDA, we were unable to
support the value of the investment by substantiated methods and determined that
the likelihood of recovery of its investment was remote. Therefore, in
accordance with generally accepted accounting principles the investment of
$879,000 was charged to impairment expense

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

We incurred a net loss of $11,155,000, or ($.63) per share based upon
17,736,0000 weighted average shares outstanding for the year ended December 31,
2002. This compares to a net loss applicable to common shareholders of
$13,044,000, or ($.98) per share, based on 13,245,000 weighted average shares
outstanding for the year ended December 31, 2001. For the year ended December
31, 2001, the net loss attributable to common shareholders included a reduction
of $2,901,000 in connection with two private placements offered by us in 2001
($2,587,000 was attributable to the beneficial conversion feature included in
the Series E and Series F Preferred Stock offerings and $314,000 represented the
computed value of the warrants associated with the Series E Preferred Stock
offering). No such calculation was included in the net loss for the fiscal year
2002. The net loss for 2002 included $2,961,000 of impairment expense due
principally to the write down of intangible assets in excess of current
valuation.

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

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

We used cash in operating activities of $87,000 for the three months
ended March 31, 2003, compared to $1,334,000 for the three months ended March
31, 2002. The decrease in cash used by operating activities for the first three
months of 2003 was primarily attributable to reduced operating costs, including
the closure of the San Diego facility. We did not use any cash in investing
activities for the three months ended March 31, 2003, compared to $210,000 in
the same period in 2002. Cash used in investing activities in the first three
months of 2002 was primarily due to the cash paid in the acquisition of certain
assets of Innovative Optics and capital equipment. Net cash used in financing
activities was $15,000 for the three months ended March 31, 2003 and 2002,
resulting from principal payments on lease obligations.

We used cash in operating activities of $2,872,000 for twelve months
ended December 31, 2002, compared to $8,799,000 for the twelve months ended
December 31, 2001. We decreased our inventory balance by $952,000 during the
year by decreasing purchases as compared to 2001 and utilizing the inventory on
hand in our production. In anticipation of building product to meet sales
demand, more specifically, for the Blood Flow Analyzer and the P45 ultrasonic
Biomicroscope workstation plus, we purchased significant amounts of inventory in
2001. Trade receivables decreased by $1,473,000 mainly due to the increased
collection of outstanding accounts and to lower sales during 2002. We used cash
in investing activities of $299,000 for the twelve months ended December 31,
2002, compared to $246,000 for the year 2001 due mainly to less fixed asset
additions during 2002 compared to the same period in 2001. Net cash provided by

financing activities for the twelve months ended December 31, 2002 was $503,000,
compared to $9,553,000 for the year ended December 31, 2001. We received
$8,965,000 in net proceeds from two private placements, the Series E and Series
F Preferred Stock offerings during 2001, compared to net proceeds from one
private placement of common stock in 2002 of $631,000. We also sold 392,000
shares of our common stock under the $20,000,000 equity line for $673,000 in
2001 reducing the amount available under the equity line to approximately
$18,500,000. No sales of common stock under the equity line occurred during
2002. Debt reduction for the year was $59,000.

As of March 31, 2003, we had raised approximately $1,500,000 through a
$20,000,000 equity line of credit under an investment banking arrangement. As of
March 31, 2003, approximately $18,500,000 was available under the equity line of
credit. In the past, we have relied heavily upon sales of our common and
preferred stock to fund operations. There can be no assurance that such equity
funding will be available on terms acceptable to us in the future. We will
continue to seek funding to meet our working capital requirements through
collaborative arrangements and strategic alliances, additional public offerings
and/or private placements of its securities or bank borrowings. We are uncertain
whether or not the combination of existing working capital, benefits from sales
of our products and the private equity line of credit will be sufficient to
assure our operations through December 31, 2003.

We have taken measures to reduce the amount of uncollectible accounts
receivable such as more thorough and stringent credit approval, improved
training and instruction by sales personnel, and frequent direct communication
with the customer subsequent to delivery of the system. The allowance for
doubtful accounts was 13% of total outstanding receivables as of December 31,
2001, compared to 27% as of December 31, 2002, and 23% as of March 31, 2003.
Much of the increase in the allowance relates to our outstanding receivable
balance pertaining to our international dealers. The downturn in the economy
worldwide has resulted in increased difficulty in collecting certain accounts.
Certain international dealers have some aged unpaid invoices that have not been
resolved. We have addressed our credit procedures and collection efforts during
2002 and have instituted changes that require more payments at the time of sale
via letters of credit and not on a credit term basis. Such changes have resulted
in a decrease in the allowance as a percentage of total accounts receivable at
March 31, 2003, however, we intend to continue our efforts to reduce the
allowance as a percentage of accounts receivable.

We carried an allowance for obsolete inventory of $2,251,000 at March
31, 2003, and $2,126,000 as of December 31, 2002, or approximately 48% and 45%
of total inventory, respectively. This inventory reserve was increased by
$125,000 in the first quarter of 2003 and $1,755,000 during 2002 mainly due to
sales declines and the discontinuance of the microkeratome purchased from
Innovative Optics in 2002. Our 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, we have acquired
substantial inventory, some of which the eventual use and recoverability was
uncertain. In addition, we have a significant amount of inventory relating to
our 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.

At March 31, 2003, we had net operating loss carryforwards (NOLs) of
approximately $41,000,000 and research and development tax credit carryforwards
of approximately $34,000. These carryforwards are available to offset future
taxable income, if any, and began to expire in the year 2001 and extend for
twenty years. Our ability to use our net operating loss carryforwards (NOLs) to
offset future income is dependent upon certain limitations as a result of the
pooling transaction with Vismed, Inc. d/b/a Dicon and the tax laws in effect at
the time the NOLs can be utilized. The Tax Reform Act of 1986 significantly
limits the annual amount that can be utilized for certain of these carryforwards
as a result of changes of ownership.

Effect of Inflation and Foreign Currency Exchange

We have not realized a reduction in the selling price of our products
as a result of domestic inflation. Nor have we experienced unfavorable profit
reductions due to currency exchange fluctuations or inflation with its foreign
customers. All sales transactions to date have been denominated in US Dollars.

Impact of New Accounting Pronouncements

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

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

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

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

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

BUSINESS

General

We develop, manufacture, source, market and sell ophthalmic surgical
and diagnostic instrumentation and related accessories, including disposable
products. Our surgical equipment is designed for minimally invasive cataract
treatment. We market three cataract surgery systems with related accessories and
disposable products. Our flagship cataract removal system, the Photon(TM) laser
system, is a laser cataract surgery system marketed as the next generation of
cataract removal. The Photon(TM) product is currently under review by the Food
Drug and Administration ("FDA"). The Photon(TM) is available for sale in many
markets outside of the United States. Both the Photon(TM) and the Precisionist
ThirtyThousand(TM) are manufactured as an Ocular Surgery Workstation(TM). We
plan to market the Ocular Surgery Workstation(TM) as a plug-in module for the
Photon(TM) and other lasers for use in eye care and other medical specialties.
We also offer the SIStem(TM), a mid-range priced ultrasonic phaco, and competes
in the market segment that only desires an ultrasonic phaco.

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

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

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

On July 23, 1998, we 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, we 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 our common stock, we 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 us 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 our cataract surgical equipment
and our ocular Blood Flow Analyzer(TM). The Ultrasonic Biometer calculates the
prescription for the intraocular lens to be implanted during cataract surgery.
The Ultrasound Pachymeter measures corneal thickness for the new refractive
surgical applications that eliminate the need for eyeglasses and for optometric
applications including contact lens fitting. The A/B Scan System combines the
Ultrasonic Biometer and ultrasound imaging for advanced diagnostic testing
throughout the eye and is a viable tool for retinal specialists. The Ultrasound
Biomicroscope utilizes microscopic digital ultrasound resolution for detection
of tumors and improved glaucoma management. We introduced the P45 in the fall of
2000, which combines the A/B Scan, and the Ultrasonic Biometer in one machine.

On October 21, 1999, we purchased Mentor's surgical product line,
consisting of the Phaco SIStem(TM), the Odyssey(TM) and the Surg-E-Trol(TM).
This acquisition rounds out our cataract surgery product line by adding
entry-level, moderately priced cataract surgery products. The transaction was
paid for with $1.5 million worth of our common stock.

On June 5, 2000, we purchased Vismed Inc. d/b/a Dicon(TM) under a
pooling of interest accounting treatment. The purchase included the Dicon(TM)
perimeter product line consisting of the LD 400, the TKS 4000, the SST(TM),
FieldLink(TM), FieldView(TM) and Advanced FieldView and the corneal topographer
product line, the CT 200(TM), the CT 50 and an ongoing service and software
business. Perimeters are used to determine retinal sensitivity testing the
visual pathway. Corneal topographers are used to determine the shape and
integrity of the cornea, the anterior surface of the eye. Corneal topographers
are used for the refractive surgical applications that eliminate the need for
eyeglasses and for optometric applications including contact lens fitting.

In January 2002, we purchased the Innovatome(TM) microkeratome of
Innovative Optics, Inc. ("Innovative Optics") by issuing an aggregate of
1,272,825 shares of its common stock, warrants to purchase 250,000 shares of our
common stock at $5.00 per share, exercisable over a period of three years from
the closing date, and $100,000 in cash. The transaction was accounted for as a
purchase in accordance with Statement of Financial Accounting Standards No. 141
("SFAS No. 141").

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

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

Background

Corporate History: Our business originated with Paradigm Medical, Inc.
("PMI"), a California corporation formed in October 1989. PMI developed our
present ophthalmic business and was operated by our founders Thomas F. Motter
and Robert W. Millar. In May 1993, PMI merged with us. At the time of the
merger, we were a dormant public shell existing under the name French Bar
Industries, Inc. ("French Bar"). French Bar had operated a mining and tourist
business in Montana. Prior to its merger with PMI in 1993, French Bar had
disposed of its mineral and mining assets in a settlement of outstanding debt
and had returned to the status of a dormant entity. Pursuant to the merger, we
caused a 1-for-7.96 reverse stock split of our shares of common stock. We then
acquired all of the issued and outstanding shares of common stock of PMI using
shares of our own common stock as consideration. As part of the merger, we
changed our name from French Bar Industries, Inc. to Paradigm Medical
Industries, Inc. and the management of PMI assumed control of the company. In
April 1994, we caused a 1-for-5 reverse stock split of our shares of common
stock. In February 1996, we 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 pressure in the eye),
corneal disorders such as scars, defects and irregular surfaces and
vitro-retinal disorders such as the attachment of membrane growths to the retina
causing blood leakage within the eye. All of these disorders can impair vision.
Many refractive disorders can be corrected through the use of eyeglasses and
contact lenses. Myopia (nearsightedness), hyperopia (farsightedness) and
presbyopia (inability to focus) are three of the most common refractive
disorders.

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

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

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

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

Products

Our principal proprietary surgical products are systems for use by
ophthalmologists to perform surgical treatment procedures to remove cataracts.
We have complete ownership of each product with no technological licensing
limitations.

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

Precisionist ThirtyThousand(TM): The Precisionist ThirtyThousand(TM)
(the "Precisionist(TM)") is our core phaco surgical technology. The
Precisionist(TM) was placed into production and offered for sale in 1997. As a
phaco cataract surgery system, we believe the Precisionist(TM) with its new
fluidics panel is equal or superior to the present competitive systems in the
United States. The system features a graphic color display and unique
proprietary on-board computer and graphic user interface linked to a soft-key
membrane panel for flexible programmable operation. The system provides
real-time "on-the-fly" adjustment capabilities for each surgical parameter
during the surgical procedure for high-volume applications. In addition, the
Precisionist(TM) provides one hundred pre-programmable surgery set-ups, with a
second level of sub-programmed custom modes within each major surgical screen
(i.e., ultrasound phaco and irrigation/aspiration modes). The Precisionist(TM)
features our newly developed proprietary fluidics panel which is completely
non-invasive for improved sterility and to provide a surgical environment in the
eye that virtually eliminates fluidic surge and solves chamber maintenance
problems normally associated with phaco cataract surgery. This new fluidics
system provides greater control for the surgeon and allows the safe operation at
much higher vacuum settings by sampling changes in aspiration 100 times per
second. Greater vacuum in phaco surgery means less use of ultrasound or laser
energy to fragment the cataract and less chance for surrounding tissue damage.
In addition to the full complement of surgical modalities (e.g., irrigation,
aspiration, bipolar coagulation and anterior vitrectomy), system automation
includes "dimensional" audio feedback of vacuum levels and voice confirmation
for major system functions, providing an intuitive environment in which the
advanced phaco surgeon can concentrate on the surgical technique rather than the
equipment. Sales of the Precisionist(TM) were not significant in the fiscal
years 2002 or 2001.

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

Photon(TM) Laser System: The Photon(TM) laser cataract system, which is
still subject to FDA approval, is designed to be installed as a seamless plug-in
upgrade or add-on to our Precisionist(TM) Ocular Surgery Workstation(TM). The
plug-in platform concept is unique in the ophthalmic surgical market for systems
of this magnitude and presents a unique market opportunity for us. The main
elements of the laser system are the Nd:YAG laser module, Photon(TM) laser
software package and interchangeable disposable hand-held fiber optic laser
cataract probe. The Photon(TM) laser utilizes the on-board microprocessor
computer of the Workstation(TM) to generate short pulse laser energy developed
through the patented LCP(TM) to targeted cataract tissue inside the eye, while
simultaneously irrigating the eye and aspirating the diseased cataract tissue
from the eye. The probe is smaller in diameter than conventional ultrasound
phaco needles and presents no damaging vibration or heat build-up in the eye.
Our 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 which utilize a more delicate clear cornea incision which can
eliminate sutures and be conducted with topical anesthesia. However, this system
may not effectively remove harder grade cataracts. Harder grade cataracts can be
removed using the already existing ultrasound capability of the
Precisionist(TM).

We intend to refine the laser delivery system and laser cataract
surgical technique used on soft cataracts through expanded research and clinical
studies. As far as the we 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.

Our laser system is based upon the concept that pulsed laser energy
produced with the micro-processor controlled Nd:YAG laser system provides
ophthalmic surgeons with a more precise and less traumatic alternative in
cataract surgery. Although conventional ultrasonic surgical systems have proven
effective and reliable in clinical use for many years, their use of high
frequency shock waves and vibration to fragment the cataract can make the
procedure difficult and can present risk of complication both during and after
surgery. In contrast, our 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, our
Photon(TM) laser cataract system should only affect tissues it comes into direct
contact with.

In addition to cataract surgery, we believe that our Photon(TM) laser
system is capable of being configured with specialty probes for use in other
ophthalmic surgical and other medical procedures. In October of 2000, we
received FDA approval for the Photon(TM) Workstation(TM) to be used with a 532mm
green laser which is effective for medical procedures other than cataract
removal, such as photocoagulation of retinal and venous anomalies within or
outside the eye, pigmented lesions around the orbital socket, posterior or
anterior procedures associated with glaucoma or diabetes and general
photocoagulation for various dermatological venous anomalies including
telangiectasia (surface veins), or commonly referred to as "spider veins". The
goal is to be able to integrate multiple laser wavelengths into one system or
workstation that can be used for multiple medical specialties. This approval
represents only one of the potential applications that could represent
substantial growth opportunities including additional sales of equipment,
instruments, accessories and disposables. The Photon(TM) Ocular Surgery
Workstation(TM) has not been commercially developed with any other added
hardware or software features. There is no guarantee that the ophthalmic surgery
market will accept the laser in this capacity or that the FDA will grant
approval. See the Regulation section below.

Surgical Instruments, Accessories and Disposables: In addition to the
cataract surgery equipment, our 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. We intend to expand its
disposable accessories as it further penetrates the cataract surgery market and
expands the treatment applications for its Workstation(TM). These products
contributed approximately 11% and 8% of total revenues for 2002 and 2001,
respectively.

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

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

We market the Blood Flow Analyzer(TM) as a stand-alone model packaged
with a custom built computer system. The Blood Flow Analyzer(TM) utilizes a
single-use disposable cover for its AMAP(TM) corneal probe which is shipped in
sterile packages. The AMAP(TM) probe tip cover provides accurate readings and
acts as a prophylactic barrier for the patient. The device has been issued a
patent in the European Economic Community and the United States and has a patent
pending in Japan. The FDA cleared the Blood Flow Analyzer(TM) for marketing in
June 1997 and we commenced selling the system in September 1997. In addition to
the Humphrey products, this diagnostic product allowed us 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 our surgical systems.

In April 2001, we received authorization from the CPT Code Research and
Development Division of the American Medical Association to use a common
procedure terminology (CPT) code for our Blood Flow Analyzer(TM) which provides
for a reimbursement to doctors. However, certain payers have elected not to
reimburse doctors using the Blood Flow Analyzer(TM). We are continuing our
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. The manufacturing activities for the
Blood Flow Analyzer(TM) have been moved to the Salt Lake City facility from the
outsourced plant located in England. The revenues from sales of the Blood Flow
Analyzer(TM) represented approximately 9% and 25% of total 2002 and 2001
revenues, respectively. On November 4, 2002, we 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, we are continuing
its aggressive campaign to educate the payers about the Blood Flow Analyzer(TM),
its purposes and the significance of its performance in patient care in order to
achieve reimbursements to the providers. These efforts should lead to a more
positive effect on sales

Dicon(TM) perimeters consist of the LD 400, the TKS 4000, the SST(TM),
FieldLink(TM), FieldView(TM) and Advanced FieldView. Perimeters are used to
determine retinal sensitivity testing the visual pathway. Perimeters have become
a standard of care in the detection and monitoring of glaucoma worldwide.
Perimetry is reimbursable worldwide. The Dicon(TM) perimeters feature patented
kinetic fixation and voice synthesis now in 27 different languages. Software
programs are sold to assist in the analysis of the test results. Sales of the
perimeters generated approximately 20% and 15% of the 2002 and 2001 total
revenues, respectively.

Dicon(TM) corneal topographers include the CT 200(TM) and the CT 50.
Corneal topographers are used to determine the shape and integrity of the
cornea, the anterior surface of the eye. Clinical applications for corneal
topographers include refractive surgery that eliminates the need for eyeglasses
and optometric applications including contact lens fitting. Revenues from the
topographer were 7% and 12% of the total revenues for 2002 and 2001,
respectively.

Pachymetric Analyzer: The ultrasonic pachymeter is used for measurement
of corneal thickness. The Model P55 is positioned as a standard office
pachymeter. This device is targeted to the refractive surgery market and
contributed approximately 3% and 1% to the total revenues for 2002 and 2001,
respectively.

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

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

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

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

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

Marketing and Sales

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

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

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

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

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

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

Manufacturing and Raw Materials: Currently, we maintain a 31,000 square
foot facility in Salt Lake City and an 800 square foot facility in Oceanside,
California. We transferred the manufacturing activities for the Blood Flow
Analyzer(TM) to San Diego from OBF in England during 2001. During the second
quarter of 2002, we consolidated and closed the San Diego operations into the
Salt Lake City facility. The facility accommodates our manufacturing, marketing
and engineering capabilities. We manufacture under systems of quality control
and testing, which comply with the Quality System Requirements (QSR) established
by the FDA, as well as similar guidelines established by foreign governments,
including the CE Mark and IS0-9001.

We subcontract 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 our
financial purchasing capabilities and pricing needs. We manufacture the LCP(TM)
laser cataract probe and some of its surgical instruments, accessories and
fluidics surgical tubing sets at our facility in Salt Lake City.

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

Research and Development

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

We believe our research and development capabilities provide us 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. We intend to continue investing in research and
development and to strengthen our ability to enhance existing products and
develop new products.

Competition

General. We are 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. We believe that the combined sales of five entities account for over
90% of the cataract surgery market. The remaining market is fragmented among
emerging smaller companies, some of which are foreign. The ophthalmic diagnostic
market has a similar composition.

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

The Cataract Surgical System Industry: presently, the major
manufacturers utilizing ultrasonic technology offer products currently in use.
Those systems rely on accessories including single-use cassette packs and other
ancillary surgical disposables such as saline solution, sutures and intraocular
lenses for their profits. The cassette packs are required for fluid and tissue
collection during the surgical procedure. The cassette packs are generally
unique and proprietary to their respective systems and represent a barrier to
entry for third-party, lower-cost after-market suppliers. While there is growing
market resistance in the United States and internationally to single-use
cassettes, we anticipate 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. Our Precisionist Thirty
Thousand(TM) ultrasonic phaco system has the ability to use either reusable or
single-use disposable components. The Photon(TM) laser cataract system will
utilize probes and cassette packs designed for single-use and semi-disposable
instruments priced at a level consistent with the demands of health care cost
containment. This will allow the health care providers a substantial measure of
cost containment, while providing us 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, we are
establishing ourself and, as yet, do not hold a significant share of the market.
We currently recognize Bausch & Lomb, Alcon Laboratories, and Allergan Medical
Optics as our primary competitors in the ultrasound phaco cataract equipment
market.

Laser Equipment Manufacturers. To the our knowledge, there are several
other companies attempting to develop laser equipment for cataract surgery.
These companies can be differentiated by the laser wavelength employed for the
cataract surgery. Based on the information currently available to us; Er:YAG
laser wavelength appears to offer a less viable means of removing cataracts than
the Nd:Yag wavelength used by the Photon(TM). One competitor uses a Nd:YAG
wavelength, however the laser is used only to vibrate an ultrasonic needle. Thus
the device remains an ultrasonic system subject to same risk factors of phaco,
thereby eliminating the benefits of using a laser to remove the cataract. We
also believe that our 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, we are
seeking to exploit these opportunities. Depending upon further developments, we
may ultimately exploit those opportunities through a merger with a stronger
entity already established or one that desires to enter the medical industry.

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

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

We are 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 we believe account for the majority of
diagnostic equipment sales. We continue 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 our analyzer retail at comparable prices. Thus, we believe
that we can compete in the diagnostic market place based upon the lower price
and improved diagnostic functions of the analyzer.

Intellectual Property Protection

Our cataract surgical products are proprietary in design, engineering
and performance. Our 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.

We did acquire proprietary intellectual property in the transaction
with Humphrey Systems when we purchased the diagnostic ultrasonic product line
in 1999. This technology uses ultrasound to create a high-resolution computer
image of the unseen parts of the eye that is a "map" for the practitioner.

The Photon(TM) laser cataract probe is protected under a United States
patent issued in 1987 to Daniel M. Eichenbaum, M.D. and subsequently assigned to
Photomed International, Inc. ("Photomed") and a Japanese patent issued in 1997
to us for the utility and methods of laser ablation, aspiration and irrigation
of tissue through a hand-held probe of a unique design. We secured the exclusive
worldwide right to this patent shortly after its issue, and to the international
patents pending, from Photomed by means of a license agreement (the "License
Agreement"). The License Agreement was amended on December 5, 1997 to allow
Photomed the right to conduct research, development and marketing utilizing the
patent in certain medical subspecialties other than ophthalmology for which we
would receive royalty payments equal to 1% of the proceeds from the net sales of
products utilizing the patent. See "Management" and "Certain Relationships and
Related Transactions."

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

Our trademarks are important to our business. It is our policy to
pursue trademark registrations for its trademarks associated with its products
as appropriate. Also, we rely on common law trademark rights to protect its
unregistered trademarks, although common law trademark rights do not provide us
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.

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

Regulation

The FDA under the FD&C Act regulates our 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 us to show
reasonable assurance of safety and effectiveness regarding our products.
Pursuant to the FD&C Act, the FDA regulates the manufacture, distribution and
production of medical devices in the United States and the export of medical
devices from the United States. Noncompliance with applicable requirements can
result in fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, denial of Premarket clearance or
approval for devices. Recommendations by the FDA that we not be allowed to enter
into government contracts and criminal prosecution may also be made.

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

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

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

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

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

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

Any products manufactured or distributed by us pursuant to a premarket
clearance notification or PMA are or will be subject to pervasive and continuing
regulation by the FDA. The FD&C Act also requires that our products be
manufactured in registered establishments and in accordance with QSR
regulations. Labeling, advertising and promotional activities are subject to
scrutiny by the FDA and, in certain instances, by the Federal Trade Commission.
The export of medical devices is also subject to regulation in certain
instances. In addition, the use of our products may be regulated by various
state agencies. All lasers manufactured for us 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 we believe that we currently comply and will continue to
comply with all applicable regulations regarding the manufacture and sale of
medical devices, such regulations are always subject to change and depend
heavily on administrative interpretations. There can be no assurance that future
changes in review guidelines, regulations or administrative interpretations by
the FDA or other regulatory bodies, with possible retroactive effect, will not
materially adversely affect us. In addition to the foregoing, we are 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 we 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 our ability to conduct business.

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

Congress has considered several comprehensive federal health care
programs designed to broaden coverage and reduce the costs of existing
government and private insurance programs. These programs have been the subject
of criticism within Congress and the health care industry, and many alternative
programs and features of programs have been proposed and discussed. Therefore,
we cannot predict the content of any federal health care program, if any is
passed by Congress, or its effect on us and our 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 our 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 our
business could result in volatility of the market price of our common stock.

Furthermore, the introduction of our products in foreign countries may
require us to obtain foreign regulatory clearances. We believe that only a
limited number of foreign countries have extensive regulatory requirements,
including France, Germany, Korea, China and Japan. The time involved for

regulatory approval in foreign countries varies and can take a number of years.
A number of European and other economically advanced countries, including Italy,
Norway, Spain and Sweden, have not developed regulatory agencies for intensive
supervision of such devices. Instead, they generally have been willing to accept
the approval of the FDA. Therefore, a PMA, Section 510(k) or approved IDE from
the FDA is tantamount to approval in those countries. These countries and most
developing countries have simply deferred direct discretion to licensed
practicing surgeons to determine the nature of devices that they will use in
medical procedures. Our two ultrasound systems, the Photon(TM) laser cataract
system we are developing and the ocular blood flow analyzer are all devices,
which require FDA approval. Therefore, a significant aspect of the acceptance of
the devices in the market is the our effectiveness in obtaining the necessary
approvals. Having an approved IDE allows us to export a product to qualified
investigational sites.

Regulatory Status of Products

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

We acquired permission from the FDA to export the Photon(TM) Laser
Cataract System outside the United States under an open IDE granted by the FDA
in September 1994. Although the Photon(TM) laser cataract system is uniquely
configured in an original and proprietary manner, the laser system, a Nd:YAG
laser, is not proprietary to the device or us 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 our
belief that the surgical treatment method used with the Photon(TM) laser is
similar to the current ultrasound cataract treatment employed by
ophthalmologists.

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

Subsequent to the warning letter, we received approval to continue our
clinical trials, the results of which were included in our supplemental
submission to the FDA in October 2001 for the existing (510)(k) predicate device
application for the Photon(TM) laser system. In December 2001, we received a
preliminary review from the FDA regarding the supplemental submission. As a
result of that preliminary review, we submitted additional clinical information
to the FDA on February 6, 2002. The application is receiving ongoing review by
the FDA. We believe all items in the warning letter have been satisfied and the
clinical trials and their data are in good standing. On May 7, 2002, we received
a letter from the FDA requesting further clinical information. We are in the
process of generating the additional clinical information in response to the
letter. We expect to make a submission to the FDA with the additional clinical
information within the first quarter of 2004. We believe the costs of generating
the additional clinic information will not be substantial and will not adversely
impact the results of our operations.

Facilities

Our executive offices are currently located at 2355 South 1070 West,
Salt Lake City, Utah. This facility consists of approximately 29,088 square feet
of leased office space under a three-year lease that was to expire on March 1,
2003 with an additional three-year renewal option. These facilities are leased
from Eden Roc, a California partnership, at a base monthly rate of $21,163 plus
a $3,342 monthly common area maintenance fee. In January 2003, we renegotiated a
three-year lease with Eden Roc at a monthly rate of $12,500 plus a $2,500 common
area maintenance fee for the year 2003, with rate increases to $12,875 for 2004
and to $13,261 for 2005. Pursuant to the lease, we pay all real estate and
personal property taxes and the insurance costs on the premises.

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

We believe that these facilities are adequate and satisfy its needs for
the foreseeable future.

Employees

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

In December 2001, we initiated the first phase of a corporate
downsizing program to reduce our operating expenses. We implemented the second
phase of our downsizing program in the second quarter of 2002, by closing and
transferring our manufacturing from our 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 our employees has
been reduced by 77% from 112 to 26 employees. The estimated cost savings from
the downsizing program will be in excess of $2,000,000 annually. The costs of
downsizing have included one-time expenses of approximately $43,000 for moving
and travel. In addition, we incurred additional one-time expenses of
approximately $18,000 for housing accommodations for key employees working in
Salt Lake City. We realized a net cost savings from downsizing of approximately
$2,394,000 during the twelve month period ended December 31, 2002.

Legal Proceedings

An action was brought against us 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 we owe Mr. Wiseman 6,370 shares of our common stock
plus costs, attorney's fees and a wage penalty (equal to 1,960 additional shares
of our common stock) pursuant to Utah law. The action is based upon an extension
of a written employment agreement. We believe the complaint is without merit and
intend to vigorously defend against the action.

An action was brought against us on March 7, 2000 in the Third District
Court of Salt Lake County, State of Utah, by the Merrill Corporation that
alleges that we owe the plaintiff approximately $20,000 together with interest
thereon at the rate of 10% per annum from August 30, 1999, plus costs and
attorney's fees. The complaint alleges a breach of contract relative to printing
services. We filed an answer to the complaint and discovery is proceeding. We
believe that the complaint against us is without merit and intend to vigorously
defend against the action.

An action was brought against us in September 2000 by PhotoMed
International, Inc. and Daniel M. Eichenbaum in the Third District Court of Salt
Lake County, State of Utah. The action involves an amount of royalties that are
allegedly due and owing to PhotoMed International, Inc. and Dr. Eichenbaum with
respect to the sales of certain equipment plus attorney's fees. Discovery has
taken place and we have paid royalties of $14,736 to bring all payments up to
date through June 30, 2001. We are in the process of working with Photomed
International and Dr. Eichenbaum to ensure that the calculations have been
correctly made on the royalties paid as well as the proper method of calculation
for the future. It is anticipated that once the parties can agree on the correct
calculations on the royalties, the legal action will be dismissed.

We received demand letters dated September 29, 2002 and December 10,
2002 from counsel for CitiCorp, Vendor Finance, Inc. and its
successor-in-interest, The Copy Man, dba TCM Business. The letters demand
payment of $49,627 plus interest for the leasing of two copy machines that were
delivered to our Salt Lake City facilities on or about April of 2000. The
majority of the amounts alleged to be owed by us are from the remaining payments
on the leases. We dispute the amounts allegedly owed, asserting that the copy
machines, which it returned to the leasing company, did not operate properly.

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

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

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

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

In or about March 2002, we were involved in the sale of certain
equipment to a physician in Mexico. To assist in the accomplishment of the
transaction, we arranged for financing with Franklin Funding, Inc. with us as
lessee. The term was 60 months with payments of $1,731 per month. Westland
Financial Corporation was to take us out with Westland being directly involved
with the physician. Westland made several of the monthly payments to Franklin,
the last being made in or about October 2002. We are working to have Westland
assume its contemplated responsibility so as to protect us in our relationship
with Franklin. No litigation has been commenced.

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

We are 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 our financial
condition or results of operations.

MANAGEMENT

Directors and Executive Officers

As of June 30, 2003, our executive officers and directors, their ages
and their positions are set forth below:

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

Jeffrey F. Poore 55 President and Chief Executive Officer
Gregory Hill 54 Vice President of Finance, Treasurer, and
Chief Financial Officer
Randall A. Mackey, Esq. 57 Chairman of the Board, Secretary and
Director
David M. Silver, PhD. 61 Director
Keith D. Ignotz 54 Director

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

Jeffrey F. Poore, D.D.S. has served as President and Chief Executive
Officer of our company since March 24, 2003. Dr. Poore served as Court Appointed
Receiver and Custodian of a $50 million a year company from 2000 to 2003. From
1998 to 2000, Dr. Poore served as Chief Executive Officer for Outsource Group, a
high-tech company that produces medical practice management software. From 1996
to 1998, he served as Chairman, Chief Executive Officer and acting President of
Healthchair Group, Inc., a manufacturer of medical and dental equipment. From
1994 to 1996, Dr. Poore served as President and Chief Executive Officer of

Comphealth, one of the nation's largest health care professional staffing
organizations. From 1985 to 1992, Dr. Poore served as Associate Regional Vice
President of FHP of Utah, Inc. He earned a B.A. degree in Economics from Brigham
Young University in 1971, and a D.D.S. degree from Loyola Medical Center in
1976. Dr. Poore also served as a director of Interwest Home Medical from 1995
until its acquisition by Praxair in June 2001

Gregory Hill has served as Vice President of Finance, Treasurer and
Chief Financial Officer of our company since June 3, 2003. From 1999 to 2001,
Mr. Hill served as Senior Vice President, Chief Financial Officer and Treasurer
of Lineo, Inc., a software company specializing in embedded systems. From 1997
to 1999, he was employed by Sensorium Software, Inc., where he served as Chief
Financial Officer. From 1995 to 1997, Mr. Hill was Treasurer of Quark, Inc., a
desktop publishing software company. Mr. Hill also served as Vice President and
Treasurer of Tyco Toys, Inc. from 1993 to 1995, where he directed the worldwide
treasury of Tyco Toys. Mr. Hill received a B.S. degree from the Massachusetts
Institute of Technology (M.I.T.) in 1973 and an M.B.A. degree from the Harvard
Business School in 1976.

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

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

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

Technical and Medical Advisory Personnel

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

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

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

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

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

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

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

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

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

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

David Silver, Ph.D. -- Dr. Silver is a Principal Senior Scientist in
the Milton S. Eisenhower Research and Technology Development Center at the Johns
Hopkins University Applied Physics Laboratory. He received a Ph.D. degree from
Iowa State University.

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

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

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

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

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

Board Meetings and Committees

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

The Audit Committee

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

Executive Compensation

The following table sets forth, for each of the last three fiscal
years, the compensation received by Thomas F. Motter, former Chairman of the
Board, and Chief Executive Officer and other executive officers (collectively,
the "Named Executive Officers") whose salary and bonus for all services in all
capacities exceed $100,000 for the fiscal years ended December 31, 2002, 2001
and 2000.

Summary Compensation Table

Annual Compensation Long-Term Compensation
Awards Payouts

Other Securities
Annual Restricted Underlying Long-term All Other
Name and Compensa- Stock Options/ Incentive Compensa-
Principal Position Period Salary$ Bonus($) tion($)(6) Awards($) SARs(#) Payouts($) tion($)(4)
------------------ ------ ------- -------- ---------- --------- ---------- ---------- ----------

Thomas F. Motter 2001(1) $200,000 $ 22,380(7) 0 0 925,000(9) 0 $ 6,000(4)
Former Chairman of the 2000(2) $178,357 $486,113(6) 0 0 0 $ 28,792(5)
Board and Chief 1999(3) $141,208 0 0 0 50,000(10) 0 $ 5,000(5)
Executive Officer

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

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

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

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

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

Number of Securities Underlying Value of Unexercised
Unexercised Options/SARs In-the-Money Options/SARs
At December 31, 2002(#) At December 31, 2002($)
Shares Acquired Value
Name On Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
------------------------------------------------------------------------------------------------------------------------------

Mark R. Miehle 0 0 102,500 212,500 0 0
Aziz Mohabbat 0 0 17,500 42,500 0 0
Heber C. Maughan 0 0 7,500 22,500 0 0

Director Compensation

On September 11, 2001, Messrs. Randall A. Mackey, Dr. David M. Silver
and Keith D. Ignotz, directors of our company, were each granted options to
purchase 125,000 shares of our Common Stock at an exercise price of $2.75 per
share. On September 11, 2001, Messrs. Mackey and Silver were each granted
options to purchase 200,000 shares of our Common Stock at an exercise price of
$2.75 per share in consideration for past services as our directors from
November 1995 to September 1998 and since January 2000. In addition, outside
directors are also reimbursed for their expenses in attending board and
committee meetings. Directors are not precluded from serving us in any other
capacity and receiving compensation therefore. The options were not issued at a
discount to the then market price.

Employee 401(k) Plan

In October 1996, our Board of Directors adopted a 401(k) Retirement
Savings Plan. Under the terms of the 401(k) plan, effective as of November 1,
1996, we may make discretionary employer matching contributions to our 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 us and satisfy other plan
requirements are eligible to participate in the 401(k) plan.

1995 Stock Option Plan

We adopted a 1995 Stock Option Plan (the "Plan"), for the officers,
employees, directors and consultants of our company on November 7, 1995. The
Plan authorized the granting of stock options ("Plan Options") to purchase an
aggregate of not more than 300,000 shares of our common stock. On February 16,
1996, options for substantially all 300,000 shares were granted. On June 9,
1997, our 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, our 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, our 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, our 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, our shareholders approved an amendment to the Plan to increase the member
of shares of common stock reserved for issuance thereunder from 2,700,000 shares
to 3,700,000 shares.

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

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

Employment Agreements

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

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

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

Limitation of Liability and Indemnification

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

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

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

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

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

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information with respect to
beneficial ownership of our common stock as of March 31, 2003 for (i) each
executive officer (ii) each director, (iii) each person known to us to be the
beneficial owner of more than 5% of the outstanding shares, and (iv) all
directors and officers as a group.

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

Douglas A. MacLeod, M.D. (2) 4,150,707 17.2%
502 South M Street
Tacoma Washington 98405

Jeffrey F. Poore(3) 800,000 3.3

Dr. David M. Silver(4) 491,166 2.0

Randall A. Mackey(4) 475,000 2.0

Keith D. Ignotz(5) 204,560 *

Gregory Hill -- *

Executive officers and directors
as a group (five persons) 1,970,726 8.2%
-----------------
*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) Includes the stock held by Douglas A. MacLeod, M.D. Profit Sharing
Trust, St. Mark's Eye Institute and Milan Holdings, Ltd. (3) Includes
options to purchase 800,000 shares of Common Stock granted to Dr. Poore
that are currently exercisable or will become exercisable within 60
days of March 31, 2003.
(4) Includes options to purchase 475,000 shares of Common Stock granted to
each of Dr. Silver and Mr. Mackey that are currently exercisable or
will become exercisable within 60 days of March 31, 2003.
(5) Includes options to purchase 203,851 shares of Common Stock granted to
Mr. Ignotz that are currently exercisable or will become exercisable
within 60 days of March 31, 2003.

CERTAIN TRANSACTIONS

The information set forth herein describes certain transactions between
us 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 us than those that could be obtained from unaffiliated parties.

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

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

Randall A. Mackey, a director since January 21, 2000, and from
September 1995 to September 3, 1998 and chairman of the board since August 30,
2002, is President and a shareholder of the law firm of Mackey Price & Thompson,
which rendered legal services in connection with various corporate matters.
Legal fees and expenses paid to Mackey Price & Thompson for the fiscal years
ended December 31, 2002 and 2001, totaled $167,000 and $159,000, respectively.
As of December 31, 2002, we owed this firm $47,000, which is included in
accounts payable.

DESCRIPTION OF SECURITIES

Our authorized capital stock consists of 80,000,000 shares of common
stock, $.001 par value per share, and 5,000,000 shares of preferred stock, $.001
par value per share. We have created six classes of preferred stock, designated
as Series A preferred stock, Series B preferred stock, Series C convertible
preferred stock, Series D convertible preferred stock, Series E convertible
preferred stock and Series F convertible preferred stock.

Common Stock. The holders of common stock are entitled to one vote for
each share held of record on all matters to be voted on by stockholders. The
holders of common stock are entitled to receive such dividends, if any, as may
be declared from time to time by the Board of Directors in its discretion from
legally available funds. Upon our liquidation or dissolution, the holders of
common stock are entitled to receive, pro rata, assets remaining available for
distribution to stockholders. The common stock has no cumulative voting,
preemptive or subscription rights and is not subject to any future calls. There
are no conversion or redemption rights applicable to the shares of common stock.
All the outstanding shares of common stock are fully paid and nonassessable.

Preferred Stock. The Board of Directors is authorized, without further
action by the stockholders, to issue, from time to time, up to 5,000,000 shares
of preferred stock in one or more classes or series, and to fix or alter the
designations, power and preferences, and relative participation, option or other
rights, if any, and qualifications, limitations or restrictions thereof,
including, without limitation, dividend rights (and whether dividends are
cumulative), conversion rights, if any, voting rights (including the number of
votes, if any, per share), redemption rights (including sinking fund provisions,
if any), and liquidation preferences of any unissued shares or wholly unissued
series of preferred stock, and the number of shares constituting any such class
or series and its designation and to increase or decrease the number of such
class or series subsequent to the issuance of shares of such class or series,
but not below the number of shares of such class or series then outstanding. The
issuance of any series of preferred stock under certain circumstances could have
the effect of delaying, deferring or preventing a change in control and could
adversely affect the rights of the holders of the common stock. As of the date
of this Memorandum, we have created and issued shares of five classes of
preferred stock more fully discussed below.

Series A Preferred Stock. The Board of Directors has authorized the
issuance of a total of 500,000 shares of Series A preferred stock. Each share of
Series A preferred stock is convertible into shares of common stock at a rate of
1.2 shares of common stock for each share of Series A preferred stock. We may,
at our sole option, at any time, redeem all of the then-outstanding shares of
Series A preferred stock at a price of $4.50 per share, plus accrued and unpaid
dividends, if any. The holders of shares of Series A preferred stock are
entitled to non-cumulative preferred dividends at the rate of $0.24 per share of
Series A preferred stock per annum, payable in cash on or before December 31 of
each year, commencing December 31, 1995. Such dividends, however, can only be
paid from our surplus earnings and further, because these dividends are
non-cumulative, no deficiencies in dividend payments from any calendar year can
be carried forward to the next calendar year. The Series A preferred stock has
priority rights to dividends over the common stock, but will not participate in
any dividends payable to the holders of shares of common stock. No dividends
will be paid to holders of shares of common stock unless and until all dividends
on shares of preferred stock have been paid in full for the same period. Except
upon the redemption of the Series A preferred stock or before the payment of
dividends on any shares of capital stock that are on par with or junior or
subordinate to the Series A preferred stock as to dividends, or upon our
liquidation, dissolution or winding-up, the payment of dividend from surplus
earnings was not mandatory prior to December 31, 1995. In the event of any
liquidation, dissolution or winding-up, the holders of shares of Series A
preferred stock are entitled to receive, prior and in preference to, any
distribution of any of the assets or surplus funds to the holders of shares of
common stock or any other stock ranking on liquidation junior or subordinate to
the Series A preferred stock, an amount equal to $1.00 per share, plus accrued
and unpaid dividends, if any. Holders of shares of Series A preferred stock have
no voting rights, except in those instances required by Delaware law.

As of June 30, 2003, there were a total of 5,627 shares of Series A
preferred stock issued and outstanding. A total of 6,753 shares of common stock
has been set aside and reserved in the event the holders of shares of Series A
preferred stock elect to convert those shares into shares of common stock. As of
June 30, 2003, 116,897 shares of Series A preferred stock have been converted
into 140,276 shares of common stock.

Series B Preferred Stock. The Board of Directors has authorized the
issuance of a total of 500,000 shares of Series B preferred stock. Each share of
the Series B preferred stock is convertible into shares of common stock at a
rate of 1.2 shares of common stock for each share of Series B preferred stock.
We may, at our sole option, at any time, redeem all of the then-outstanding
shares of Series B preferred stock at a price of $4.50 per share, plus accrued
and unpaid dividends, if any. The holders of shares of Series B preferred stock
are entitled to non-cumulative preferred dividends at the rate of $0.48 per
share of Series B preferred stock per annum, payable in cash on or before
December 31 of each year, commencing December 31, 1995. Such dividends, however,
can only be paid from our surplus earnings and further, because these dividends
are non-cumulative, no deficiencies in dividend payments from any calendar year
can be carried forward to the next calendar year. The Series B preferred stock
has priority rights to dividends over the common stock, but will not participate
in any dividends payable to the holders of shares of common stock. No dividends
will be paid to holders of shares of common stock unless and until all dividends
on shares of preferred stock have been paid in full for the same period. Except
upon the redemption of the Series B preferred stock or before the payment of
dividends on any shares of capital stock that are on par with or junior or
subordinate to the Series B preferred stock as to dividends, or upon our
liquidation, dissolution or winding-up, the payment of dividends from surplus
earnings was not mandatory prior to December 31, 1995. In the event of any
liquidation, dissolution or winding-up, the holders of shares of Series B
preferred stock are entitled to receive, prior and in preference to, any
distribution of any of the assets or surplus funds to the holders of shares of
common stock or any other stock ranking on liquidation junior or subordinate to
the Series B preferred stock, an amount equal to $4.00 per share, plus accrued
and unpaid dividends, if any. Holders of shares of Series B preferred stock have
no voting rights, except in those instances required by Delaware law.

As of June 30, 2003, there were a total of 8,986 shares of Series B
preferred stock issued and outstanding. A total of 10,783 shares of common stock
have been set aside and reserved in the event the holders of shares of Series B
preferred stock elect to convert those shares into shares of common stock. As of
June 30, 2003, 484,014 shares of Series B preferred stock have been converted
into 580,817 shares of common stock.

Series C Preferred Stock. The Board of Directors has authorized the
issuance of a total of 30,000 shares of Series C preferred stock at $100 per
share. Each share of Series C preferred stock is convertible into shares of
common stock at an initial conversion price equal to $1.75 per share of common
stock (or approximately 57.14 common shares for each share of Series C preferred
stock), subject to adjustments for stock splits, stock dividends and certain
combinations or recapitalizations in respect of the common stock. The shares are
also automatically converted into common stock upon 30 days' written notice by
us to the holders of the shares after (i) the 30-day anniversary of the
effective date of the filing of a registration statement in which shares of
common stock issuable upon conversion of the shares were registered and (ii) the
average closing price of the common stock for the 20-day period immediately
prior to the date in which notice of conversion is given to the holders of the
shares is at least $3.50 per shares. Any shares still outstanding after January
1, 2002 shall be mandatorily converted at such date at the conversion price then
in effect. Holders of the shares have no redemption rights. The holders of
shares of Series C preferred stock are entitled to 12% non-cumulative preferred
dividends. However, the shares shall be entitled to dividends declared on the
common stock on an as-converted basis. Such dividends shall accrue from the date
of issuance or the last preferred dividend record date and be payable in cash or
shares of common stock. Such dividends, however, can only be paid at our sole
option from surplus earnings and further, because these dividends are non-
cumulative, no deficiencies in dividend payments from any calendar year can be
carried forward to the next calendar year. In the event of any liquidation,
dissolution, sale of all or substantially all of the assets or merger or
consolidation (and, in case of a merger or consolidation, Paradigm is not the
surviving entity), the holders of Series C preferred stock shall be entitled to
receive, in preference to the holders of all other classes of capital stock,
whether now existing or hereinafter created (other than Series A preferred stock
and Series B preferred stock with which Series C preferred stock shall, for
purposes of a liquidation, rank junior), an amount per share equal to the
greater of (A) the amount such shares would have received had such holders
converted the Series C preferred stock into common stock immediately prior to
such liquidation, plus declared or unpaid dividends or (B) or the stated value,
$100 per share, subject to such liquidation plus declared but unpaid dividends.
Holders of shares of Series C preferred stock shall have no voting rights,
except in those instances required by Delaware law.

As of June 30, 2003, there were no shares of Series C preferred stock
issued and outstanding. As of June 30, 2003, 29,990 shares of Series C preferred
stock have been converted into 1,713,714 shares of common stock.

Series D Convertible Preferred Stock. The Board of Directors authorized
the issuance of a total of 1,140,000 shares of Series D convertible preferred
stock at $1.75 per share. Each share of Series D preferred stock is convertible
into one share of common stock, subject to adjustments for stock splits, stock
dividends and certain combinations or recapitalizations in respect of the common
stock. The shares are also automatically converted into common stock upon 30
days' written notice by us to the holders of the shares after (i) the 30-day
anniversary of the effective date of a registration statement in which shares of
common stock issuable upon conversion of the shares are registered and (ii) the
average closing price of the common stock for the 20-day period immediately
prior to the date in which notice of conversion is given to the holders of the
shares is at least $3.50 per share. Any shares still outstanding after January
1, 2002 shall be mandatorily converted at such date at the conversion price then
in effect. Holders of the shares have no redemption rights. The holders of
shares of Series D preferred stock are entitled to 10% non-cumulative preferred
dividends. Additionally, holders of the shares will receive any dividends
declared on the common stock on an as-converted basis. Such dividends accrue
from the date of issuance or the last preferred dividend record date and are
payable in cash or shares of common stock. Such dividends, however, can only be
paid at our sole option from surplus earnings and further because these
dividends are non-cumulative, no deficiencies in dividend payments from any
calendar year can be carried forward to the next calendar year. In the event of
any liquidation, dissolution, sale of all or substantially all of the assets or
merger or consolidation (and, in case of a merger or consolidation, we are not
the surviving entity), the holders of Series D preferred stock are entitled to
receive, in preference to the holders of all other classes of capital stock,
whether now existing or hereinafter created, other than Series A preferred
stock, Series B preferred stock and Series C preferred stock with which Series D
preferred stock shall, for purposes of a liquidation, rank junior, an amount per
share equal to the greater of (A) the amount such shares would have received had
such holders converted the Series D preferred stock into common stock
immediately prior to such liquidation, plus declared or unpaid dividends or (B)
or the stated value, $1.75 per share, subject to such liquidation plus declared
but unpaid dividends. Holders of shares of Series D preferred stock have no
voting rights, except in those instances required by Delaware law.

As of June 30, 2003, there were a total of 5,000 shares of Series D
preferred stock issued and outstanding. A total of 8,750 shares of common stock
has been set aside and reserved in the event the holders of the Series D
preferred stock elect to convert those shares into shares of common stock. As of
June 30, 2003, 1,630,000 shares of Series D preferred stock have been converted
into 1,985,000 shares of common stock.

Series E Preferred Stock. The Board of Directors has authorized the
issuance of a total of 50,000 shares of Series E preferred stock at a stated
value of $100 per share. Each share of Series E preferred stock is convertible
into shares of common stock at an initial conversion price equal to $1.875 per
share of common stock (or 53.33 common shares for each share of Series E
preferred stock), subject to adjustments for stock splits, stock dividends and
certain combinations or recapitalizations in respect of the common stock. The
shares are also automatically converted into common stock upon 30 days' written
notice by us to the holders of the shares after (i) the 30-day anniversary of
the effective date of the filing of a registration statement in which shares of
common stock issuable upon conversion of the shares were registered and (ii) the
average closing price of the common stock for the 20-day period immediately
prior to the date in which notice of conversion is given to the holders of the
shares is at least $3.50 per share. Any shares still outstanding after January
1, 2005 shall be mandatorily converted at such date at the conversion price then
in effect. Holders of the shares have no redemption rights. The holders of
shares of Series E preferred stock are entitled to 8% non-cumulative preferred
dividends. However, the shares shall be entitled to dividends declared on the
common stock on an as-converted basis. Such dividends shall accrue from the date
of issuance or the last preferred dividend record date and be payable in cash or
shares of common stock. Such dividends, however, can only be paid at our sole
option from surplus earnings and further, because these dividends are non-
cumulative, no deficiencies in dividend payments from any calendar year can be
carried forward to the next calendar year. In the event of any liquidation,
dissolution, sale of all or substantially all of the assets or merger or
consolidation (and, in case of a merger or consolidation, we are not the
surviving entity), the holders of Series E preferred stock shall be entitled to
receive, in preference to the holders of all other classes of capital stock,
whether now existing or hereinafter created (other than Series A preferred
stock, Series B preferred stock, Series C preferred stock and Series D
convertible preferred stock with which Series E preferred stock shall, for
purposes of a liquidation, rank junior), an amount per share equal to the
greater of (A) the amount such shares would have received had such holders
converted the Series E preferred stock into common stock immediately prior to
such liquidation, plus declared or unpaid dividends or (B) or the stated value,
$100 per share, subject to such liquidation plus declared but unpaid dividends.
Holders of shares of Series E preferred stock shall have no voting rights,
except in those instances required by Delaware law.

As of June 30, 2003, there were a total of 1,500 shares of Series E
preferred stock issued and outstanding. A total of 80,000 shares of common stock
has been set aside and reserved in the event the holders of Series E preferred
stock elect to convert those shares into shares of common stock. As of June 30,
2003, 44,719 shares of Series E preferred stock have been converted into
2,385,013 shares of common stock.

Series F Preferred Stock. The Board of Directors has authorized the
issuance of a total of 50,000 shares of Series F preferred stock at a stated
price of $100 per share. Each share of Series F preferred stock is convertible
into shares of common stock at an initial conversion price equal to $1.875 per
share of common stock (or 53.33 common shares for each share of Series E
preferred stock), subject to adjustments for stock splits, stock dividends and
certain combinations or recapitalizations in respect of the common stock. The
shares are also automatically converted into common stock upon 30 days' written
notice by us to the holders of the shares after (i) the 30-day anniversary of
the effective date of the filing of a registration statement in which shares of
common stock issuable upon conversion of the shares were registered and (ii) the
average closing price of the common stock for the 20-day period immediately
prior to the date in which notice of conversion is given to the holders of the
shares is at least $3.50 per share. Any shares still outstanding after January
1, 2005 shall be mandatorily converted at such date at the conversion price then
in effect. Holders of the shares have no redemption rights. The holders of
shares of Series F preferred stock are entitled to 8% non-cumulative preferred
dividends. However, the shares shall be entitled to dividends declared on the
common stock on an as-converted basis. Such dividends shall accrue from the date
of issuance or the last preferred dividend record date and be payable in cash or
shares of common stock. Such dividends, however, can only be paid at our sole
option from surplus earnings and further, because these dividends are non-
cumulative, no deficiencies in dividend payments from any calendar year can be
carried forward to the next calendar year. In the event of any liquidation,
dissolution, sale of all or substantially all of the assets or merger or
consolidation (and, in case of a merger or consolidation, we are not the
surviving entity), the holders of Series F preferred stock shall be entitled to
receive, in preference to the holders of all other classes of capital stock,
whether now existing or hereinafter created (other than Series A preferred
stock, Series B preferred stock, Series C preferred stock, Series D Convertible
preferred stock and Series E preferred stock with which Series F preferred stock
shall, for purposes of a liquidation, rank junior), an amount per share equal to
the greater of (A) the amount such shares would have received had such holders
converted the Series F preferred stock into common stock immediately prior to
such liquidation, plus declared or unpaid dividends or (B) or the stated value,
$100 per share, subject to such liquidation plus declared but unpaid dividends.
Holders of shares of Series F preferred stock shall have no voting rights,
except in those instances required by Delaware law.

As of June 30, 2003, there were 5,603.75 shares of Series F preferred
stock issued and outstanding. A total of 298,867 shares of common stock has been
set aside and reserved in the event the holders of Series F preferred stock
elect to convert those shares of common stock. As of June 30, 2003, 42,443.25
shares of Series F preferred stock have been converted into 2,263,639 shares of
common stock.

Although we were not instructed by any regulatory body to actually
conduct the Rescission Offer, we decided to go forward with the Rescission Offer
to reduce any type of potential contingent liability we may be exposed to in
connection with our private placement of Series B preferred stock. The
Rescission Offer is designed to reduce such contingent liability by placing the
Series B Stockholders on notice of possible defects and presenting them with an
opportunity to avoid or mitigate damages. The Rescission Offer, however, may not
fully relieve us from exposure to contingent liability under federal or state
securities laws.

Class A Warrants. Each Class A warrant entitles the holder to purchase
one share of common stock at an exercise price of $7.50 per share. Class A
warrants are exercisable through July 10, 2003, provided that at the time of
exercise a current prospectus relating to the common stock is then in effect and
the common stock is qualified for sale or exempt from qualification under
applicable state securities laws. The Class A warrants are subject to redemption
by us commencing July 10, 1997, upon 30 days' written notice, at a price of $.05
per Class A warrant if the average closing bid price of the common stock for any
30 consecutive business days ending within 15 days of the date of which the
notice of redemption is given shall have exceeded $8.50 per share. Holders of
Class A warrants automatically forfeit their rights to purchase the shares of
common stock issuable upon exercise of such warrants unless the warrants are
exercised before the close of business on the business day immediately prior to
the date set for redemption. All outstanding Class A warrants must be redeemed
if any Class A warrants are redeemed. A notice of redemption shall be mailed to
each of the registered holders of the Class A warrants by first class mail,
postage prepaid, 30 days before the date fixed for redemption. The notice of
redemption shall specify the redemption price, the date fixed for redemption,
the place where the Class A warrant certificates shall be delivered and the
redemption price to be paid, and that the right to exercise a Class A warrant
shall terminate at 5:00 p.m. (Salt Lake City time) on the business day
immediately preceding the date fixed for redemption.

The Class A warrants may be exercised upon surrender of the
certificate(s) therefore on or prior to the expiration or the redemption date at
the offices of Continental Stock Transfer & Trust Company, our warrant agent
(the "Warrant Agent") with the subscription form on the reverse side of the
certificate(s) completed and executed as indicated, accomplished by payment (in
the form of a certified or cashier's check payable to the order of Paradigm) of
the full exercise price for the number of warrants being exercised.

The Class A warrants contain provisions that protect the holders
thereof against dissolution by adjustment of the exercise price per share and
the number of shares issuable upon exercise thereof upon the occurrence of
certain events including issuances of common stock (or securities convertible,
exchangeable or exercisable into common stock) at less than market value, stock
dividends, stock splits, mergers, sale of substantially all of our assets, and
for other extraordinary events; provided, however, that no such adjustment shall
be made upon, among other things (i) the issuance or exercise of options or
other securities under employee benefit plans (ii) the sale or exercise of
outstanding options or warrants or the Class A warrants, or (iii) the conversion
of shares of our preferred stock to common stock.

We are not required to issue fractional shares of common stock, and in
lieu thereof will make a cash payment based upon the current market value of
such fractional shares. The holder of Class A warrants will not possess any
right as a shareholder of Paradigm unless or until he or she exercises the Class
A warrants. As of June 30, 2003, the Class A warrants have not been exercised.

Series E Preferred Stockholders Warrants. In connection with the sale
of 48,219 shares of Series E preferred stock through a private offering in
reliance on the exemption contained in Section 4(2) of the Securities Act of
1933, as amended, and pursuant to the provisions of Rule 506 of Regulation D
promulgated thereunder, we issued warrants to holders of Series E preferred
stock to purchase 241,095 shares of common stock. Each warrant entitled the
holder to purchase one share of common stock at an exercise price of $4.00 per
share. The warrants are exercisable through May 23, 2006. These warrants contain
provisions that protect the holder thereof against dilution by adjustment of the
exercise price per share and the number of shares issuable upon exercise thereof
upon the occurrence of certain events, including stock dividends, stock splits,
mergers and the sale of substantially all of our assets. We are not required to
issue fractional shares of common stock, and in lieu thereof will make a cash
payment based upon the current market value of such fractional shares. The
holders of the warrants will not possess any rights as shareholders unless and
until the holders exercise the warrants. As of June 30, 2003, none of the Series
E Preferred Shareholders warrants has been exercised.

Series F Preferred Stockholders Warrants. In connection with the sale
of 48,046 shares of Series F preferred stock through a private offering in
reliance on the exemption contained in Section 4(2) of the Securities Act of
1933, as amended, and pursuant to the provisions of Rule 506 of Regulation D
promulgated thereunder, we issued warrants to purchase 251,114 shares of common
stock. Each Warrant entitled the holder to purchase one share of common stock at
an exercise price of $4.00 per share. The warrants are exercisable through
August 20, 2006. These warrants contain provisions that protect the holder
thereof against dilution by adjustment of the exercise price per share and the
number of shares issuable upon exercise thereof upon the occurrence of certain
events, including stock dividends, stock splits, mergers and the sale of
substantially all of our assets. We are not required to issue fractional shares
of common stock, and in lieu thereof will make a cash payment based upon the
current market value of such fractional shares. The holders of the warrants will
not possess any rights as shareholders unless and until the holders exercise the
warrants. As of June 30, 2003, none of the Series F Preferred Shareholders
warrants has been exercised.

Kenneth Jerome Warrants. In connection with our public offering, we
issued and sold warrants to Kenneth Jerome & Company, Inc. ("Kenneth Jerome")
the underwriters of that offering, to purchase 100,000 shares of common stock at
$8.125 per share commencing July 10, 1998 and continuing to be exercisable until
July 10, 2003, and an additional 100,000 shares of common stock at a price of
$7.50 per share exercisable for the same period of time. During the exercise
period, holders of the Kenneth Jerome warrants are entitled to certain demand

and incidental registration rights with respect to the securities issuable upon
exercise of the Kenneth Jerome warrants. The number of shares covered by the
Kenneth Jerome warrants are subject to adjustment in certain events to prevent
dissolution. We may redeem the Kenneth Jerome warrants beginning July 10, 1998
at a price of $.05 per warrant at such time as our common stock has been trading
on The Nasdaq SmallCap Market or an established exchange at a price equal to or
above $10.00 per share for a period of 30 consecutive business days ending
within 15 days of the date of redemption. Prior to July 10, 1998, the Kenneth
Jerome warrants are not transferable except to officers and directors of the
representative, co-underwriters, selling group members and their officers or
partners. As of June 30, 2003, none of the Kenneth Jerome warrants has been
exercised.

KSH Investment Group Warrants. In connection with our Series D
Preferred private placement, we issued warrants to KSH Investment Group, Inc.
("KSH Investment Group") warrants to purchase 208,400 shares of common stock.
These warrants consist of Placement Agent Warrants to purchase 68,400 shares of
common stock at any time not later than February 12, 2004 at exercise price of
$2.50 per share for warrants to purchase 55,539 shares of common stock, $2.69
per share for warrants to purchase 10,461 shares, and $2.38 per share for
warrants to purchase 2,400 shares of common stock. The Investment Banking Fee
warrants consist of warrants to purchase 140,000 shares of common stock at any
time no later than March 1, 2004 at an exercise price of $2.38 per share. The
KSH Investment Group warrants contain provisions that protect holders thereof
against dilution by adjustment of the exercise price per share and the number of
shares issuable upon exercise thereof upon the occurrence of certain events,
including stock dividends, stock splits, mergers and the sale of substantially
all of our assets. We are not required to issue fractional shares of common
stock, and in lieu thereof will make a cash payment based upon the current
market value of such fractional shares. The registered holders of the KSH
Investment Group warrants also may elect to exercise their warrants by way of
cashless exercise of the warrants. The number of shares of common stock issuable
on the cashless exercise of the KSH Investment Group warrants is equal to the
total number of warrants issued to the holder times the difference between the
then current market price and the exercise price of the warrants divided by the
market price of the warrants. The holder of the KSH Investment Group warrants
will not possess any rights as a shareholder unless and until the holder
exercises the warrants. As of June 30, 2003, none of the KSH Investment Group
warrants has been exercised.

Cyndel Warrants. In connection with certain financings that Cyndel
provided to us, we issued warrants to Cyndel & Co., Inc. ("Cyndel") to purchase
an aggregate of 475,000 shares of common stock. These warrants consist of
warrants to purchase 75,000 shares of common stock at any time not later than
February 7, 2006, at an exercise price of $4.00 per share; warrants to purchase
150,000 shares of common stock at any time not later than August 10, 2005, at an
exercise price of $4.00 per share; and warrants to purchase 250,000 shares of
common stock at any time not later than August 31, 2005, at an exercise price of
$3.00 per share. The warrants contain provisions that protect the holder thereof
against dilution by adjustment of the exercise price per share and the number of
shares issuable upon exercise thereof upon the occurrence of certain events,
including stock dividends, stock splits, mergers and the sale of substantially
all of our assets. We are not required to issue fractional shares of common
stock, and in lieu thereof will make a cash payment based upon the current
market value of such fractional shares. The holder of the warrants will not
possess any rights as a shareholder unless and until the holder exercises the
warrants. As of June 30, 2003, none of the Cyndel warrants have been exercised.

Lafferty Warrants. In connection with an investment banking agreement
with R. F. Lafferty & Co., Inc. ("Lafferty"), we issued warrants to Lafferty to
purchase 100,000 shares of our common stock. Each warrant entitles Lafferty to
purchase one share of common stock at an exercise price of $4.00 per share. The
warrants are exercisable through October 15, 2004. The warrants contain
provisions that protect the holder thereof against delusion by adjustment of the
exercise price per share and the number of shares issuable upon the exercise
thereof upon the occurrence of certain events, including stock dividends, stock
splits, mergers and the sale of substantially all of our assets. We are not
required to issue fractional shares of common stock, and in lieu thereof will
make a cash payment based upon the current market value of such fractional
shares. The holder of the warrants will not possess any rights as a shareholder
unless and until the holder exercises the warrants. As of June 30, 2003, none of
the Lafferty warrants has been exercised.

Limberg Warrants. In connection with certain consulting services
provided to us, we issued warrants to Dr. Michael B. Limberg to purchase 300,000
shares of common stock. These warrants consist of warrants to purchase 100,000
shares of common stock at any time not later than December 1, 2008 at an
exercise price of $4.00 per share; warrants to purchase 50,000 shares of common
stock at any time not later than December 1, 2009 at an exercise price of $4.75
per share; warrants to purchase 50,000 shares of common stock at any time not
later than June 1, 2010 at an exercise price of $6.75 per share; warrants to
purchase 50,000 shares of common stock at any time not later than December 1,
2011 at an exercise price of $4.00 per share; and warrants to purchase 50,000
shares of common stock at any time not later than June 1, 2011 at an exercise
price of $4.00 per share. These warrants contain provisions that protect the
holder thereof against dilution by adjustment of the exercise price per share
and the number of shares issuable upon exercise thereof upon the occurrence of
certain events, including stock dividends, stock splits, mergers and the sale of
substantially all of our assets. We are not required to issue fractional shares
of common stock, and in lieu thereof will make a cash payment based upon the
current market value of such fractional shares. The holder of the warrants will
not possess any rights as a shareholder unless and until the holder exercises
the warrants. As of June 30, 2003, none of the Limberg warrants has been
exercised.

Hemmer Warrants. In connection with the prior retirement of John W.
Hemmer, the Board of Directors authorized the issuance of warrants to Mr. Hemmer
to purchase 75,000 shares of common stock. The Board of Directors authorized the
issuance of these warrants to Mr. Hemmer at such time as he exercised warrants
to purchase 125,000 shares of common stock at an exercise price of $2.63 per
share, which were previously issued to him upon his retirement. Each warrant
entitles the holder to purchase one share of common stock at an exercise price
of $7.50 per share. The warrants are exercisable through January 24, 2005. The

warrants contain provisions that protect the holder thereof against dilution by
adjustment of the exercise price per share and the number of shares issuable
upon exercise thereof upon the occurrence of certain events, including stock
dividends, stock splits, mergers and the sale of substantially all of our
assets. We are not required to issue fractional shares of common stock, and in
lieu thereof will make a cash payment based on the current market value of such
fractional shares. The holder of the warrants will not possess any rights as a
shareholder unless and until the holder exercises the warrants. As of June 30,
2003, the Hemmer warrants to purchase 75,000 shares of common stock have not
been exercised.

Kohn and Sucoff Warrants. In connection with certain financial
consulting services provided to us, we issued warrants to KSH Investment Group,
Inc. to purchase 100,000 shares of common stock. These warrants consist of
warrants to purchase 100,000 shares of common stock at any time not later than
February 7, 2006 at an exercise price of $4.00 per share. These warrants were
subsequently assigned to Helen Kohn and Ronit Sucoff. Warrants to purchase
50,000 shares of common stock were assigned to Helen Kohn (the "Kohn Warrants")
and warrants to purchase 50,000 shares of common stock were assigned to Ronit
Sucoff (the "Sucoff Warrants"). These warrants contain provisions that protect
the holder thereof against dilution by adjustment of the exercise price per
share and the number of shares issuable upon exercise thereof upon the
occurrence of certain events, including stock dividends, stock splits, mergers
and the sale of substantially all of our assets. We are not required to issue
fractional shares of common stock, and in lieu thereof will make a cash payment
based upon the current market value of such fractional shares. The holders of
the warrants will not possess any rights as shareholders unless and until the
holders exercise the warrants. As of June 30, 2003, none of the Kohn or Sucoff
Warrants has been exercised.

Kaplan Warrants. In connection with certain consulting services
provided to us, we issued warrants to Barry Kaplan Associates to purchase
100,000 shares of common stock. Each warrant entitles Kaplan to purchase one
share of common stock at an exercise price of $3.00 per share. The warrants are
exercisable through May 15, 2004. The warrants contain provisions that protect
the holder thereof against dilution by adjustment of the exercise price per
share and the number of shares issuable upon exercise thereof upon the
occurrence of certain events, including stock dividends, stock splits, mergers
and the sale of substantially all of our assets. We are not required to issue
fractional shares of common stock, and in lieu thereof will make a cash payment
based upon the current market value of such fractional shares. The holder of the
warrants will not possess any rights as a shareholder unless and until the
holder exercises the warrants. As of June 30, 2003, none of the Kaplan warrants
has been exercised.

Rodman & Renshaw Warrants. In connection with certain consulting
services provided to us, we issued warrants to Rodman & Renshaw to purchase
35,000 shares of common stock. Each warrant entitles Rodman & Renshaw to
purchase one share of common stock at an exercise price of $2.00 per share. The
warrants are exercisable through May 13, 2006. The warrants contain provisions
that protect the holder thereof against dilution by adjustment of the exercise
price per share and the number of shares issuable upon exercise thereof upon the
occurrence of certain events, including stock dividends, stock splits, mergers
and the sale of substantially all of our assets. We are not required to issue
fractional shares of common stock, and in lieu thereof will make a cash payment
based upon the current market value of such fractional shares. The holder of the
warrants will not possess any rights as a shareholder unless and until the
holder exercises the warrants. As of June 30, 2003, none of the Rodman & Renshaw
warrants has been exercised.

Warrants Issued to Archambeau, Banzhaf, Lipson, MacLeod, MacLeod Profit
Sharing Trust, St. Mark's Eye Institute, Milan Holdings, Ltd., Mauro and
Reichardt. In connection with our September 6, 2002 private placement, we issued
warrants to Paul L. Archambeau, M.D., John H. Banzhaf, Daniel S. Lipson, Douglas
A. MacLeod, M.D., Douglas A. MacLeod, M.D. Profit Sharing Trust, St. Mark's Eye
Institute, Milan Holdings, Ltd., Frank G. Mauro and Delbert D. Reichardt to
purchase an aggregate of 788,750 shares of common stock. These warrants are
exercisable at any time not later than September 6, 2005 at an exercise price of
$.25 per share. These warrants contain provisions that protect holders thereof
against dilution by adjustment of the exercise price per share and the number of
shares issuable upon exercise thereof upon the occurrence of certain events
including stock dividends stock splits, mergers and the sale of substantially
all of our assets. We are not required to issue fractional shares of common
stock, and in lieu thereof will make a cash payment based upon the current
market value of such fractional shares. The holders of the warrants will not
possess any rights as shareholders unless and until the holders exercise the
warrants. As of June 30, 2003, none of these warrants has been exercised.

Forstrom Warrants. In connection with certain consulting services
provided to us, we issued warrants to Timothy R. Forstrom to purchase 200,000
shares of common stock. Each warrant entitles Forstrom to purchase one share of
common stock at an exercise price of $.16 per share. The warrants are
exercisable through April 30, 2006. The warrants contain provisions that protect
the holder thereof against dilution by adjustment of the exercise price per
share and the number of shares issuable upon exercise thereof upon the
occurrence of certain events, including stock dividends, stock splits, mergers
and the sale of substantially all of our assets. We are not required to issue
fractional shares of common stock, and in lieu thereof will make a cash payment
based upon the current market value of such fractional shares. The holder of the
warrants will not possess any rights as a shareholder unless and until the
holder exercises the warrants. As of June 30, 2003, none of the Forstrom
warrants has been exercised.

Certain Provisions of Certificate of Incorporation. Our Certificate of
Incorporation provides that to the fullest extent permitted by Delaware law, our
directors shall not be liable to us and our stockholders. The Certificate of
Incorporation also contains provisions entitling the officers and directors to
indemnification by us to the fullest extent permitted by the Delaware General
Corporation Law.

Indemnification Agreements. We have entered into indemnification
agreements with our officers and directors. Such indemnification agreements
provide that we will indemnify its officers and directors against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
arising out of threatened, pending or completed legal action against any officer
or director to the fullest extent permitted by the Delaware General Corporate
Law.

Transfer and Warrant Agent. Our transfer agent and registrar for its
common stock and the Warrant Agent for the Class A warrants is Continental Stock
Transfer & Trust Company, New York, New York.

PLAN OF DISTRIBUTION

We are registering 8,000,000 shares of our common stock at an estimated
offering price of $.50 per share. The shares will be sold on a
self-underwritten, best efforts basis by us, through the efforts of our officers
and directors. Consequently, there may be less due diligence performed in
conjunction with this offering than would be performed in an underwritten
offering.

Subject to the requirements of the Securities Act of 1933 and
applicable state securities laws, we plan to offer and sell the shares in
specific states in which the shares are registered or are exempt from
registration, following the procedures for subscribing as outlined in this
prospectus, including the form subscription agreement, and in compliance with
Regulation M.

Our officers and directors will offer the shares by prospectus and
sales literature to, among other persons, prospective investors who have
indicated an interest in the offering. On the effective date of our registration
statement, or as soon thereafter as practicable, our officers and directors
intend to mail copies of the prospectus to potential cash investors who are
known to them. We also anticipate that persons who may not be presently known to
our officers and directors may come to know about our offering from other
sources including the Securities and Exchange Commission's EDGAR system. With
the assistance of counsel, we intend to implement offering protocols and
procedures that will ensure compliance with the requirements of applicable
federal and state securities laws.

The shares will not be sold through an independent broker dealer or
underwriter, so no compensation will be paid with respect to any sales, except
for reimbursement of expenses actually incurred on behalf of us in connection
with such activities. We do not consider any of our officers and directors to be
brokers under the Securities Exchange Act of 1934 (the "Exchange Act") because
none of them has been, or will be, in the business of effecting transactions in
securities for the accounts of others. Their participation in our offering is
limited to this transaction and is not part of a general business of effecting
securities transactions. We also believe that each of our officers and directors
is not a broker or associated person of a broker under rule 3a4-1 of the
Exchange Act for the following reasons:

o He is not subject to a statutory disqualification, as that term is
defined in Section 3(a)(39) of the Exchange Act, at the time of
his participation.

o He will not be compensated for his participation in the sale of
our securities by the payment of a commission or other
remuneration based either directly or indirectly on transactions
in securities.

o He is not, at the time of participation in the offering, an
associated person of a broker or dealer.

o He meets the conditions of paragraph (a)(4)(ii) of Rule 3a4-1 of
the Exchange Act, in that he: (i) primarily performs or is
intended primarily to perform at the end of the offering
substantial duties for or on behalf of us otherwise than in
connection with transactions in securities; (ii) has not been a
broker or dealer, or an associated person of a broker or dealer,
within the preceding twelve months; and (iii) does not participate
in selling and offering of securities for any issuer more than
once every twelve months other than in reliance on this rule.

If it is later determined than an exemption from the broker
registration requirements is unavailable to exempt the activities of our
officers and directors, we will either retain a registered broker or ensure that
appropriate registrations are obtained before selling activities commence.

We believe that unsolicited offers to purchase the shares will be made.
However, in the event that we retain a broker dealer who may be deemed an
underwriter to assist in the offer and sale of our shares, we will file a
post-effective amendment to our registration statement.

The offering will remain open for a period of 30 days, unless the
entire offering has been sold prior to that time or we decide, in our sole
discretion, to cease all selling efforts. While we have no plans to extend the
period of the offering beyond 30 days, we may decide, in our sole discretion, to
extend the offering period beyond that time.

There is no minimum offering of shares that must be sold. Accordingly,
we will have use of any proceeds received once a subscription agreement is
executed and delivered to us and funds have cleared. The proceeds shall be
non-refundable except as may be required by applicable law. We reserve the right
to reject any subscription in whole or in part, or to allot to any prospective
investor less than the number of shares subscribed for by such investor.

Our shares are covered by Section 15(g) of the Exchange Act and Rules
15g-1 through 15g-6 promulgated thereunder. These rules impose additional sales
practice requirements on broker/dealers who sell out securities to persons other
than established customers and accredited investors (generally institutions with
assets in excess of $5,000,000 or individuals with net worth in excess of
$1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their
spouses).

Rule 15g-1 exempts a number of specific transactions from the scope of
the penny stock rules. Rule 15g-2 declares unlawful broker/dealer transactions
in penny stocks unless the broker/dealer has first provided to the customer a
standardized disclosure document. Rule 15g-3 provides that it is unlawful for a
broker/dealer to engage in a penny stock transaction unless the broker/dealer
first discloses and subsequently confirms to the customer current quotation
prices or similar market information concerning the penny stock in question.
Rule 15g-4 prohibits broker/dealers from completing penny stock transactions for
a customer unless the broker/dealer first discloses to the customer the amount
of compensation or other remuneration received as a result of the penny stock
transaction. Rule 15g-5 requires that a broker/dealer executing a penny stock
transaction, other than one exempt under Rule 15g-1, disclose to its customer,
at the time of or prior to the transaction, information about the sales person's
compensation. Rule 15g-6 requires broker/dealers selling penny stocks to provide
their customers with monthly account statements. The application of the penny
stock rules may affect your ability to resell your shares.

EXPERTS

Our consolidated financial statements for the years ended December 31,
2002 and 2001, appearing in this Prospectus and Registration Statement, have
been audited by Tanner & Co., independent auditors, as indicated in their report
thereon. Such consolidated financial statements are included herein in reliance
upon such report given upon the authority of such firm as experts in auditing
and accounting.

LEGAL MATTERS

The validity of the issuance of the shares of common stock offered
hereby and certain other legal matters in connection have been passed upon for
us by Mackey Price & Thompson, Salt Lake City, Utah.

AVAILABLE INFORMATION

We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended and, in accordance therewith, files reports,
proxy and information statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy and information
statements and other information that we have filed can be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its regional offices at
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois
60661-2511. Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549 at prescribed rates. In addition, the Commission maintains a web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, including ours.

We have filed with the Commission a Registration Statement (together
with all amendments and exhibits, the "Registration Statement") on Form SB-2
under the Securities Act of 1933, as amended, with respect to the common stock
offered pursuant to this prospectus. This prospectus does not contain all the
information set forth in the registration statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission.
Statements made in this prospectus as to the contents of any agreement or other
document referred to herein are not necessarily complete and reference is made
to the copy of such agreement or to the registration statement and to the
exhibits and schedules filed therewith. Copies of the material containing this
information may be obtained from the Commission upon payment of the prescribed
fee.

Financial Statements
--------------------

Balance Sheet (unaudited) - March 31, 2003 .................... 3

Statements of Operations (unaudited) for the three months
ended March 31, 2003 and March 31, 2002 ........................ 4

Statements of Cash Flows (unaudited) for the three months
ended March 31, 2003 and March 31, 2002......................... 5

Notes to Financial Statements (unaudited)....................... 6

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

PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)

March 31,
2003
-------------
(Unaudited)
ASSETS
Current Assets
Cash & Cash Equivalents $ 92,000
Receivables, Net 890,000
Prepaid Expenses 57,000
Inventory 2,405,000
---------------
Total Current Assets 3,444,000

Intangibles, Net 789,000
Property and Equipment, Net 415,000
Deposits and Other Assets 96,000
---------------
Total Assets 4,744,000
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade Accounts Payable 903,000
Accrued Expenses 1,587,000
Current Portion of Long-term Debt 29,000
---------------
Total Current Liabilities 2,519,000
Long-term Debt 80,000
---------------
Total Liabilities 2,599,000

Stockholders' Equity:
Preferred Stock, Authorized:
5,000,000 Shares, $.001 par value
Series A
Authorized: 500,000 shares; issued and
outstanding: 5,627 shares at March 31, 2003 -
Series B
Authorized: 500,000 shares; issued and
outstanding: 8,986 shares at March 31, 2003 -
Series C
Authorized: 30,000 shares; issued and
outstanding: zero shares at March 31, 2003 -
Series D
Authorized: 1,140,000 shares; issued and
outstanding: 5,000 shares at March 31, 2003 -
Series E
Authorized: 50,000; issued and
outstanding: 1,500 at March 31, 2003 -
Series F
Authorized: 50,000; issued and
outstanding: 5,774 at March 31, 2003 -
Common Stock, Authorized:
40,000,000 Shares, $.001 par value; issued and
outstanding: 21,986,874 at March 31, 2003 22,000
Additional paid-in-capital 56,776,000
Stock subscription receivable (294,000)
Accumulated Deficit (54,359,000)
---------------
Total Stockholders' Equity 2,145,000
---------------
Total Liabilities and Stockholders' Equity $ 4,744,000
===============

See accompanying notes to financial statements

PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

Three Months Ended
March 31,

2003 2002
(Unaudited) (Unaudited)

Sales $ 727,000 $ 1,537,000

Cost of Sales 346,000 841,000
------------ ------------

Gross Profit 381,000 696,000
------------ ------------
Operating Expenses:
Marketing and Selling 322,000 1,015,000
General and Administrative 477,000 998,000
Research, development and service 281,000 750,000
------------ ------------
Total Operating Expenses 1,080,000 2,763,000
------------ ------------

Operating Income (Loss) (699,000) (2,067,000)

Other Income and (Expense):
Interest Income 3,000 4,000
Interest Expense (7,000) (10,000)
------------ ------------
Total Other Income and
(Expense) (4,000) (6,000)
------------ ------------
Net loss before provision
for income taxes (703,000) (2,073,000)

Income taxes - -
------------ ------------
Net Loss $ (703,000) $ (2,073,000)
============ ============

Net Loss Per Common Share - Basic
and Diluted $ (.03) $ (.13)
============ ============

Weighted Average Outstanding
Shares - Basic and Diluted 21,976,000 15,775,000
============ ============

See accompanying notes to financial statements

PARADIGM MEDICAL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

Three Months Ended March 31,
2003 2002
(Unaudited) (Unaudited)

Cash Flows from Operating Activities:
Net Loss $ (703,000) $ (2,073,000)
Adjustment to Reconcile Net Loss to Net
Cash Used In Operating Activities:
Depreciation and Amortization 119,000 132,000
Issuance of Common Stock for Services - 18,000
Provision for (recovery of) Losses on Receivables (75,000) (10,000)

(Increase) Decrease from Changes in:
Trade Accounts Receivable 129,000 824,000
Inventories 244,000 191,000
Prepaid Expenses 24,000 (55,000)
Increase (Decrease) from Changes in:
Trade Accounts Payable (1,000) (430,000)
Accrued Expenses and Deposits 176,000 69,000
-------------- ---------------
Net Cash Used in Operating Activities (87,000) (1,334,000)
-------------- ---------------
Cash Flow from Investing Activities:
Purchase of Property and Equipment - (110,000)
Net Cash Paid in Acquisition - (100,000)
-------------- ---------------
Net Cash Used in Investing Activities - (210,000)
-------------- ---------------
Cash Flows from Financing Activities:
Principal Payments on Notes Payable (15,000) (15,000)
-------------- ---------------
Net Cash (Used) Provided by Financing Activities (15,000) (15,000)
-------------- ---------------

Net Decrease in Cash and Cash Equivalents (102,000) (1,559,000)

Cash and Cash Equivalents at Beginning of Period 194,000 2,702,000
-------------- ---------------
Cash and Cash Equivalents at End of Period $ 92,000 $ 1,143,000
============== ===============

Supplemental Disclosure of Cash Flow Information:

Cash Paid for Interest $ 7,000 $ 10,000
============== ===============
Cash Paid for Income Taxes $ - $ -
============== ===============

See accompanying notes to financial statements

PARADIGM MEDICAL INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)

Significant Accounting Policies:
--------------------------------

In the opinion of management, the accompanying financial statements contain all
adjustments (consisting only of normal recurring items) necessary to present
fairly the financial position of Paradigm Medical Industries, Inc. (the Company)
as of March 31, 2003 and the results of its operations for the three months
ended March 31, 2003 and 2002, and its cash flows for the three months ended
March 31, 2003 and 2002. The results of operations for the periods presented are
not necessarily indicative of the results to be expected for the full year
period.

Liquidity and Going Concern
---------------------------

Due to the declining sales, significant recurring losses and cash used to fund
operating activities, the auditors' report for the year ended December 31, 2002
included an explanatory paragraph that expressed substantial doubt about our
ability to continue as a going concern. The Company has taken significant steps
to reduce costs and increase operating efficiencies. In addition, the Company is
attempting to obtain additional funding through the sale of its common stock.
Traditionally the Company has relied on financing from the sale of its common
and preferred stock to fund operations. If the Company is unable to obtain such
financing in the near future it may be required to reduce or cease its
operations.

Reclassifications
-----------------

Certain amounts in the financial statements for the three months ended March 31,
2002 have been reclassed to conform with the presentation of the current period
financial statements.

Net Income (Loss) Per Share
---------------------------

Net income (loss) per common share is computed on the weighted average number of
common and common equivalent shares outstanding during each period. Common stock
equivalents consist of convertible preferred stock, common stock options and
warrants. Common equivalent shares are excluded from the computation when their
effect is anti-dilutive. Other common stock equivalents have not been included
in loss years because they are anti-dilutive.

Preferred Stock Conversions:
----------------------------

Under the Company's Articles of Incorporation, holders of the Company's Class A
and Class B Preferred Stock have the right to convert such stock into shares of
the Company's common stock at the rate of 1.2 shares of common stock for each
share of preferred stock. During the three month period ended March 31, 2003, no
shares of Series A Preferred Stock and no shares of Series B Preferred Stock
were converted to the Company's Common Stock.

Holders of Series D Preferred have the right to convert such stock into shares
of the Company's common stock at the rate of 1 share of common stock for each
share of preferred stock. During the three months ended March 31, 2003, no
shares of Series D Preferred Stock were converted to the Company's Common stock.

Holders of Series E Preferred have the right to convert such stock into shares
of the Company's common stock at the rate of 53.3 shares of common stock for
each share of preferred stock. During the three months ended March 31, 2003, no
shares of Series E Preferred Stock were converted to the Company's Common stock.

Holders of Series F Preferred have the right to convert such stock into shares
of the Company's common stock at the rate of 53.3 shares of common stock for
each share of preferred stock. During the three months ended March 31, 2003, 498
shares of Series F Preferred Stock were converted to shares of the Company's
Common stock.

Warrants:
---------

The fair value of warrants granted as described herein is estimated at the date
of grant using the Black-Scholes pricing model. The exercise price per share is
reflective of the then current market value of the stock. No grant exercise
price was established at a discount to market. All warrants are fully vested,
exercisable and nonforfeitable as of the grant date. No warrants were granted
during the three months ended March 31, 2003.

Related Party Transactions:
---------------------------

Payments for legal services to the firm of which the chairman of the board of
directors is a partner were approximately $15,000 and $53,000 for the three
months ended March 31, 2003 and 2002, respectively.

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 123 which requires expense recognition based on the
fair value of the options/warrants granted. The Company calculates the fair
value of options and warrants granted by use of the Black-Scholes pricing model.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation.

Three Months Ended March 31,
2003 2002
----------------------------

Net loss - as reported $ (703,000) $ (2,073,000)

Deduct: total stock-based employee
compensation determined under fair value
based method for all awards, net of
related tax effects (274,000) -
---------------------------

Net loss - pro forma $ (977,000) $ (2,073,000)
----------------------------

Earnings per share:
Basic and diluted - as reported $ (.03) $ (.13)
Basic and diluted - pro forma $ (.04) $ (.13)

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

Three Months Ended March 31,
2003 2002
----------------------------

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

The weighted average fair value of options granted during the three months ended
March 31, 2003 was $.13.

PARADIGM MEDICAL INDUSTRIES, INC.
Index to Financial Statements

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

Page
----

Report of Tanner + Co. F-2

Balance Sheet F-3

Statement of Operations F-4

Statement of Stockholders' Equity F-5

Statement of Cash Flows F-6

Notes to Financial Statements F-7

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

INDEPENDENT AUDITORS' REPORT

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

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

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

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

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

TANNER + CO.
Salt Lake City, Utah
March 11, 2003

F-2

PARADIGM MEDICAL INDUSTRIES, INC.
Balance Sheet

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

Assets
------

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

Total current assets 3,868,000

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

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

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

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

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

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

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

Commitments and contingencies -

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Operations

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

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

Sales $ 5,368,000 $ 7,919,000

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

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

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

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

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

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

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

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

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Stockholders' Equity

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

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

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

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

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

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

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

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

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

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

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

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

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

Balance, December 31, 2002 $ - 21,954,238 $ 22,000 $ 56,775,000 - $ - $ (294,000) $ (53,656,000)
-------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-5

PARADIGM MEDICAL INDUSTRIES, INC.
Statement of Cash Flows

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

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

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

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

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

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

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

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

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

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

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

---------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-6

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements

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

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

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

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

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

During the years ended December 31, 2002 and 2001, no
single customer represented more than 10 percent of
total net sales.

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

Reclassifications
Certain amounts in the 2001 financial statements have
been reclassified to conform to the presentation of the
current year financial statements.

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

4. Detail of
Certain
Balance
Sheet
Accounts

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

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

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

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

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

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

2,223,000

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

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

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

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

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

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

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

1,889,000

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

8. Lease During the years ended December 31, 2002 and 2001, the
Obligations Company leased certain equipment under noncancellable
capital leases. These leases provide the Company the
option to purchase the leased assets at the end of the
initial lease term. Assets under capital leases included
in fixed assets and are as follows:

Computer and other equipment $ 291,000

Less accumulated amortization (121,000)
------------------

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

158,000

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

Present value of future minimum lease payments 124,000

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

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

The Company leases office and warehouse space under an
operating lease agreement. Future minimum rental
payments under the noncancellable operating lease as of
December 31, 2002 are approximately as follows:

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

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

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

17,583,000

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

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

2. Upon the liquidation of the Company, the holders
of the Series B Preferred Stock are entitled to
receive, prior to any distribution of any assets
or surplus funds to the holders of shares of
common stock or any other stock, an amount equal
to $4.00 per share, plus any accrued and unpaid
dividends related to the fiscal year in which such
liquidation occurs. Such right, however, is
subordinate to the rights of the holders of Series
A Preferred Stock to receive a distribution of
$1.00 per share plus accrued and unpaid dividends.
Total liquidation preference at December 31, 2002
was $36,000.

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

10. Capital The following table summarizes preferred stock activity
Stock during the years ended December 31, 2002 and 2001:
Continued

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,
2001 5,957 $ - 8,986 $ - - $ - 52,500 $ - - $ - - $ -

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

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

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

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

11. Stock Option The Company has a Stock Option Plan (the Option Plan),
Plan and which reserves shares of the Company's authorized but
Warrants unissued common stock for the granting of stock options.
Amendments to the Option Plan increased the number of
shares of common stock reserved for issuance thereunder
to an aggregate of 2,700,000 shares.

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

A schedule of the options and warrants is as follows:

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

15. Savings Plan In November 1996, the Company established a 401(k)
Retirement Savings Plan for the Company's officers and
employees. The Plan provisions include eligibility after
six months of service, a three year vesting provision
and 100% matching contribution by the Company up to 3%
of a participant's compensation. During the years ended
December 31, 2002 and 2001, the Company contributed
approximately $59,000 and $68,000 to the Plan,
respectively.

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

The Company has an amended exclusive patent license
agreement with a company which owns the patent for the
laser-probe used on the Photon machine. The agreement
provides for the payment of a 1% royalty on all sales
proceeds related directly or indirectly, to the Photon
machine. The agreement terminates on July 7, 2003.
Through December 31, 2002, no significant royalties have
been paid under this agreement.

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
Notes to Financial Statements
Continued

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

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

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

No dealer, salesman or any other person
has been authorized to give information
or to make any representations other
than those contained in this Prospectus,
and, if given or made, such information 8,000,000 Shares of Common Stock
or representations must not be relied
upon as having been authorized by us or
the Underwriter. This Prospectus does
not constitute an offer to sell or a PARADIGM MEDICAL INDUSTRIES, INC.
solicitation of any offer to buy any of
the securities offered hereby by anyone -----------------
in any jurisdiction in which such offer
or solicitation is not authorized or in PROSPECTUS
which the person making such offer or
solicitation is not qualified to do so -----------------
or to anyone to whom it is unlawful to
make such offer or solicitation. Neither
the delivery of this Prospectus nor any
sale made hereunder shall, under any July __, 2003
circumstances, create any implication
that there has been no change in our
affairs since the date hereof.

---------------------
TABLE OF CONTENTS

Page

Prospectus Summary......................
Risk Factors ..........................
Use of Proceeds.........................
Dividend Policy.........................
Capitalization..........................
Market for Common Equity and
Related Shareholder Matters............
Selected Financial Data.................
Management's Discussion and
Analysis of Plan of Operation..........
Business ...............................
Management .............................
Security Ownership of Certain
Beneficial Owners and Management ......
Certain Transactions....................
Description of Securities...............
Plan of Distribution....................
Experts.................................
Legal Matters...........................
Available Information...................

II-1

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 24. Indemnification of Directors and Officers

Section 145 of the General Corporation Law of the State of Delaware
(the "Delaware Law") empowers a Delaware corporation to indemnify any person who
is, or is threatened to be made, a party to any threatened, pending or completed
legal action, suit or proceedings, whether civil, criminal, administrative or
investigative (other than action by or in the right of such corporation), by
reason of the fact that such person was an officer or director of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided that such officer or
director acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the corporation's best interests, and, for criminal
proceedings, had no reasonable cause to believe his or her conduct was illegal.
A Delaware corporation may indemnify officers and directors in an action by or
in the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation in the performance of his
or her duty. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against the expenses which such officer or director
actually and reasonably incurred.

In accordance with the Delaware Law, the Certificate of Incorporation
of the Company contains a provision to limit the personal liability of the
directors of the Company for violations of their fiduciary duty. This provision
eliminates each director's liability to the Registrant or its stockholders for
monetary damages except (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware Law providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions, or
(iv) for any transaction from which a director derived an improper personal
benefit. The effect of this provision is to eliminate the personal liability of
directors for monetary damages for actions involving a breach of their fiduciary
duty of care, including any such actions involving gross negligence.

The Company may not indemnify an individual unless authorized and a
determination is made in the specific case that indemnification of the
individual is permissible in the circumstances because his or her conduct was in
good faith, he or she reasonably believed that his or her conduct was in, or not
opposed to, the Company's best interests and, in the case of any criminal
proceeding, he or she had no reasonable cause to believe his or her conduct was
unlawful. The Company may not advance expenses to an individual to whom the
Company may ultimately be responsible for indemnification unless authorized in
the specific case after the individual furnishes the following to the Company: a
written affirmation of his or her good faith belief that his or her conduct was
in good faith, that he or she reasonably believed that his or her conduct was
in, or not opposed to, the Company's best interests and, in the case of any
criminal proceeding, he or she had no reasonable cause to believe his or her
conduct was unlawful and (2) the individual furnishes to the Company a written
undertaking, executed personally or on his or her behalf, to repay the advance
if it is ultimately determined that he or she did not meet the standard of
conduct referenced in part (1) of this sentence. In addition to the individual
furnishing the aforementioned written affirmation and undertaking, in order for
the Company to advance expenses, a determination must also be made that the
facts then- known to those making the determination would not preclude
indemnification.

All determinations relative to indemnification must be made as follows:
(1) by the Board of Directors of the Company by a majority vote of those present
at a meeting at which a quorum is present, and only those directors not parties
to the proceeding shall be counted in satisfying the quorum requirement; or (2)
if a quorum cannot be obtained as contemplated in part (1) of this sentence, by
a majority vote of a committee of the Board of Directors designated by the Board
of Directors of the Company, which committee shall consist of two or more
directors not parties to the proceeding, except that directors who are parties
to the proceeding may participate in the designation of directors for the
committee; or (3) by special legal counsel selected by the Board of Directors or
its committee in the manner prescribed in part (1) or part (2) of this sentence
(however, if a quorum of the Board of Directors cannot be obtained under part
(1) of this sentence and a committee cannot be designated under part (2) of this
sentence, then a special legal counsel shall be selected by a majority vote of
the full board of directors, in which selection directors who are parties to the
proceeding may participate); or (4) by the shareholders, by a majority of the
votes entitled to be cast by holders of qualified shares present in person or by
proxy at a meeting.

The Company has also entered into Indemnification Agreements with its
executive officers and directors. These Indemnification Agreements are
substantially similar in effect to the Bylaws and the provisions of our
Certificate of Incorporation relative to providing indemnification to the
maximum extent and in the manner permitted by the Delaware General Corporation

II-2

Law. Additionally, such Indemnification Agreements contractually bind the
Company with respect to indemnification and contain certain exceptions to
indemnification, but do not limit the indemnification available pursuant to our
Bylaws, our Certificate of Incorporation or the Delaware General Corporation
Law.

Item 25. Other Expenses of Issuance and Distribution

The following table sets forth the expenses payable by the Company in
connection with the issuance and distribution of the securities being registered
(all amounts except the Securities and Exchange Commission filing fee are
estimated):

Filing fee -- Securities and Exchange Commission........... $ 368
Printing and engraving expenses............................ 2,500
Legal fees and disbursements............................... 30,000
Accounting fees and disbursements.......................... 5,000
Blue Sky fees and expenses (including legal fees).......... 5,000
Transfer agent and registrar fees and expenses............. 1,500
Miscellaneous.............................................. 1,632
--------
Total expenses............................................. $ 46,000

Item 26. Recent Sales of Unregistered Securities

The following information is furnished with regard to all issuances of
unregistered shares of our common stock during the past three years. Each of the
following transactions was exempt from under the Securities Act of 1933 by
virtue of the provisions of Section 4(2) of the 1933 Act or, in the case of the
exercise of warrants, the shares were registered pursuant to a registration
statement in effect at the time of the warrant exercise.

I. Common Stock

On July 14, 2000, the Company issued 75,758 shares of common stock to
Triton West Group, Inc. for a cash investment in the amount of $300,000, or a
purchase price of $3.96 per share.

On July 20, 2000, the Company issued 12,350 shares of common stock to
John W. Hemmer for a cash investment in the amount of $61,750 pursuant to the
exercise of warrants at an exercise price of $5.00 per share.

On July 24, 2000, the Company issued 300 shares of common stock to
Gabriel Plaut for a cash investment in the amount of $807 pursuant to the
exercise of warrants at an exercise price of $2.69 per share.

On August 30, 2000, the Company sold a total of 500,000 shares of
common stock to 34 accredited investors through a private placement under
Regulation D promulgated under the Securities Act of 1933 at a price of $3.625
per share. The Company received $1,812,500 in cash as a result of the private
placement transaction and paid $133,125 in commissions and expenses.

On August 31, 2000, the Company issued 85,175 shares of common stock to
Triton West Group, Inc. for a cash investment in the amount of $308,759, or at a
purchase price of $3.625 per share.

On September 6, 2000, the Company issued 5,384 shares of common stock
to Randall A. Mackey for services as a director of the Company from July 10,
1996 to September 3, 1998.

On September 6, 2000, the Company issued 200,000 shares of common stock
to two accredited investors through a private placement under Regulation D
promulgated under the Securities Act of 1933 at a price of $3.625 per share. The
Company received $725,000 in cash as a result of the private placement
transaction and paid $65,250 in commissions and expenses.

On September 9, 2000, the Company issued 19,000 shares of common stock
to the Estate of Albert J. Barbara for a cash investment in the amount of
$57,000 pursuant to the exercise of warrants at an exercise price of $3.00 per
share.

On September 25, 2000, the Company issued 1,115 shares of common stock
to Christopher Brothers pursuant to the cashless exercise of warrants.

II-3

On October 18, 2000, the Company issued 83,000 shares of common stock
to Triton West Group, Inc. for a cash investment in the amount of $260,205, or
at a purchase price of $3.14 per share.

On November 28, 2000, the Company issued 1,870 shares of common stock
to Michael P. Fenten pursuant to the cashless exercise of warrants.

On February 20, 2001, the Company issued 150,000 shares of common stock
to Triton West Group, Inc. for a cash investment in the amount of $300,000, or
at a purchase price of $2.00 per share.

On March 14, 2001, the Company issued 49,716 shares of common stock to
Triton West Group, Inc. for a cash investment in the amount of $87,500, or at a
purchase price of $1.76 per share.

On May 22, 2001, the Company issued 40,440 shares of common stock to
Triton West Group, Inc. for a cash investment in the amount of $100,000, or at a
purchase price of $2.47 per share.

On May 30, 2001, the Company issued 37,381 shares of Common stock to
Triton West Group, Inc. for a cash investment in the amount of $100,000, or at a
purchase price of $1.95 per share.

On June 26, 2001, the Company issued 51,188 shares of common stock to
Triton West Group, Inc. for a cash investment in the amount of $100,000, or at a
purchase price of $1.95 per share.

On August 22, 2001, the Company issued 350,000 shares of common stock
to Mentor Corporation pursuant to a settlement agreement dated July 2, 2001
regarding the settlement of a dispute between the Company and Mentor
Corporation.

On January 31, 2002, the Company issued 1,272,825 shares of common
stock to Innovative Optics, Inc. as consideration pursuant to the completion of
a transaction involving the purchase of all of the assets of Innovative Optics,
Inc.

On January 31, 2002, the Company issued 50,000 shares of common stock
to Dr. Scott S. Bair as consideration pursuant to the completion of a
transaction involving the purchase of all the assets of Innovative Optics, Inc.

On June 19, 2002, the Company issued 17,007 shares of common stock to
John Charles Casebeer, M.D. for services rendered to the Company under a
consulting agreement.

On July 9, 2002, the Company issued 35,000 shares of common stock to
Michael W. Stelzer pursuant to the Severance Agreement and General Release,
which the Company entered into with Mr. Stelzer on January 21, 2000.

On July 29, 2002, the Company issued 26,677 shares of common stock to
John Charles Casebeer, M.D. for services rendered to the Company under a
consulting agreement.

On July 30, 2002, the Company issued 50,000 shares of common stock to
each of Peter Kristensen and F. Briton McConkie for services rendered to the
Company under a Major Account Facilitator Contract.

On August 2, 2002, the Company issued 48,000 shares of common stock to
Dr. Michael B. Lindberg for services rendered to the Company under a consulting
agreement.

On September 26, 2002, the Company issued a total of 736,945 shares of
its on stock to 34 shareholders of International Bio- Immune Systems, Inc.
("IBS") in connection with a transaction with IBS to acquire 19.9% of the
outstanding shares of IBS common stock through the exchange and issuance of the
736,945 shares of its common stock for 2,663,254 shares of common stock of IBS.
In addition, as part of the transaction, the Company lent 300,000 shares of its
common stock to IBS and, as consideration for the payment of certain expenses of
IBS in the transaction, issued 44,000 shares of its common stock to IBS and
50,000 shares of its common stock to Joseph S. Anile, II.

On September 30, 2002, the Company issued 40,000 shares of common stock
to Michael W. Stelzer pursuant to a Severance Agreement and General Release,
which the Company entered into with Mr. Stelzer on September 27, 2002.

On January 22, 2003, the Company issued a total of 2,524,000 shares of
common stock to six accredited investors through a private placement under
Regulation D promulgated under the Securities Act of 1933 at a price of $.25 per
share. The Company received a total of $631,000 in cash in the private placement
transaction and paid $69,410 in commissions and expenses. In addition, the

III-4

Company issued warrants to purchase 157,750 shares of common stock at an
exercise price of $.25 per share for commissions and expenses. The accredited
investors also received warrants to purchase a total of 631,000 shares of common
stock at an exercise price of $.25 per share.

On March 26, 2003, the Company issued 695,991 shares of common stock to
Triton West Group, Inc. for a cash investment in the amount of $85,746, or at a
purchase price of $.12 per share.

On June 13, 2003, the Company issued 50,000 shares of common stock to
Frank G. Mauro for a cash investment of $12,500 pursuant to the exercise of
warrants at an exercise price of $.25 per share.

On June 13, 2003, the Company issued 7,888 shares of common stock to
Delbert G. Reichardt for a cash investment in the amount of $1,972 pursuant to
the exercise of warrants at an exercise price of $.25 per share.

On June 13, 2003, the Company issued 7,887 shares of common stock to
John H. Banzhaf for a cash investment in the amount of $1,971.25 pursuant to the
exercise of warrants at an exercise price of $.25 per share.

On June 26, 2003, the Company issued 51,000 shares of common stock to
Paul L. Archambeau, M.D. for a cash investment in the amount of $12,750 pursuant
to the exercise of warrants at an exercise price of $.25 per share.

On June 30, 2003, the Company completed the sale of 845,267 shares of
common stock to 15 accredited investors through a private placement under
Regulation D promulgated under the Securities Act of 1933 at a price of $.375
per shares. The Company received a total of $316,975 in cash in the private
placement transaction and issued 84,527 shares of common stock in commissions
and expenses. The accredited investors also received warrants to purchase
422,634 shares of common stock at an exercise price of $.75 per shares.

II. Series E Preferred Stock

During the period from May 31, 2001 to August 20, 2001, the Company
sold a total of 46,219 shares of Series E convertible preferred Stock (the
"Series E preferred stock") to 44 accredited investors through a private
placement under Regulation D promulgated under the Securities Act of 1933 at a
price of $100.00 per share. The Company received $4,621,900 in cash as a result
of the private placement transaction and paid $369,752 in commissions and
expenses. The Series E preferred stock is convertible into shares of common
stock at a conversion price of $1.875 per share of common stock. The accredited
investors also received warrants to purchase a total of 231,095 shares of common
stock at an exercise price of $4.00 per share.

III. Series F Preferred

During the period from August 20, 2002 to November 21, 2001, the
Company sold a total of 48,597.20 shares of Series F convertible preferred stock
(the "Series F preferred stock") to 58 accredited investors through a private
placement under Regulation D promulgated under the Securities Act of 1933 at a
price of $100.00 per share. The Company received $4,859,720 in cash as a result
of the private placement transaction and paid $388,788 in commissions and
expenses. The Series F Preferred Stock is convertible into shares of common
stock at a conversion price equal to $1.875 per share of common stock. The
accredited investors also received warrants to purchase a total of 242,986
shares of common stock at an exercise price of $4.00 per share.

Item 27. Exhibits

(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(11)
3.3 Bylaws(1)
4.1 Warrant Agency Agreement with Continental Stock Transfer & Trust
Company(3)
4.2 Specimen Common Stock Certificate (2)

II-5

4.3 Specimen Class A Warrant Certificate(2)
4.4 Form of Class A Warrant Agreement(2)
4.5 Underwriter's Warrant with Kenneth Jerome & Co., Inc.(3)
4.6 Warrant to Purchase Common Stock with Note Holders re bridge
financing (1)
4.7 Warrant to Purchase Common Stock with Mackey Price & Williams (1)
4.8 Specimen Series C Convertible Preferred Stock Certificate(4)
4.9 Certificate of the Designations, Powers, Preferences and Rights of
the Series Convertible Preferred Stock(4)
4.10 Specimen Series D Convertible Preferred Stock Certificate (6)
4.11 Certificate of the Designations, Powers, Preferences and Rights of
the Series D Convertible Preferred Stock (6)
4.12 Warrant to Purchase Common Stock with Cyndel & Co. (6)
4.13 Warrant Agreement with KSH Investment Group, Inc. (6)
4.14 Warrant to Purchase Common Stock with R.F. Lafferty & Co., Inc.
(6)
4.15 Warrant to Purchase Common Stock with Dr. Michael B. Limberg (6)
4.16 Warrant to Purchase Common Stock with John W. Hemmer (7)
4.17 Stock Purchase Warrant with Triton West Group, Inc.(9)
4.18 Warrant to Purchase Common Stock with KSH Investment Group,
Inc.(9)
4.19 Warrants to Purchase Common Stock with Consulting for Strategic
Growth, Ltd.(9)
5.1 Opinion of Mackey Price & Williams
10.1 Exclusive Patent License Agreement with Photomed(1)
10.2 Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3 Lease with Eden Roc (4)
10.4 1995 Stock Option Plan and forms of Stock Option Grant Agreement
(1)
10.5 Employment Agreement with Thomas F. Motter (5)
10.6 Employment Agreement with Mark R. Miehle (8)
10.7 Employment Agreement with John W. Hemmer (8)
10.8 Private Equity Line of Credit Agreement with Triton West Group,
Inc. (8)
10.9 Agreement with KSH Investment Group, Inc. (8)
10.10 Renewed Consulting Agreement with Dr. Michael B. Limberg (9)
10.11 Asset Purchase Agreement with Innovative Optics, Inc. and Barton
Dietrich Investments, L.P.(10)
10.12 Escrow Agreement with Innovative Optics, Inc., Barton Dietrich
Investments, L.P. and Mackey Price & Williams(10)
10.13 Assignment and Assumption Agreement with Innovative Optics,
Inc.(10)
10.14 General Assignment and Bill of Sale with Innovative Optics,
Inc.(10)
10.15 Non-Competition and Confidentiality Agreement with Mario F.
Barton(10)
10.16 Termination of Employment Agreement with Mark R. Miehle(12)
10.17 Consulting Agreement with Mark R. Miehle(12)
10.18 Employment Agreement with Jeffrey F. Poore
23.1 Consent of Mackey Price & Williams (Included in Exhibit 5.1)
23.2 Consent of Tanner & Co.
-----------------
(1) Incorporated by reference from Registration Statement on Form
SB-2, as filed on March 19, 1996.
(2) Incorporated by reference from Amendment No. 1 to Registration
Statement on Form SB-2, as filed on May 14, 1996.
(3) Incorporated by reference from Amendment No. 2 to Registration
Statement on Form SB-2, as filed on June 13, 1996.
(4) Incorporated by reference from Annual Report on Form 10-KSB, as
filed on April 16, 1998.
(5) Incorporated by reference from Quarter Report on Form 10-QSB, as
filed on November 12, 1998.
(6) Incorporated by reference from Registration Statement on Form
SB-2, as filed on April 29, 1999.
(7) Incorporated by reference from Report on Form 10-QSB, as filed on
August 16, 2000.
(8) Incorporated by reference from Report on Form 10-QSB, as filed on
March 15, 2001.
(9) Incorporated by reference from Report on Form 10-QSB, as filed on
August 14, 2001.
(10) Incorporated by reference from Current Report on Form 8-K, as
filed on March 5, 2002.
(11) Incorporated by reference from Amendment No. 1 to Registration
Statement on Form S-3, as filed on March 20, 2002.
(12) Incorporated by reference from Report on Form 10-QSB, as filed on
November 18, 2002.

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

Current Report on Form 8-K, as filed on April 29, 2003.

II-6

Item 28. Undertakings

The undersigned registrant hereby undertakes (a) subject to the terms
and conditions of Section 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"), to file with the Securities and Exchange Commission such
supplementary and periodic information, documents and reports as may be
prescribed by any rule or regulation of the Commission heretofore or hereafter
duly adopted pursuant to authority conferred in that section; (b) to provide the
underwriter at the closing specified in the underwriting agreement certificates
in such denominations and registered in the names as required by the
underwriters to permit prompt delivery to each purchaser; (c) if any public
offering by the underwriters is to be made on terms differing from those set
forth on the cover page of the prospectus, to file a post-effective amendment
setting forth the terms of such offering; and (d) to deregister, by means of a
post- effective amendment, any securities covered by this registration statement
that remain unsold at the termination of this offering.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or preceding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against policy as expressed in the Securities Act
and will be governed by the final adjudication of such issue.

The undersigned registrant also undertakes that:

(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or Rule
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering of those securities.

The undersigned registrant also undertakes that it will file, during
any period in which it offers or sells securities, a post- effective amendment
to this registration statement to (i) include any prospectus required by Section
10(a)(3) of the Securities Act, (ii) reflect in the prospectus any facts or
events which, individually or together, represent a fundamental change in the
information in the registration statement, and (iii) include any additional or
changed material information on the plan of distribution.

II-7

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, in Salt Lake City,
State of Utah, this 3rd day of July 2003.

PARADIGM MEDICAL INDUSTRIES, INC.

By: /s/ Jeffrey R. Poore
-------------------------
Jeffrey R. Poore
Its: President and Chief Executive
Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jeffrey F. Poore as his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Registration Statement, and to file the same, with
all Exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated:

Signature Title Date

/s/ Jeffrey R. Poore President and Chief Executive Officer July 3, 2003
----------------------- (Principal Executive Officer)
Jeffrey F. Poore

/s/ Randall A. Mackey Chairman of the Board and Secretary July 3, 2003
-----------------------
Randall A. Mackey

/s/ David M. Silver Director July 3, 2003
-----------------------
David M. Silver

/s/ Keith D. Ignotz Director July 3, 2003
-----------------------
Keith D. Ignotz

/s/ Gregory Hill Vice President of Finance, Treasurer July 3, 2003
----------------------- and Chief Financial Officer (Principal
Gregory Hill Financial and Accounting Officer)

II-8