Edgar Filing: PARADIGM MEDICAL INDUSTRIES INC

As filed with the Securities and Exchange Commission on April 16, 2007
Commission File No. 333-137334
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________

AMENDMENT NO. 3
TO
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 or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification Number)
or organization) Code 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)

Raymond P.L. Cannefax, President and Chief Executive Officer
Paradigm Medical Industries, Inc.
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 & Ostler
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, check the following box and
list the Securities Act registration statement number of the earlier effective
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 this Form is a post-effective amendment filed pursuant to Rule
462(d) 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, check the following box. [ ]

___________________________

CALCULATION OF REGISTRATION FEE

Title of each Proposed Proposed
class of Number of maximum maximum Amount of
securities to be Shares to be offering price aggregate registration
registered registered(1) per Share(2) offering price fee
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Common Stock, $.001
par value per share... 60,000,000 .006 $ 360,000 $ 38.52
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(1) Includes shares of our common stock, $.001 par value per share, which
may be offered pursuant to this registration statement, which shares
are issuable upon conversion of callable secured convertible notes held
by the selling stockholders. Pursuant to an agreement with the holders
of the convertible notes, we are required to register for resale up to
but no greater than 60,000,000 shares of our common stock issuable upon
conversion of the notes even though additional shares might be issued
to the noteholders upon conversion of their notes. Thus, should the
conversion ratio result in our having insufficient shares registered
for the resale of the additional shares that might be issued to the
noteholders upon conversion of their notes, we will not file a new
registration statement to cover the resale of such additional shares
should that become necessary.

(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of
1933, as amended, using the last reported sale price on the OTC
Bulletin Board on September 6, 2006, which was $.006 per share.

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 such Section 8(a),
may determine.

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED APRIL , 2007
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Up to 60,000,000 Shares of Common Stock

PARADIGM MEDICAL INDUSTRIES, INC.

This prospectus relates to the resale by the selling stockholders of up
to 60,000,000 shares of our common stock issuable upon conversion of the
callable secured convertible notes in the principal amount of $1,500,000
(consisting of $1,000,000 in convertible notes that were sold to four investors
pursuant to a securities purchase agreement dated February 26, 2006, plus
$500,000 in notes to be sold to the investors upon the effectiveness of a
registration statement to register 60,000,000 shares of our common stock
issuable upon conversion of such notes). The $1,500,000 in convertible notes are
convertible into our common stock at the lower of (i) $.02 or (ii) 60% of the
average of the three lowest intraday trading prices for our common stock on the
OTC Bulletin Board for the 20 trading days before but not including the
conversion date. The selling stockholders may sell common shares from time to
time in the principal market on which the stock is traded at the prevailing
market price or in negotiated transactions. The selling stockholders may be
deemed underwriters of the shares of common stock that they are offering. We
will pay the expenses of registering these shares.

Our common stock is registered under Section 12(g) of the Securities
Exchange Act of 1934, as amended, and is quoted on the Over-the-Counter Bulletin
Board under the symbol PMED.OB. On March 22, 2007, the last reported sale price
of our common stock was $.02 per share.

Investing in our common stock involves substantial risks that are
described in the "Risk Factors" section beginning on page 7 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 information in this prospectus is not complete and may be changed.
This prospectus is included in the registration statement that was filed by
Paradigm Medical Industries, Inc. with the U.S. Securities and Exchange
Commission. The selling stockholders may not sell these securities until the
registration statement becomes effective. This prospectus is not an offer to
sell these securities and is not soliciting an offer to buy these securities in
any state where the sale is not permitted.

The date of this prospectus is April __, 2007.

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.

As reflected in the results for the fiscal years ended December 31,
2006 and 2005, diagnostic products are currently our major focus and the
Photon(TM) laser system and other extensive research and development projects
have been put on hold pending future evaluation when our financial position
improves. Our focus is not on any specific diagnostic product or products, but
rather on our entire group of diagnostic products. We sell our products in all
countries of the world in which we are permitted to do so. The nature of the
regulatory approval processes in those countries vary by country but, in general
terms, follow the approach of the regulatory approval processes of the United
States Food and Drug Administration, or FDA, and the approval processes of the
countries in the European Union. The status of specific approvals is detailed in
the table in the Business section of this prospectus.

We market two cataract surgery systems with related accessories and
disposable products. Our 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 has yet to be approved by the Food and Drug
Administration. Except for the Photon(TM) laser system, which can only be sold
in countries outside of the United States, our products can be sold in the
United States and in foreign countries including but not limited to Argentina,
Australia, Bangladesh, Borneo, Brazil, Canada, China, Czechoslovakia, Egypt,
France, Germany, Greece, Hong Kong, India, Israel, Italy, Japan, Jordan, Korea,
Malaysia, Mexico, New Zealand, Pakistan, Peru, Poland, Puerto Rico, Russia,
Saudi Arabia, Spain, Sri Lanka, Taiwan, Thailand, Turkey, United Kingdom, and
United Arab Emirates . Both the Photon(TM) laser system and the Precisionist
ThirtyThousand (TM) are manufactured as an Ocular Surgery Workstation(TM). At
present, because the Photon(TM) laser system has not received FDA approval, it
does not provide significant revenues to us. We estimate that the funds needed
to complete the clinical trials in order to obtain the necessary regulatory
approval on the Photon(TM) to be approximately $225,000. Any possible future
efforts to complete the clinical trials on the Photon(TM) would depend on our
obtaining adequate funding. Thus, due to the uncertainty surrounding the
timetable for obtaining FDA approval and the lack of significant revenues from
other surgical products, we have recorded an inventory reserve against the
majority of inventory associated with the Photon(TM) laser system and
Precisionist Thirty Thousand(TM).

Our diagnostic products include a P55 pachmetric analyzer, a P37
Ultrasonic A/B Scan, the P40, P45 and P60 UBM Ultrasound Biomicroscopes, a P37
A/B Scan, two perimeters, a corneal topographer and the Blood Flow Analyzer
(TM). The diagnostic ultrasonic products, including the P55 pachymetric
analyzer, the P37 Ultrasonic A/B Scan and the P40 UBM Ultrasound Biomicroscope
were acquired from Humphrey Systems, a division of Carl Zeiss, Inc. in 1998. We
developed and offered for sale in the fall of 2000 the P45, which combines the
P37 Ultrasonic A/B Scan and the P40 UBM Ultrasound Biomicroscope into 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 the 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. In March 2005, we developed and offered for
sale the P60 UBM Ultrasound Biomicroscope, the fourth generation of UBM devices,
which has better visual clarity and image flexibility than earlier versions. We
are currently developing additional applications for all of our diagnostic
products.

We rely upon several products for revenues. For the twelve months ended
December 31, 2006, 39% of our revenues were derived from the Dicon(TM)
diagnostic products sales (the perimeter and corneal topographer), 10% of
revenues from Blood Flow Analyzer(TM) sales, 25% of revenues from P40, P45 and
P60 UBM Ultrasound Biomicroscope sales, 14% of revenues from Humphrey Systems
diagnostic product sales (the P55 pachymetric analyzer, the P-20 A-Scan and the
P37 Ultrasonic A/B Scan), and 12% of revenues from services, disposables and
other sales.

For the fiscal year ended December 31, 2005, 31% of our revenues were
derived from the Dicon(TM) diagnostic products sales (the perimeter and the
corneal topographer), 4% of revenues from Blood Flow Analyzer(TM) sales, 43% of
revenues from the P40, P45 and P60 UBM Ultrasound Biomicroscope sales, 10% of
revenues from Humphrey systems diagnostic products sales (the P55 pachymetric
analyzer, the P20 A-Scan and the P37 A/B Scan), and 12% of revenues from
services, disposables 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.

Audited revenues for the fiscal year ended December 31, 2006 were
$2,195,000 as compared to $2,201,000 for the comparable period for fiscal 2005.

On January 5, 2006, our Board of Directors appointed Raymond P.L.
Cannefax as President and Chief Executive Officer of the company, replacing John
Y. Yoon who served in those positions from March 18, 2004 to December 31, 2005.
Mr. Yoon resigned as President and Chief Executive Officer, effective December
31, 2005, to pursue other opportunities. On March 20, 2006, our Board of
Directors appointed Luis A. Mostacero as Vice President of Finance, Treasurer
and Secretary. Mr. Mostacero previously served as Controller from June 20, 2000
to September 15, 2005, when he resigned to pursue other opportunities. On April
10, 2006, Michael S. Austin was appointed as Vice President of Sales and
Marketing.

On November 15, 2005, Aziz A. Mohabbat resigned as Vice President of
Operations and Chief Operating Officer to pursue other opportunities. Mr.
Mohabbat served as Vice President of Operations and Chief Operating Officer from
March 22, 2004 to November 15, 2005, and as Chief Operating Officer from August
30, 2002 to March 2003. On January 20, 2006, Frederick D. Geiger resigned as
Vice President of Engineering to pursue other opportunities. Mr. Geiger served
as Vice President of Engineering from May 23, 2005 to January 20, 2006. The
Board of Directors has not yet appointed a new Chief Operating Officer since
Aziz A. Mohabbat resigned or a new Vice President of Engineering since Mr.
Geiger resigned in an effort to conserve our financial resources. Moreover,
since Mr. Mohabbat's and Mr. Geiger's resignations, we have endeavored to reduce
our operating expenditures, which has resulted in a reduction in the number of
our employees. It is our intention to appoint a new Chief Operating Officer and
a new Vice President of Engineering in the future when we have adequate funds to
do so.

On January 4, 2006, Alfred B. Franklin was appointed as Vice President
of Domestic Sales, replacing Michael S. Austin who resigned as Vice President of
Sales and Marketing on November 28, 2006, to pursue other opportunities;
Christina M. O'Conner was appointed as Vice president of International Sales;
and Julio C. Maximo was appointed as Vice President of Operations.

The Offering

Common stock offered by
selling stockholders....... Up to 60,000,000 shares issuable upon conversion
of the convertible notes in the principal amount
of $1,500,000. Pursuant to an agreement with the
holders of the convertible notes, we are
required to register for resale up to but no
greater than 60,000,000 shares of our common
stock issuable upon conversion of the notes even
though additional shares might be issued to the
noteholders upon conversion of their notes.

Common stock outstanding
prior to the offering(1)... 203,986,625 shares.

Common stock outstanding
after the offering(1)...... Up to 263,986,625 shares.

Use of proceeds............ We will not receive any proceeds from the sale
of the common stock hereunder. We received total
gross proceeds of $1,000,000 from the sale of
the convertible notes that were sold to four
investors pursuant to the securities purchase
agreement dated February 28, 2006,and the
investors are obligated to purchase from us
$500,000 in additional notes within five days of
a registration statement being declared
effective by the Securities and Exchange
Commission that registers 60,000,000 shares of
common stock issuable upon conversion of the
notes. The proceeds from the sale of the
convertible notes will be used for purchase of
inventory, marketing and sales, increasing the
number of our direct sales representatives, and
working capital.

Risk Factors/Dilution...... The offering involves a high degree of risk.

OTC Bulletin Board symbols
Common stock.......... PMED.OB

___________________________

(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 conversion of 5,000 shares of
Series D preferred stock, 13,333 shares of common stock issuable upon
conversion of 250 shares of Series E preferred stock, 234,550 shares of
common stock issuable upon conversion of 4,398.75 shares of Series F
preferred stock, 588,235 shares of stock issuable upon conversion of
588,235 shares of Series G preferred stock, options to purchase a total of
7,075,500 shares of common stock issuable upon the exercise of stock
options at prices ranging from $.01 to $2.75 per share, and warrants to
purchase 25,059,392 shares of common stock issuable upon the exercise of
warrants at prices ranging from $.10 to $6.75 per share.

Outstanding Commitments to Issue Shares

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

Underlying Shares
Security of Common Stock

Notes (1) 262,090,000
Warrants (2) 25,059,392
Preferred Stock (3) 862,404
Stock Options (4) 7,075,500
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Total 295,087,296

(1) Assumes full conversion of $3,145,080 of notes issued to AJW Partners,
LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC, and New Millennium
Capital Partners II, LLC at a conversion price of $.012 per share (based
upon a market price of $.02 as of March 22, 2007 with a 40% discount).
(2) Consisting of warrants exerciseable at prices ranging from $.10 per share
to $6.75 per share, including warrants issued to AJW Partners, LLC, AJW
Offshore, Ltd., AJW Qualified Partners, LLC, and New Millennium Capital
Partners II, LLC to purchase 16,534,392 shares of common stock at an
exercise price of $.20 per share, exerciseable through the period from
April 27, 2010 to June 30, 2010, and warrants to purchase 8,000,000 shares
of common stock at an exerciseable price of $.10 per share, exerciseable
through the period from February 28, 2011 to June 28, 2011.
(3) Consisting of 6,753 shares of common stock issuable upon conversion of
5,627 shares of Series A preferred stock, 10,783 shares of common stock
issuable upon conversion of 8,986 shares of Series B preferred stock,
8,750 shares of common stock issuable upon conversion of 5,000 shares of
Series D preferred stock, 13,333 shares of common stock issuable upon
conversion of 250 shares of Series E preferred stock, 234,550 shares of
common stock issuable upon conversion of 4,398.75 shares of Series F
preferred stock, and 588,235 shares of common stock issuable upon
conversion of 588,235 shares of Series G preferred stock.
(4) Consisting of stock options granted to executive officers and employees to
purchase 4,825,500 shares of common stock at exercise prices ranging from
$.01 per share to $2.75 per share, and stock options granted to directors
to purchase 2,250,000 shares of common stock at exercise prices ranging
from $.09 per share to $2.75 per share.

There are a total of 295,087,296 shares underlying our convertible
notes, warrants, preferred stock and stock options, assuming full conversion of
the outstanding notes and preferred stock and the exercise of all the
outstanding warrants and stock options. The number of our authorized shares of
common stock is 800,000,000 shares. The large number of our shares of common
stock underlying our notes, warrants, preferred stock and stock options will
require us to increase the number of authorized shares. Failure to obtain
stockholder approval to increase the number of authorized shares could result in
the noteholders commencing legal action against us and foreclosing on all of our
assets to recover damages. Any such action would require us to curtail or cease
our operations.

Convertible Notes and Warrants

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

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

(including debt financing with an equity component) that involves (i) the
issuance of common stock at a discount to the market price of the common stock
on the date of issuance (taking into account the value of any warrants or
options to acquire common stock in connection therewith), (ii) the issuance of
convertible securities that are convertible into an indeterminate number of
shares of common stock, or (iii) the issuance of warrants during the lock-up
period beginning April 27, 2005 and ending on the later of (A) 270 days from
April 27, 2005, and (B) 180 days from the date the registration statement is
declared effective.

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

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

The $2,500,000 in convertible notes are secured by our assets,
including our inventory, accounts receivable and intellectual property.
Moreover, we have a call option under the terms of the notes. The call option
provides us with the right to prepay all of the outstanding convertible notes at
any time, provided there is no event of default by us and our stock is trading
at or below $.09 per share. An event of default includes the failure by us to
pay the principal or interest on the convertible notes when due or to timely
file a registration statement as required by us or obtain effectiveness with the
Securities and Exchange Commission of the registration statement. Prepayment of
the convertible notes is to be made in cash equal to either (i) 125% of the
outstanding principal and accrued interest for prepayments occurring within 30
days following the issue date of the notes; (ii) 130% of the outstanding
principal and accrued interest for prepayments occurring between 31 and 60 days
following the issue date of the notes; and (iii) 145% of the outstanding
principal and accrued interest for prepayments occurring after the 60th day
following the issue date of the notes.

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

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

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

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

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

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

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

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

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

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

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

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

Simple Conversion Calculation

The number of shares of common stock issuable upon conversion of the
convertible notes is determined by dividing that portion of the principal of the
notes to be converted and interest, if any, by the conversion price. For
example, assuming conversion of the $3,145,080 principal amount of notes on
March 31, 2007 (consisting of $3,500,000 in convertible notes that were sold to
the four investors pursuant to the securities purchase agreements dated April
27, 2005 and February 25, 2006, plus $500,000 in notes to be sold to the
investors upon the effectiveness of a registration statement, less $854,920 in
notes that were converted during the period from June 30, 2005 to March 31,
2007) and a conversion price of $.012 per share, the number of shares issuable
upon conversion would be:

$3,145,080/$.012 = 262,090,000 shares.

Our obligation to issue shares upon conversion of our convertible notes
is essentially limitless. The following is an example of the amount of shares of
our common stock that are issuable upon conversion of the $3,145,080 principal
amount of our convertible notes, based on market prices 25%, 50%, and 75% below
the market price, as of March 22, 2007 of $.02.

% Below Price Per With 40% Number of % of
Market Share Discount Shares Issuable Outstanding*
------- --------- -------- --------------- ------------
25% $.015 $.009 349,453,333 171.3%
50% $.01 $.006 524,180,000 257.0%
75% $.005 $.003 1,048,360,000 513.9%

*Based on 203,986,625 shares outstanding.

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

See the "Risk Factors" and "Selling Stockholders" sections for a
complete description of the convertible notes and warrants.

Summary Financial Information

For the year ended
December 31,
---------------------------

Statement of Operations Data: 2005 2006
----------------------------- ------------ -------------

Net Sales.............................. $ 2,201,000 $ 2,195,000
Net cost of sales....................... 1,599,000 1,277,000
Operating expenses...................... 2,782,000 1,629,000
Operating loss.......................... (2,180,000) (711,000)
Other income (expense).................. (3,209,000) (1,105,000)
Net income (loss)....................... (5,389,000) (1,816,000)
Net income (loss) applicable to common
shareholders..................... (5,389,000) (1,816,000)
Net income (loss) per common share...... $ (0.13) $ (0.01)
Shares used in computing net loss per
share............................ 42,033,000 175,034,000

As of As of
December 31, December 31,
Balance Sheet Data: 2005 2006
------------------- ------------ -------------
Current assets........................... $ 1,331,000 $ 1,572,000
Current liabilities..................... 1,177,000 1,202,000
Working capital (deficit)............... 154,000 370,000
Total assets............................ 1,702,000 1,932,000
Accumulated (deficit)................... (62,196,000) (64,012,000)
Stockholder's (deficit)................. (1,513,000) (1,932,000)

RISK FACTORS

Before you invest in our common stock, you should be aware of the risks
described below which constitute 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.

Our auditors have expressed substantial doubt about our ability to continue as a
going concern.

Due to our significant recurring losses and our inability to generate
sufficient cash flows from operations to satisfy our liabilities and sustain
operations, our auditors have expressed substantial doubt about our ability to
continue as a going concern. Although we have had success in raising working
capital from the sale of our common stock in the past, the going concern
language in our auditors' report could negatively affect our ability to raise
such funds in the future. Some investors are unwilling to invest with companies
that have going concern language in the auditors' report and others demand
substantial discounts from the market price. Unless we are able to raise
additional working capital through the sale of our common stock, we will not be
able to continue the development of our products nor will we be able to pay our
existing current liabilities, which could result in protection under bankruptcy
laws. Under certain conditions, including but not limited to having judgments
rendered against us in a court of law, a group of creditors could force us into
bankruptcy due to our inability to pay the liabilities arising out of such
judgments. At this time, we are unable to assess the likelihood that we would
seek bankruptcy protection in the near future. There can be no assurance that we
will be successful in raising working capital from the sale of our common stock.

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

As of December 31, 2005,we had working capital of $154,000. As of
December 31, 2006, our working capital was $370,000. Our accumulated deficit was
$62,196,000 as of December 31,2005, and $64,012,000 as of December 31, 2006. We
had a net loss of $5,389,000 for the fiscal year ended December 31, 2005, and a
net loss of $1,820,000 for the twelve months ended December 31, 2006. Our losses
have resulted principally from costs incurred in connection with research and
development and beneficial conversion of the convertible notes. We did not sell
medical products 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.

Because our securities trade on the Over-the-Counter Bulletin Board, your
ability to sell your shares in the secondary market may be limited.

Since June 26, 2003, our shares have traded on the Over-the-Counter
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. 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 Nasdaq's rules. 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 Nasdaq's rules. 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 former 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 Over-the-Counter Bulletin Board effective June 26, 2003.
Because our securities are delisted from the Nasdaq SmallCap Market and now
trade on the Over-the-Counter Bulletin Board, additional sales requirements on
broker-dealers will adversely affect the ability of purchasers to sell our
securities and the trading price of our securities could decline.

Moreover, because our securities currently trade on the
Over-the-Counter Bulletin Board, they are subject to the rules promulgated under
the Securities Exchange Act of 1934, as amended, which impose additional sales
practice requirements on broker-dealers that sell securities governed by these
rules 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 such transactions, the broker-dealer must determine whether 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, these rules may adversely affect the
ability of purchasers to sell our securities and otherwise affect the trading
market in our securities.

Because our shares may be deemed "penny stocks," you may have difficulty selling
them in the secondary trading market.

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 Securities
Exchange Act of 1934 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.
Furthermore, monthly statements are required to be sent disclosing recent price
information for the penny stocks.

We are limited to registering for resale only up to 60,000,000 shares of our
common stock issuable upon conversion of the convertible notes and, absent an
ability to register additional shares for resale, we may not be able to repay
the outstanding notes, which could result in the noteholders commencing legal
action against us that could require us to curtail or cease operations.

As of March 31, 2007, we had $2,645,080 in convertible notes
outstanding and an obligation to sell $500,000 in convertible notes upon the
effectiveness of a registration statement to register 60,000,000 shares of
common stock issuable upon conversion of the notes that were sold to four
accredited investors pursuant to the securities purchase agreements dated April
27, 2005 and February 28, 2006. These notes bear interest at 8% per annum from
the date of issuance. Interest is payable quarterly in cash, with six months of
interest payable up front. Any amount of principal or interest on the notes that
is not paid when due shall bear interest at the rate of 15% per annum from the
date due until such amount is paid.

The notes mature in three years from the date of issuance. The
$1,645,080 in notes outstanding, which were sold pursuant to the securities
purchase agreement dated April 27, 2005, are convertible into our common stock
at the selling stockholder's option, at the lower of (i) $.09 or (ii) 60% of the
average of the three lowest intraday trading prices for our common stock on the
OTC Bulletin Board for the 20 trading days before but not including the
conversion date. The $1,000,000 in notes outstanding, which were sold pursuant
to the securities purchase agreement dated February 28, 2006, are convertible
into our common stock at the selling stockholders option, at the lower of (x)
$.02 or (y) 60% of the average of the three lowest intraday trading prices for
our common stock for the 20 trading days before but not including the conversion
date.

Because we are limited to registering for resale only up to 60,000,000
shares of common stock issuable upon conversion of the notes, the notes are
expected to be converted over a longer period of time because the shares
issuable upon conversion of the notes may only be sold, after 60,000,000 shares
being registered for resale are sold upon conversion of the notes, under an

exemption available under the Securities Act of 1933, as amended, particularly
Rule 144 of the General Rules and Regulations thereunder, which limits the
ability of the selling stockholders to sell the shares they receive upon
conversion of the notes. Generally, under Rule 144, a person holding restricted
shares for a period of one year may, every three months, sell in ordinary
brokers' transactions, or in transactions directly with a market maker a number
of such shares equal to the greater of (i) one percent of our then outstanding
common stock, or (ii) the average weekly trading volume in our common stock
during the four calender weeks preceding the sale of such shares.

If the noteholders do not convert their notes to pay the principal and
interest on the notes when due, we will be required to pay the principal and
interest when due in cash. Absent an ability to register additional shares for
resale, we may not have sufficient cash to repay the outstanding notes, which is
likely in view of our losses that are expected to continue, which could result
in the noteholders commencing legal action against us and foreclosing on all of
our assets to recover the amounts due. Any such action would require us to
curtail or cease operations.

There are a large number of shares underlying our convertible notes and warrants
that may be available for future sale, and the sale of these shares may depress
the market price of our common stock.

As of March 31, 2007, we had 203,986,625 shares of our common stock
issued and outstanding and $2,645,080 in convertible notes outstanding that may
be converted into an estimated 220,423,333 shares of common stock at current
market prices, and outstanding warrants to purchase 25,059,392 shares of our
common stock. Additionally, we have an obligation to sell $500,000 convertible
notes that may be converted into an estimated 41,666,667 shares of common stock
at current market prices and issue warrants to purchase 4,000,000 shares of
common stock in the near future. In addition, the number of shares of common
stock issuable upon conversion of the outstanding convertible notes may increase
if the market price of our stock declines. Up to 60,000,000 shares issuable upon
conversion of the notes may be sold without restriction upon the effectiveness
of this registration statement. The sale of these shares may adversely affect
the market price of our common stock.

The continuously adjustable conversion price feature of our convertible notes
could require us to issue a substantially greater number of shares, which will
cause dissolution to our existing stockholders.

*Based on 203,986,625 shares outstanding.

The large number of shares issuable upon conversion of the convertible notes and
preferred stock and exercise of warrants and options will require us to increase
the number of authorized shares issuable upon full conversion of the convertible
notes and exercise of warrants and options, and failure to obtain stockholder
approval to increase the number of authorized shares could result in legal
action against us, which could require us to curtail or cease operations.

There are a large number of shares underlying our convertible notes.
Assuming full conversion of the $3,145,080 principal amount of the notes on
March 31, 2007 (consisting of $3,500,000 in notes that were sold to the four
investors pursuant to the securities purchase agreements dated April 27, 2005
and February 25, 2006, plus $500,000 in notes to be sold to the investors upon
the effectiveness of a registration statement, less $854,920 in notes that were
converted during the period from June 30, 2005 to March 31, 2007), the number of
shares issuable upon conversion of the notes would be 262,090,000 shares. In
addition, there are currently outstanding warrants issued to individuals and
entities to purchase a total of 25,059,392 shares of our common stock at
exercise prices ranging from $.10 per share to $6.75 per share, and options to
individuals to purchase a total of 7,075,500 shares of our common stock at
prices ranging from $.01 per share to $2.75 per share. Further, the number of
common shares issuable upon the full conversion of our preferred stock is
862,404 shares. The number of our authorized shares of common stock is
800,000,000 shares. The large number of our shares of common stock underlying
our notes, warrants, stock options and preferred stock will require us to
increase the number of authorized shares issuable upon full conversion of the
notes and preferred shares, and exercise of the warrants and options, and the
failure to obtain stockholder approval to increase the number of authorized
shares could result in the noteholders commencing legal action against us and
foreclosing on all our assets to recover damages. Any such action would require
us to curtail or cease operations.

The continuously adjustable conversion price feature of our convertible notes
may encourage investors to make short sales in our common stock, which could
have a depressive effect on the price of our common stock.

The convertible notes are convertible into shares of our common stock
at a 40% discount to the trading price of the common stock prior to the
conversion. The significant downward pressure on the price of the common stock
as the selling stockholders convert and sell material amounts of common stock
could encourage short sales by investors. This could place further downward
pressure on the price of the common stock. The selling stockholders could sell
common stock into the market in anticipation of covering the short sale by
converting their securities, which could cause the further downward pressure on
the stock price. In addition, not only the sale of shares issued upon conversion
or exercise of notes, warrants and options, but also the mere perception that
these sales could occur, may adversely affect the market price of the common
stock.

The issuance of shares upon conversion of the convertible notes and exercise of
outstanding warrants may cause immediate and substantial dilution to our
existing stockholders.

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

If we are required for any reason to repay our outstanding convertible notes, we
would be required to deplete our working capital, if available, or raise
additional funds. Our failure to repay the convertible notes, if required, could
result in legal action against us, which could require us to curtail or cease
our operations.

On April 27, 2005, we entered into a securities purchase agreement for
the sale of an aggregate of $2,500,000 principal amount of convertible notes.
These convertible notes are due and payable, with 8% interest, three years from
the date of issuance, unless sooner converted into shares of our common stock.
As of March 31, 2007, a total of $854,920 of these convertible notes have been
converted into shares of our common stock, reducing the outstanding principal
amount of the notes to $1,645,080. On February 28, 2006, we entered into a
securities purchase agreement for the sale of an aggregate $1,500,000 in
principal amount of convertible notes. These convertible notes are due and
payable, with 8% interest, three years from the date of issuance, unless sooner
converted into shares of our common stock. Although we currently have $1,000,000
in convertible notes outstanding pursuant to the securities purchase agreement
we entered into on February 28, 2006, we are obligated to sell additional
convertible notes to the convertible noteholders in the aggregate amount of
$500,000. Any event of default such as our failure to repay the principal or
interest when due, our failure to issue shares of common stock upon conversion
by the holder, our failure to timely file a registration statement or to have
such registration statement declared effective, breach of any covenant,
representation or warranty in the securities purchase agreement or related
convertible notes, the assignment or appointment of a receiver to control a
substantial part of our property or business, the filing of a money judgment,
writ or similar process against us in excess of $50,000, the commencement of a
bankruptcy, insolvency, reorganization or liquidation proceeding against our
company, and the delisting of our common stock could require the early repayment
of the convertible notes, including a default interest rate of 15% on the
outstanding principal balance of the notes if the default is not cured within
the specified grace period. We anticipate that the full amount of convertible
notes will be converted into shares of our common stock, in accordance with the
terms of the notes. However, if we are required to repay the notes, we would be
required to use our limited working capital and raise additional funds. If we
were unable to repay the notes when required, the noteholders could commence
legal action against us and foreclose on all of our assets to recover the
amounts due. Any such action would require us to curtail or cease 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 further, 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 ourselves,
which may materially adversely affect our continued operations.

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 and
further development of the Photon(TM) is on hold until our financial situation
improves, and we may lose our rights to manufacture or sell the Photon(TM) laser
system if we are unable to agree on the correct method of calculating royalty
payments under a license agreement.

We are subject to substantial regulation by the Food and Drug
Administration or FDA and other federal and state regulatory agencies. FDA
regulations require us to obtain either 510(k) clearance or premarketing
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 that 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 because in the United States most cataracts are removed before tissue
hardens. We received an FDA warning letter in August 2000 concerning
deficiencies in the Phase I clinical trials and, after making several
submissions to the FDA, we received a letter from the FDA in February 2001
stating that the deficiencies had been corrected and the clinical trials could
continue.

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 have generated additional clinical information
in response to the letter and are uncertain if we will make a submission to the
FDA with the additional clinical information. Because of the "going concern"
status of the company, management has focused efforts on those products and
activities that will, in its opinion, achieve the most resource efficient
short-term cash flow to the company. As reflected in the results for the fiscal
year ended December 31, 2003, diagnostic products are currently our major focus
and the Photon(TM) and other extensive research and development projects have
been put on hold pending future evaluation when our financial position improves.
Our focus is not on any specific diagnostic product or products, but rather on
our entire group of diagnostic products.

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.

The Photon(TM) laser system is protected under a United States patent
issued to Daniel M. Eichenbaum, M.D. in 1987 and subsequently assigned to
PhotoMed International, Inc. and a Japanese patent issued to us in 1997. The
United States patent expired in September 2004. We secured the exclusive
worldwide rights to this patent from PhotoMed by means of a license agreement
dated July 7, 1993. The license agreement expired when the United States patent
rights expired in September 2004. PhotoMed and Dr. Eichenbaum brought legal
action against us on September 11, 2000 involving an amount of royalties that
are allegedly due and owing to them from the sale of equipment by us under the
license agreement. We have paid $15,717, which we believe brings all payments
current as of the date of the last payment on January 7, 2005. We have been
working with PhotoMed and Dr. Eichenbaum to insure that the royalty calculations
have been correctly made on the royalties paid as well as the proper method of
calculations for the future.

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

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:Yttrium-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 that 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, engineering 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 such 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.

We are dependent upon a limited number of key suppliers for components and parts
used in our products and the interruption in the supply of these components and
parts could impede our ability to deliver our products to market.

We currently purchase components and parts used in our products from a
limited number of key suppliers. Although we maintain alternative suppliers, our
reliance on our principal suppliers could result in delays associated with
redesigning a product due to an inability to obtain an adequate supply of
required components and parts, and reduced control over pricing, quality and
timely delivery. The loss of any of these principal suppliers or the inability
of a supplier to meet performance and quality specifications, requested
quantities or delivery schedules could cause our revenues to decline. In
addition, any interruption or discontinuance in the supply of components or

parts could have an adverse effect on our business, results of operation and
financial condition. Further, a significant price increase from any of our
principal suppliers could cause our profitability to decline if we cannot
increase the prices of our products to our customers. Our principal suppliers
include Capistrano Labs, U.S. Ultrasound and Anello.

No independent marketing studies have been made to confirm the commercial demand
for the Photon(TM) laser system, the Blood Flow Analyzer(TM), and the P40, P45
and P60 Ultrasound Biomicroscopes.

We believe that there is substantial commercial demand for our
Photon(TM) laser system, our Blood Flow Analyzer(TM), and our P40, P45 and P60
Ultrasound Biomicrocopes 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. A United States
patent issued in 1987 to Daniel M. Eichenbaum, M.D. protects our laser probe.
These patent rights expired in September 2004. Patents have also 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 ourselves 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 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 Ocular 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 dis tributed, 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 that 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 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 affected by a
significant increase in value of the U.S. dollar against local currencies,
economic and political instability, and changes in the regulatory processes and
other regulations.

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. In addition, other specific
risks in doing business in foreign countries include changes in the regulatory
processes affecting our products, in controls governing foreign payments by our
customers, and in regulations, taxes and customs duties or requirements that may
be imposed on the purchase of our products. The foreign countries where our
products are sold include but are not limited to Argentina, Australia,
Bangladesh, Borneo, Brazil, Canada, China, Czechoslovakia, Egypt, France,
Germany, Greece, Hong Kong, India, Israel, Italy, Japan, Jordan, Korea,
Malaysia, Mexico, New Zealand, Pakistan, Peru, Poland, Puerto Rico, Russia,
Saudi Arabia, Spain, Sri Lanka, Taiwan, Thailand, Turkey, United Kingdom, and
United Arab Emirates. Certain of countries may experience political, economic or
social instability, which could adversely affect our sales.

The market price of our securities could fluctuate significantly.

Our common stock was delisted on The Nasdaq SmallCap Market, effective
June 26, 2003, and currently trades 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 our board of directors may determine from time to time.
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
that 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 March 31, 2007, 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;
250 shares of Series E preferred stock convertible into 13,333 common shares;
4,398.75 shares of Series F preferred stock convertible into 234,550 common
shares; and 588,235 shares of Series G preferred stock convertible into 588,235
common shares.

Our preferred shares have rights that amount to a preference over the shares of
this offering.

Our preferred shares have dividend and liquidation rights that amount
to preferences over the shares of this offering. We must pay any cash dividends
to our holders of preferred shares before paying cash dividends to the holders
of the shares of this offering. The dividend rights of our preferred shares are
as follows: for Series A and Series B preferred shares, $.24 per share per annum
payable, at our option, in cash from surplus earnings; for Series C preferred
shares, 12% noncumulative preferred shares payable, at our option, in common
stock or cash from surplus earnings; and for Series D, E, F and G preferred
shares, 8% noncumulative preferred dividends payable, at our option, in common
stock or cash from surplus earnings. Upon our liquidation, we must pay
preferential distributions to our preferred shareholders before paying any
distributions to holders of the shares of this offering. The liquidation rights
of our preferred shares are as follows: for Series A preferred shares, $1.00 per
share, plus accrued and unpaid dividends; for Series B preferred shares, $4.00
per share, plus accrued and unpaid dividends; for Series C preferred shares, the
stated value of $100.00 per share, plus declared but unpaid dividends; for
Series D preferred shares, the stated value of $1.75 per share, plus declared
but unpaid dividends; for Series E, F, and G preferred shares, the greater of
(i) the amount of distributions such shares would have received had the holders
converted such preferred shares into common stock immediately prior to
liquidation, or (ii) the stated value of $100.00 per share, plus declared but
unpaid dividends.

Exercise of outstanding options and warrants will dilute existing stockholders
and could decrease the market price of our common stock

As of March 31, 2007, we had issued and outstanding 203,986,625 shares
of our common stock, shares of Series A, B, D, E, F and G preferred stock
convertible into 862,404 shares of common stock, and outstanding options and
warrants to purchase 32,134,892 additional shares of common stock. The existence
of the outstanding preferred shares, options and warrants may adversely affect
the market price of our common stock and the terms under which we could obtain
additional equity capital. Included in the outstanding options is 4,500,000
options issued to Raymond P.L. Cannefax, our President and Chief Executive
Officer, under the terms of his employment agreement with us. These options are
exercisable at $.01 per share and vest in 12 equal monthly installments of
375,000 shares, beginning on February 5, 2006 until such shares are fully
vested.

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, Series F
preferred stock and Series G preferred stock are entitled to noncumulative cash
dividends paid out of surplus earnings.

We may have continuing liability following our rescission offer in 1996 to
Series B preferred shareholders.

We issued 493,000 shares of Series B preferred stock in 1994 and 1995.
The Series B shares may not have been sold in compliance with certain aspects of
California corporate law and federal and state securities laws. Concurrently

with our July 1996 public offering, we provided the Series B shareholders with a
rescission offer to repurchase all Series B preferred shares or rescission
shares owned by the Series B shareholders. The Series B shareholders were
offered the right to rescind their purchases and receive a refund of the price
paid by them of $4.00 per share plus an amount equal to the interest thereon at
rates ranging from 6% to 12% per annum from the date the rescission shares were
purchased to July 25, 1996, the date our public offering closed and each
rescinding shareholder was paid by us. The original purchasers of approximately
93% of the Series B shares (460,250 shares) rejected the rescission offer by
responding as requested in the rescission offer or by failing to return a
response within 30 days of receiving the rescission offer. Two shareholders
owning a combined total of 32,750 shares accepted the rescission offer. We
purchased the 32,750 shares from the two shareholders accepting the rescission
offer from the proceeds from our public offering.

The rescission offer was designed to reduce any type of contingent
liability we may be subject to in connection with its private placement of
Series B preferred stock. However, the rescission offer may not have fully
relieved us from exposure to contingent liability under federal or state
securities laws. Not every state statutorily provides for voluntary rescission
offers. In addition, other states, although authorizing rescission offers, do
not completely limit the liability of the offeror. Thus, we may have continuing
liability in certain states following the rescission offer. Other than the
payments in 1996 to the two shareholders accepting the rescission offer, we have
made no additional payments thereunto as no other shareholder has accepted the
rescission offer. Moreover, there has been no litigation by a shareholder
involving the private offering of Series B preferred stock or the rescission
offer. As of March 31, 2007, a total of 484,014 shares of Series B preferred
stock have been converted into 580,817 shares of common stock. There are a total
of 8,986 shares of Series B preferred stock issued and outstanding, which are
convertible into 10,783 shares of common stock.

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 that 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

This prospectus relates to shares of our common stock that may be
offered and sold from time to time by the selling stockholders. We will not
receive any proceeds from the sale of shares of common stock in this offering.

In addition, we have received total gross proceeds of $1,000,000 from
the sale of the convertible notes on February 28, 2006 and the investors are
obligated to provide us with an additional $500,000 upon the effectiveness of a
registration statement to register the shares of common stock underlying the
convertible notes and the warrants. The $500,000 in additional proceeds to be
provided by the investors after the registration statement is declared effective
will be used for the purchase of inventory, marketing and sales, increasing the
number of our direct sales representatives, and working capital.

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 B, Series C, Series D, Series E, Series F and Series G preferred stock

are only payable from our surplus earnings and are noncumulative 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 capitalization on an actual basis as
of December 31, 2006.

December 31,
2006
-------------

Long-term obligations............................................ $ 2,038,000

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, 250 issued and outstanding........ -

Series F Preferred Stock, $.001 par value per share;
50,000 shares authorized, 4,598.75 issued and outstanding... -

Series G Preferred Stock, $.001 par value per share;
2,000,000 shares authorized, 588,235 issued and outstanding. 1,000

Common Stock, $.001 par value per share; 800,000,000 shares
authorized, 203,975,958 issued and outstanding, respectively 202,000

Additional paid-in-capital, common stock.................... 61,884,000

Accumulated deficit......................................... (64,012,000)

Total stockholders' equity ...................................... (1,925,000)

Total capitalization............................................. $ 113,000

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

Our common stock and Class A warrants trade on the Over-the-Counter
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. Since June 25, 2003, our common stock has traded on the
Over-the-Counter Bulletin Board. As of March 22, 2007, the closing sale price of
the common stock was $.02 per share. The following are the high and low sale
prices for the common stock by quarter as reported by the Over-the-Counter
Bulletin Board since January 1, 2004.
Common Stock
Price Range
Period (Calendar Year) High Low
----------- -----------
2004
First Quarter ................................. $ .21 $ .15
Second Quarter................................. .16 .07
Third Quarter.................................. .12 .09
Fourth Quarter................................. .12 .08
2005
First Quarter ................................. .10 .08
Second Quarter ................................ .09 .07
Third Quarter.................................. .10 .001
Fourth Quarter................................. .048 .001
2006
First Quarter ................................. .047 .001
Second Quarter .014 .006
Third Quarter ................................ .007 .004
Fourth Quarter ............................... .005 .003

2007
First Quarter ................................. .032 .003

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

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,
Series F preferred stock and Series G 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,
Series F and Series G preferred stock are only payable from our surplus
earnings, and are noncumulative 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, 2005 and 2006. The following financial information
should be read in conjunction with the Financial Statements, and related notes
thereto.

Summary Financial Information

For the year ended
December 31,
---------------------------

Statement of Operations Data: 2005 2006
----------------------------- ------------ -------------
Net Sales............................... $ 2,201,000 $ 2,195,000
Net cost of sales........................ 1,599,000 1,277,000
Operating expenses....................... 2,782,000 1,629,000
Operating loss........................... (2,180,000) (711,000)
Other income (expense)................... (3,209,000) (1,105,000)
Net income (loss)........................ (5,389,000) (1,816,000)
Net income (loss) applicable to common
shareholders...................... (5,389,000) (1,816,000)
Net income (loss) per common share....... $ (0.13) $ (0.01)
Shares used in computing net loss per share 42,033,000 175,034,000

As of As of
December 31, December 31,
Balance Sheet Data: 2005 2006
------------------- ------------ -------------
Current assets........................... $ 1,331,000 $ 1,572,000
Current liabilities...................... 1,177,000 1,202,000
Working capital (deficit)................ 154,000 370,000
Total assets............................. 1,702,000 1,932,000
Accumulated (deficit).................... (62,196,000) (64,012,000)
Stockholder's (deficit).................. (1,513,000) (1,932,000)

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 its 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.

Critical Accounting Policies

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

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

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

3. The sales price is fixed or determinable. The purchase order
received from the customer includes the agreed-upon sales price. We do not

accept customer orders, and therefore do not recognize revenue, until the sales
price is fixed.

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

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

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

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

General

The following Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains forward-looking statements, which
involve risks and uncertainty. 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.

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

Results of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

Due to our ongoing cash flow difficulties, most of our vendors and
suppliers were contacted during 2005 and 2006 with attempts to negotiate reduced
payments and settlement of outstanding accounts payable. Although some vendors
refused to negotiate and demanded payment in full, some vendors were willing to
settle for a reduced amount. The accounts payable forgiven by vendors and
suppliers resulted in a gain of $34,000 and $12,000 during the years ended
December 31, 2006 and 2005, respectively.

Liquidity and Capital Resources

We used $828,000 in cash in operating activities for the twelve months
ended December 31, 2006, compared to $2,668,000 for the twelve months ended
December 31, 2005. The decrease in cash used for operating activities for the
twelve months ended December 31, 2006 was primarily attributable to our net loss
and decreases in accounts payable, accounts receivable, inventory and a
significant decrease in the beneficial conversion feature. Cash use for
investment activities on December 31, 2006 was $20,000 compared to $-0- for
December 31, 2005. Net cash used in financing activities was $988,000 for the
twelve months ended December 31, 2006, versus cash used of $2,603,000 in the
same period in 2005. We had working capital of $370,000 as of December 31, 2006.
In January 2005, we sold 2,000,000 shares of our common stock to an accredited
investor for $150,000 in cash. 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.

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

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

We have taken numerous steps to reduce costs and increase operating
efficiencies. These steps consist of the following:

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

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

3. We have reduced our direct sales force to four representatives,
which has resulted in less payroll, travel and other selling expenses.

Because we have significantly fewer sales representatives, our ability
to generate sales has been reduced.

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 15% of total outstanding receivables as of December 31,
2006 and 20% as of December 31, 2005. The allowance for doubtful accounts
decreased slightly from $100,000 at December 31, 2005 to $72,000 at December 31,
2006.

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

We carried an allowance for obsolete or estimated non-recoverable
inventory of $1,320,000 at December 31, 2006 and $1,357,000 at December 31,
2005, or 58% and 61% of total inventory, respectively. 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 is uncertain. In addition, we have a significant
amount of inventory relating to the Photon(TM) laser system, which does not yet
have FDA approval in order to sell the product domestically. Therefore, the
allowance for inventory was established to reserve for these potential
eventualities.

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

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

As of March 31, 2006, we had $2,645,080 in convertible notes
outstanding and an obligation to sell $500,000 in convertible notes upon the
effectiveness of a registration statement to register 60,000,000 shares of
common stock issuable upon conversion of the notes. Because we are limited to
registering for resale only up to 60,000,000 shares of common stock issuable
upon conversion of the notes, the notes are expected to be converted over a
longer period of time because the shares issuable upon conversion of the notes
may only be sold, after 60,000,000 shares being registered for resale are sold
upon conversion of the notes, under a limited number of exemptions available
under the Securities Act of 1933, as amended, particularly Rule 144 of the
General Rules and Regulations thereunder, which limits the ability of the
selling stockholders to sell the shares they receive upon conversion of the
notes.

If the noteholders do not convert their notes to pay the principal and
interest on the notes when due, we will be required to pay the principal and
interest when due in cash. Absent an ability to register additional shares for
resale, we may not have sufficient cash to repay the outstanding notes, which is
likely in view of our losses that are expected to continue, that could result in
the noteholders commencing legal action against us and foreclosing on all of our
assets to recover the amounts due. Any such action would require us to curtail
or cease our operations.

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 our foreign
customers. All sales transactions to date have been denominated in U.S. dollars.

Impact of New Accounting Pronouncements

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

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments. This statement is an amendment of FASB Statements
Nos. 133 and 140 to address what had been characterized as a temporary exemption
from the application of the bifurcation requirements of Statement No. 133 to
beneficial interests in securitized financial assets. Prior to the effective
date of Statement No. 133, the FASB received inquiries on the application of the
exception in paragraph 14 of Statement No. 133 to beneficial interests in
securitized financial assets. In response to the inquiries, Implementation Issue
D1 indicated that, pending issuance of further guidance, entities may continue
to apply the guidance related to accounting for beneficial interests in
paragraphs 14 and 362 of Statement No. 140. Those paragraphs indicate that any
security that can be contractually prepaid or otherwise settled in such a way
that the holder of the security would not recover substantially all of its
recorded investment should be subsequently measured like investments in debt
securities classified as available-for-sale or trading under FASB Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities, and may
not be classified as held-to-maturity. Further, Implementation Issue D1
indicated that holders of beneficial interests in securitized financial assets
that are not subject to paragraphs 14 and 362 of Statement No. 140 are not
required to apply Statement No. 133 to those beneficial interests until further
guidance is issued. We believe the adoption of new standards will not have a
material effect on our financial position, results of operations, cash flows, or
previously issued financial reports.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing
of Financial Assets. This statement amends FASB Statement No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, with respect to the accounting for separately recognized servicing

assets and servicing liabilities. In this statement the board decided to broaden
the scope of the project to include all servicing assets and servicing
liabilities. Servicing assets and servicing liabilities may be subject to
significant interest rate and prepayment risks, and many entities use financial
instruments to mitigate those risks. Currently, servicing assets and servicing
liabilities are amortized over the expected period of estimated net servicing
income or loss and assessed for impairment or increased obligation at each
reporting date. The board acknowledged that the application of the lower of
carrying amount or fair value measurement attribute to servicing assets results
in asymmetrical recognition of economic events, because it requires recognition
of all decreases in fair value but limits recognition of increases in fair value
to the original carrying amount.

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

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

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

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 two cataract surgery systems with related accessories and
disposable products. Our cataract removal system, the PhotonTM laser system, is
a laser cataract surgery system marketed as the next generation of cataract
removal. Because of the "going concern" status of the company, management has
focused efforts on those products and activities that will, in its opinion,
achieve the most resource efficient short-term cash flow to the company. As
reflected in the results for the fiscal year ended December 31, 2005, diagnostic
products are currently our major focus and the Photon(TM) and other extensive
research and development projects have been put on hold pending future
evaluation when the financial position of the company improves.

At present, the Photon(TM) has not received FDA approval to be sold in
the United States. Any possible future efforts to complete the clinical trials
on the Photon(TM) in order to file for FDA approval would depend on our
obtaining adequate financing. We estimate that the funds needed to complete the
clinical trials in order to obtain the necessary regulatory approval on the
Photon(TM) to be approximately $225,000. Due to the lack of FDA approval and the
lack of current evidence to support recoverability, we have recorded an
inventory reserve to offset the majority of the inventory associated with the
Photon(TM). In addition, most inventory associated with the Precisionist Thirty
Thousand(TM) has been reserved for due to the estimated lack of recoverability.
Our focus is not on any specific diagnostic product or products, but rather on
our entire group of diagnostic products. The Photon(TM) can be sold in markets
outside of the United States. Both the Photon(TM) and the Precisionist
ThirtyThousand(TM) are manufactured as an Ocular Surgery Workstation(TM).

Our diagnostic products include a P55 pachymetric analyzer, a P37 A/B
Scan, the P40, P45 and P60 UBM Ultrasound Biomicroscopes, a P37 A/B Scan, two
perimeters, a corneal topographer and the Blood Flow Analyzer(TM). The
diagnostic ultrasound products including the P55 pachymeter analyzer, the P37
A/B Scan, and the P40 UBM Ultrasound 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 Plus biomicroscope, which combines the P37 Ultrasonic
A/B Scan and the P40 UBM Ultrasound Biomicroscope into 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 the Ocular Blood Flow, Ltd. in June 2000, whose principal product
is the Blood Flow Analyzer(TM). This product is designed for the measurement of
intraocular pressure and pulsatile ocular blood flow volume for detection and
treatment of glaucoma. In March 2005, we developed and offered for sale the P60
UBM Ultrasound Biomicroscope, the fourth generation of UBM devices, which has
better vision clarity and image flexibility than earlier versions. We are
currently developing additional applications for all of our diagnostic products.

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

In June 1997, 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 Occular Blood
Flow, Ltd., the manufacturer of the Blood Flow Analyzer(TM). The terms and
conditions of the sale were $100,000 in cash and 100,000 shares of common stock.
In April 2001, we received authorization to use a common procedure terminology
or CPT code from the American Medical Association for procedures performed with
the Blood Flow Analyzer(TM) , for reimbursement purposes for doctors using the
device. However, certain payers have elected not to reimburse doctors using the
Blood Flow Analyzer(TM).

On July 23, 1998, 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. Because 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 P55 pachymetric measures corneal thickness for the new refractive surgical
applications that eliminate the need for eyeglasses and for optometric
applications including contact lens fitting. The P37 Ultrasonic A/B Scan
combines the Ultrasonic Biometer and ultrasound imaging for advanced diagnostic
testing throughout the eye and is a viable tool for retinal specialists. The P40
UBM Ultrasound Biomicroscope utilizes microscopic digital ultrasound resolution
for detection of tumors and improved glaucoma management. We introduced the P45
UBM Ultrasound Biomicroscope in the fall of 2000, which combines the P37
Ultrasonic A/B Scan, and the Ultrasonic Biometer into 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 was an attempt to round 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. Due to the
lack of sales volume of these products, they were determined to be obsolete and
a reserve was established to offset all inventory associated with these
products. During the fourth quarter of 2003, we sold all inventory and rights
associated with the SIStem(TM) and Odyssey(TM) for $125,000 in cash.

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 5000, the SST(TM),
FieldLink(TM), FieldView(TM) and Advanced FieldView and the corneal topographer
product line, the CT 200(TM), the CT 50 and an ongoing service and software
business. Perimeters are used to determine retinal sensitivity testing the

visual pathway. Corneal topographers are used to determine the shape and
integrity of the cornea, the anterior surface of the eye. Corneal topographers
are used for the refractive surgical applications that eliminate the need for
eyeglasses and for optometric applications including contact lens fitting.

In January 2002, we purchased the Innovatome(TM) microkeratome of
Innovative Optics, Inc. by issuing an aggregate of 1,272,825 shares of its
common stock, warrants to purchase 250,000 shares of 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. We acquired from
Innovative Optics raw materials, work in process and finished goods inventories.
Additionally, we acquired the furniture and equipment 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 April 1, 2002, we entered into a consulting agreement with
John Charles Casebeer, M.D. to develop and promote the microkeratome. For Dr.
Casebeer's services during the period from April 1, 2002 to September 30, 2002,
we issued him a total of 43,684 shares of our common stock, representing payment
of $100,000 in stock for his services. On October 9, 2003, an additional 300,000
shares of our common stock was issued to Dr. Casebeer in settlement of a lawsuit
he brought against us for additional consideration due under the consulting
agreement. All assets acquired from Innovative Optics, including remaining
inventory with a book value of $160,000 and equipment and intangible assets with
a book value of $2,082,000, were written off during 2002.

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

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

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

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

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

develop and manufacture our next generation of the Ultrasound BioMicroscope, as
well as other proprietary new products and enhancement of our current products.
The products to be manufactured by MEDA, at agreed upon costs, and supplied to
us for resale include the following new products: an Ultrasound BioMicroscope,
two Ultrasound A/B Scans, a Biometric A-Scan and a pachymeter.

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

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

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

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

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

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

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

Background

Corporate History: Our business originated with Paradigm Medical, Inc.,
a California corporation formed in October 1989. Paradigm Medical, Inc.
developed our present ophthalmic business and was operated by our founders
Thomas F. Motter and Robert W. Millar. In May 1993, Paradigm Medical, Inc.
merged with Paradigm Medical Industries, Inc. At the time of the merger, we were
a dormant public shell existing under the name French Bar Industries, Inc.
French Bar had operated a mining and tourist business in Montana. Prior to its
merger with Paradigm Medical, Inc. in 1993, French Bar had disposed of its

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

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

Lasers are widely accepted in the ophthalmic community for treatment of
certain eye disorders and are popular for surgical applications because of their
relatively noninvasive nature. In general, ophthalmic lasers, such as argon,
Nd:YAG and excimer (argon-fluoride) are used to coagulate, cut or ablate
targeted tissue. The argon laser is used to treat leaking blood vessels on the
retina (retinopathy) and retinal detachment. The excimer laser is used in
corneal refractive surgery. The Nd:YAG pulsed laser is used to perforate clouded
posterior capsules (posterior capsulotomy) and to relieve glaucoma-induced
elevated pressure in the eye (iridotomy, trabeulorplasty, transcleral
cyclophotocoagulation). Argon, Nd:YAG and excimer lasers are primarily used for
one or two clinical applications each. In contrast to these conventional laser
systems, 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.

Precisionist ThirtyThousand(TM): The Precisionist ThirtyThousand(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.
However, due to the lack of recent sales, the majority of our inventory
associated with the Precisionist Thirty Thousand(TM) has been estimated to be
obsolete and therefore a reserve for such inventory has been recorded. The
system features a graphic color display and unique proprietary on board computer
and graphic user interface linked to a soft key membrane panel for flexible
programmable operation. The system provides real-time "on-the-fly" adjustment
capabilities for each surgical parameter during the surgical procedure for high
volume applications. In addition, the Precisionist(TM) provides one hundred
pre-programmable surgery setups, with a second level of subprogrammed custom
modes within each major surgical screen (i.e., ultrasound phaco and
irrigation/aspiration modes).

The Precisionist(TM) also features 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) and
related accessories were 0% of the total revenues in both the fiscal years 2006
and 2005.

Ocular Surgery Workstation(TM): The Ocular Surgery Workstation(TM)
comprises the base system of the Precisionist 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
preexisting expansion rack, which resides in the base of the Workstation(TM).
These expanded capabilities could include, but would not be limited to laser
systems, video surgical fiber optic imaging, cutting and electrosurgery
equipment. However, there is no guarantee that the Workstation(TM) will be
accepted in the marketplace. If the FDA approves the Photon(TM), 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 that utilize a more delicate clear cornea incision which can
eliminate sutures and be conducted with topical anesthesia. However, this system
may not effectively remove harder grade cataracts. Harder grade cataracts can be
removed using the already existing ultrasound capability of the
Precisionist(TM). Because of our "going concern" status, management has focused
efforts on those products and activities that will, in its opinion, achieve the
most resource efficient short-term cash flow to us. As reflected in the results
for the fiscal year ended December 31, 2006, diagnostic products are currently
our major focus and the Photon(TM) and other extensive research and development
projects have been put on hold pending future evaluation when our financial
position improves. Due to the uncertainty surrounding the timetable for
obtaining FDA approval and the lack of significant revenue from the other
surgical products, we have recorded an inventory reserve against the majority of
the inventory associated with the Photon(TM) and the Precisionist Thirty
Thousand(TM). Our focus is not on any specific diagnostic product or products,
but rather on our entire group of diagnostic products.

At some point in the future, we may intend, subject to economic
feasibility and the availability of adequate funds, to refine the laser delivery
system and laser cataract surgical technique used on soft cataracts through
expanded research and clinical studies. Subject to the aforementioned
constraints, we intend to refine the fluidics management system by improving
chamber maintenance during surgical procedures and to develop techniques to
optimize time and improve invasive techniques through expanded research and
clinical studies. As far as 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 with which it comes
into direct contact.

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. Regulatory approval would require
completion of pending Photon(TM) clinical trials and resubmission of a 510(k)
predicate device application to the FDA. Because of our "going concern" status,
management has focused efforts on those products and activities that will, in
its opinion, achieve the most resource efficient short-term cash flow to us. As
reflected in the results for the fiscal year ended December 31, 2006, diagnostic
products consisting mainly of the P40, P45 and P60 UBM Ultrasound
Biomicroscopes, P37 A/B Scan, perimeter, CT 50 Corneal Topographer, and Blood
Flow Analyzer(TM) are currently our major focus and the Photon(TM) and other
extensive research and development projects have been put on hold pending future
evaluation when the financial position of the company improves. Our focus is not
on any specific diagnostic product or products, buy rather on the entire group
of diagnostic products.

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

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

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

Surgical Instruments and Disposables: In addition to the cataract
surgery equipment, 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 our disposable accessories
as it further penetrates the cataract surgery market and expands the treatment
applications for its Workstation(TM). These products contributed 0% of the total
revenues for both 2006 and 2005.

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

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 the Air Membrane Applanation Probe(TM), a
corneal probe which is shipped in sterile packages. The probe tip cover provides
accurate readings and acts as a prophylactic barrier for the patient. The device
has been issued a patent in the European Economic Community and the United
States and has a patent pending in Japan. The FDA cleared the Blood Flow
Analyzer(TM) for marketing in June 1997 and 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 written authorization from the CPT Editorial
Research and Development Department of the American Medical Association to use
common procedure terminology or CPT code number 92120 for our Blood Flow
Analyzer(TM), for reimbursement purposes for doctors using the device. However,
certain payers have elected not to reimburse doctors using the Blood Flow
Analyzer(TM). 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.
Currently, there is reimbursement by insurance payors to doctors using the Blood
Flow Analyzer(TM) in 22 states and partial reimbursement in four other states.
The amount of reimbursement to doctors using the Blood Flow Analyzer(TM)
generally ranges from $56.00 to $76.00 per patient, depending upon the insurance
payor. Insurance payors providing reimbursement for the Blood Flow Analyzer(TM)
have the discretion to increase or reduce the amount of reimbursement. We are
endeavoring to obtain reimbursement by insurance payors in other states where
there is currently no reimbursement being made.

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

Dicon(TM) Perimeters: Dicon(TM) perimeters consist of the LD 400, the
TKS 5000, FieldLink(TM), FieldView(TM) and Advanced FieldView. Perimeters are
used to determine retinal sensitivity testing the visual pathway. Perimeters
have become a standard of care in the detection and monitoring of glaucoma
worldwide. Perimetry is reimbursable worldwide. The Dicon(TM) perimeters feature
patented kinetic fixation and voice synthesis now in 27 different languages.
Software programs are sold to assist in the analysis of the test results. Sales
of the perimeters and related accessories generated approximately 35% and 28% of
the total revenues for 2006 and 2005, respectively.

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

Dicon(TM) Corneal Topographers: Dicon(TM) corneal topographers include
the CT 200(TM) and the CT 50. Corneal topographers are used to determine the
shape and integrity of the cornea, the anterior surface of the eye. Clinical
applications for corneal topographers include refractive surgery that eliminates
the need for eyeglasses and optometric applications including contact lens
fitting. Revenues from the topographer and related accessories were 3% of the
total revenues for both 2006 and 2005. An enhanced version of the CT 200(TM) was
introduced during the first quarter of 2004. We have completed upgrades to the
CT 200(TM) and the CT 50 Corneal Topographer, which are now operating with
Windows XP software rather than the former Windows 95 operating systems.

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

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

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

P40, P45 and P60 UBM Ultrasound Biomicroscopes: Humphrey Systems
developed the P40 UBM Ultrasound Biomicroscope in conjunction with the New York
Eye and Ear Infirmary in Manhattan and the University of Toronto. The P40
biomicroscope and its intellectual property were included in the purchase from
Humphrey Systems and gives us the proprietary rights to this device. The P40
biomicroscope creates a high resolution computer image of the unseen parts of
the eye that is a "map" for the glaucoma surgeon. The P40 biomicroscope is an
"enabling technology" for the ophthalmologist, one that we have repositioned for
broader market sales penetration. Formerly sold only to glaucoma subspecialty
practitioners, we reintroduced the P40 biomicroscope at a price point targeted
for the average practitioners seeking to add glaucoma filtering surgical
procedures and income to their cataract surgical practice.

The P40 biomicroscope related surgical filtering procedures are fully
reimbursable by Medicare and insurance providers. This untapped new market
positions us with our proprietary P40 biomicroscope and to our 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 UBM Ultrasound Biomicroscope, which combines the P40
biomicroscope and the P37 A/B Scan Ocular Ultrasound Diagnostic in one
instrument. We believe that by combining functions, the P45 biomicroscope will
appeal to a broader market. The P40 biomicroscope and related accessories sales
were 4% and 9% of the total revenues for 2006 and 2005, respectively. The P45
UBM Ultrasound Biomicroscope and related accessories sales contributed 6% and
13% of the total revenues for 2006 and 2005, respectively.

On October 25, 2004, we entered into a Manufacturing and Distribution
Agreement with E-Technologies, Inc., a Iowa based developer of software and
related technology for technical applications. Under the terms of the agreement,
E- Technologies granted to us the exclusive right to manufacture, market, sell
and distribute the P60 UBM Ultrasound Biomicroscope. Upon execution of the
agreement, we paid $30,000 to E-Technologies for engineering costs associated
with the development of the P60. When the P60 received FDA approval on May 26,
2005, we paid E-Technologies an additional fee of $45,000.

In consideration for the exclusive right to manufacture and distribute
the P60 biomicroscope, we agree to pay E- Technologies the sum of $5,000 for
each of the first 25 P60 biomicroscopes sold by us. Thereafter, we agree to pay
E- Technologies the sum of $4,000 for each P60 biomicroscope sold. As an
additional condition, we agree to sell 25 P60 biomicroscopes during the first 12
months after the P60 receives FDA approval. The agreement is effective for a
term of two years. After the expiration of the two year period, the agreement is
to automatically renew for additional one year periods, unless either party
elects to terminate the agreement upon at least 30 days prior written notice to
the other party before the end of any term of the agreement.

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

In July of 2000, we received ISO 9001 and EN 46001 certification using
TUV Essen as the notified body. Under ISO 9001 certification, 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 2005 and
retained ISO 13485 in December 2005 from TUV Essen.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

_____________________________

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

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

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

Marketing and Sales

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

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

Current Market Acceptance and Potential: The principal purchasers of
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.

Marketing Organization: We market our products internationally through
a network of dealers and domestically through direct sales representatives,
independent sales representatives, and ophthalmic product distributors. As of
March 31, 2007, we had four direct domestic sales representatives in the United
States and 57 ophthalmic and medical product distributors outside the United
States. These sales representatives are assigned exclusive territories and have
entered into contracts with us that contain performance quotas. Domestic sales
channels have been expanded to include independent sales representatives and
distributors who began training with our products in August 2003. We also plan
to continue to market our products by identifying customers through internal
market research, trade shows and direct marketing programs.

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

Manufacturing and Raw Materials: Currently, we maintain a 16,926 square
foot facility in Salt Lake City. We transferred the manufacturing activities for
the Blood Flow Analyzer(TM) to San Diego from Ocular Blood Flow, Ltd. in England
during 2001. During the second quarter of 2002, 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 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 certain
accessories and fluidics surgical tubing sets at our facility in Salt Lake City.

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

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.

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 our users and new applications for our 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.

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

During the period in which Thomas F. Motter served as Chairman and
Chief Executive Officer, he formed a clinical advisory board and met from time
to time with the board. Jeffrey F. Poore, who served as our President and Chief
Executive Officer from March 19, 2003 to March 18, 2004, and John Y. Yoon, who
served as President and Chief Executive Officer from March 13, 2004 to December
31, 2005, decided not to utilize the clinical advisory board. Instead, they
consulted with former members of the advisory board on an informal basis.
Raymond P.L. Cannefax, who currently serves as our President and Chief Executive
Officer, has also decided not to utilize the clinical advisory board. We
currently have no agreements with any former members of the clinical advisory
board and none of those former members hold or own any rights to our products or
technologies.

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. The major manufacturers
utilizing ultrasonic technology offer products currently in use. Those systems
rely on accessories including single use cassette packs and other ancillary
surgical disposables such as saline solution, sutures and intraocular lenses for
their profits. The cassette packs are required for fluid and tissue collection
during the surgical procedure. The cassette packs are generally unique and
proprietary to their respective systems and represent a barrier to entry for
third party, lower cost aftermarket suppliers. While there is growing market
resistance in the United States and internationally to single use cassettes, it
is anticipated that manufacturers of ultrasound equipment will continue to
develop and enhance their present ultrasound products in order to protect their
investments in system and cassette technology and to protect their profits from
sales of these cassettes and accessories. 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. There are several other companies
attempting to develop laser equipment for cataract surgery. These companies can
be differentiated by the laser wavelength employed for the cataract surgery.
Based on the information currently available to us; Er:YAG laser wavelength
appears to offer a less viable means of removing cataracts than the Nd:YAG
wavelength used by the Photon(TM). One competitor uses a Nd:YAG wavelength,
however the laser is used only to vibrate an ultrasonic needle. Thus the device
remains an ultrasonic system subject to the same risk factors of phaco, thereby
eliminating the benefits of using a laser to remove the cataract. 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 visual impairment in this country. The damage caused by these diseases is
irreversible. The preconditions for the onset of macular degeneration or
glaucoma are low ocular blood flow and/or high intraocular pressure. Diagnostic
screening is important for individuals susceptible to these diseases. People in
high risk categories include: African Americans over 40 years of age, all
persons over 60 years of age, persons with a family history of glaucoma or
diabetes, and the very nearsighted. The Glaucoma Research Foundation recommends
that these high-risk individuals be tested regularly for glaucoma. According to
the U.S. Census Bureau, in 1995 there were over 30 million adults 65 years of
age and older and 8 million African Americans 45 years of age and older. The
Glaucoma Research Foundation reports that glaucoma currently accounts for more
than 7 million visits to physicians annually.

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 acquired 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 P40 UBM
Ultrasound Biomicroscope, one of the ultrasonic products we purchased, is
subject to a license agreement dated September 27, 1990, with Sunnybrook Health
Science Center. Under the terms of the license agreement, we have the exclusive
worldwide rights to manufacture and sell the P40 UBM biomicroscope, for which we
are required to pay a royalty of $150 for each licensed product sold. The
license agreement was automatically terminated by its terms on September 27,
2002, at which time we had a royalty free worldwide license to use and sell the
P40 UBM Ultrasound Biomicroscope. However, we have a continuing obligation after
such termination to continue to use and sell the biomicroscope only in the field
of ophthalmology.

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

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

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

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

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

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

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

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

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

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 Food, Drug and Cosmetics 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 Food, Drug and Cosmetics Act, the FDA regulates the
manufacture, distribution and production of medical devices in the United States
and the export of medical devices from the United States. Noncompliance with
applicable requirements can result in fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production, denial
of Premarket clearance or approval for devices. Recommendations by the FDA that
we not be allowed to enter into government contracts in order to avoid criminal
prosecution may also be made.

Following the enactment of the Medical Device Amendments to the Food,
Drug and Cosmetics Act in May 1976, the FDA began classifying medical devices in
commercial distribution into one of three classes: Class I, II or III. This
classification is based on the controls that are perceived to be necessary to
reasonably ensure the safety and effectiveness of medical devices. Class I
devices are those devices, the safety and effectiveness of which can reasonably
be ensured through general controls, such as adequate labeling, advertising,
premarketing notification and adherence to the FDA's Quality System Requirements
regulations. Some Class I devices are exempt from some of the general controls.
Class II devices are those devices the safety and effectiveness of which can
reasonably be assured through the use of special controls, such as performance
standards, postmarket surveillance, patient registries and FDA guidelines. Class

III devices are devices that must receive premarketing approval by the FDA to
ensure their safety and effectiveness. Generally, Class III devices are limited
to life sustaining, life supporting or implantable devices, or to new devices
that have been found not to be substantially equivalent to legally marketed
devices.

There are two principal methods by which FDA approval may be obtained.
One method is to seek FDA approval through a premarketing notification filing
under Section 510(k) of the Food, Drug and Cosmetics Act. If a manufacturer or
distributor of a medical device can establish that a proposed device is
"substantially equivalent" to a legally marketed Class I or Class II medical
device or to a pre-1976 Class III medical device for which the FDA has not
called for a premarketing approval, the manufacturer or distributor may seek FDA
Section 510(k) premarketing clearance for the device by filing a Section 510(k)
premarketing notification. The Section 510(k) notification and the claim of
substantial equivalence will likely have to be supported by various types of
data and materials, possibly including clinical testing results, obtained under
an Investigational Device Exemption granted by the FDA. The manufacturer or
distributor may not place the device into interstate commerce until an order is
issued by the FDA granting premarketing clearance for the device. There can be
no assurance that we will obtain Section 510(k) premarketing 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 premarketing approval, and allow the proposed
device to be marketed in the United States. The FDA may determine, however, that
the proposed device is not substantially equivalent, or may require further
information, such as additional test data, before the FDA is able to make a
determination regarding substantial equivalence. A "not substantially
equivalent" determination or a request for additional information could delay
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 premarketing
approval from the FDA. If a manufacturer or distributor of a medical device
cannot establish that a proposed device is substantially equivalent to another
legally marketed device, whether or not the FDA has made a determination in
response to a Section 510(k) notification, the manufacturer or distributor will
have to seek premarketing approval for the proposed device. A premarketing
approval application would have to be submitted and be supported by extensive
data, including preclinical and clinical trial data to prove the safety and
efficacy of the device. If human clinical trials of a proposed device are
required and the device presents a significant risk, the manufacturer or the
distributor of the device will have to file an Investigational Device Exemption
application with the FDA prior to commencing human clinical trials. The
Investigational Device Exemption application must be supported by data,
typically including the results of animal and mechanical testing. If the
Investigational Device Exemption application is approved, human clinical trials
may begin at a specific number of investigational sites, and the approval letter
could include the number of patients approved by the FDA.

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

Upon receipt of the premarketing approval application, the FDA makes a
threshold determination whether the application is sufficiently complete to
permit a substantive review. If the FDA determines that the premarketing
approval is sufficiently complete to permit a substantive review, the FDA will
"file" the application. Once the submission is filed, the FDA has by regulation
90 days to review it; however, the review time is often extended significantly
by the FDA asking for more information or clarification of information already
provided in the submission. During the review period, an advisory committee may
also evaluate the application and provide recommendations to the FDA as to
whether the device should be approved. In addition, the FDA will inspect the
manufacturing facility to ensure compliance with the FDA's Quality System
Requirements prior to approval of a premarketing application. While the FDA has
responded to premarketing approval applications within the allotted time period,
premarketing approval reviews generally take approximately 12 to 18 months or
more from the date of filing to approval. The premarketing approval process is

lengthy and expensive, and there can be no assurance that such approval will be
obtained for any of our products determined to be subject to such requirements.
A number of devices for which other companies have sought premarketing approval
have never been approved for marketing.

Any products manufactured or distributed by us pursuant to a premarket
clearance notification or premarketing approval are or will be subject to
pervasive and continuing regulation by the FDA. The Food, Drug and Cosmetics Act
also requires that our products be manufactured in registered establishments and
in accordance with Quality System Requirements regulations. Labeling,
advertising and promotional activities are subject to scrutiny by the FDA and,
in certain instances, by the Federal Trade Commission. The export of medical
devices is also subject to regulation in certain instances. In addition, the use
of 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 quality
system requirements regulations and other requirements.

Congress has considered several comprehensive federal health care
programs designed to broaden coverage and reduce the costs of existing
government and private insurance programs. These programs have been the subject
of criticism within Congress and the health care industry, and many alternative
programs and features of programs have been proposed and discussed. Therefore,
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 premarketing approval, Section 510(k) or
approved Investigational Device Exemption from the FDA is tantamount to approval
in those countries. These countries and most developing countries have simply
deferred direct discretion to licensed practicing surgeons to determine the
nature of devices that they will use in medical procedures. Our two ultrasound
systems, the Photon(TM) laser cataract system we are developing and the ocular
blood flow analyzer are all devices that 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
Investigational Device Exemption 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 Investigational Device
Exemption granted by the FDA in September 1994. Although the Photon(TM) laser
cataract system is uniquely configured in an original and proprietary manner,
the laser system, a Nd:YAG laser, is not proprietary to the device or 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 Investigational Device Exemption application to provide for a
"modest clinical study" in order to collect the data required by the FDA for
clearance of the Photon(TM) laser cataract system. The FDA granted this
Investigational Device Exemption in May 1995 for a Phase I Feasibility Study. 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 relating to certain deficiencies in the human clinical trials for
our Photon(TM) Laser Cataract System. The warning letter concerned 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 granted conditional approval provided that we
correct certain deficiencies. After providing several additional submissions to
the FDA, we received a letter dated February 13, 2001 from the FDA stating that
the deficiencies had been corrected and the clinical trials could continue.

Subsequent to the warning letter, 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. On May 7, 2002, we received a letter from the FDA requesting further
clinical information. We have generated additional clinical information in
response to the letter and are uncertain if we will make a submission to the FDA
with the additional clinical information. Because of the "going concern" status
of the company, management has focused efforts on those products and activities
that will, in its opinion, achieve the most resource efficient short-term cash
flow to the company. Our diagnostic products are currently our major focus and
the Photon(TM) and other extensive research and development prospects have been
put on hold pending future evaluation until our financial position improves. Our
focus is not on any specific diagnostic product or products, but rather on our
entire group of diagnostic products.

Facilities

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

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

Employees

As of March 31, 2007, we had 21 full-time employees. This number does
not include our manufacturer's representatives who are independent contractors
rather than our employees. We also utilize 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 75% from 112 to 30 employees. The estimated cost savings from the
downsizing program will be in excess of $2,000,000 annually. The costs of
downsizing have included onetime expenses of approximately $43,000 for moving
and travel. In addition, we incurred additional onetime expenses of
approximately $18,000 for housing accommodations for key employees working in
Salt Lake City. We realized a net cost savings from downsizing in excess of $2
million during each of the years 2003 and 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 claim is without merit and
intend to vigorously defend against the action.

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

It is anticipated that once the parties can agree on the correct
calculations on the royalties, the legal action will be dismissed. An issue in
dispute concerning the method of calculating royalties is whether royalties
should be paid on returned equipment. Since July 1, 2001, only one Photon(TM)
laser system has been sold and no systems returned. Thus, the amount of
royalties due, according to our calculations, is $981. We made payment of this
amount to Photomed and Dr. Eichenbaum on January 7, 2005 and, as a result, have
sought to have the legal action dismissed by agreement.

An action was filed on June 20, 2003, in the Third Judicial District
Court, Salt Lake County, State of Utah (Civil No. 030914195) by CitiCorp Vendor
Finance, Inc., formerly known as Copelco Capital, Inc. The complaint claims that
$49,626 plus interest is due for the leasing of three copy machines that were
delivered to our Salt Lake City facilities in 2000. The action also seeks an
award of attorney's fees and costs incurred in the collection. We filed an
answer to the complaint disputing the amounts allegedly owed due to machine
problems and a claimed understanding with the vendor. We returned two of the
machines and another machine was available for return but has not been picked
up. We were engaged in settlement discussions with CitiCorp until counsel for
CitiCorp withdrew from the case. New counsel for CitiCorp was appointed. After
an initial meeting with new counsel, we provided initial disclosures to the new
counsel and initial disclosures were thereafter provided to us. A case schedule
was agreed upon and submitted to the court.

On September 10, 2003, an action was filed against us by Larry Hicks in
the Third Judicial District Court, Salt Lake County, State of Utah, (Civil No.
030922220), for payments due under a consulting agreement with us. The complaint
claims payment is due for a three year period of $111,000 minus $15,942 paid
prior to termination of the contract, plus costs, attorney's fees. The foregoing
is included as a wage claim. We have filed an answer denying liability to Mr.
Hicks as claimed. Formal discovery in the matter has commenced. A case schedule
is to be set. Settlement negotiations are in progress. Because we dispute the
amount allegedly owned, if a settlement is not reached, we intend to vigorously
defend against such action.

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

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

We are not a party to any other material legal proceedings outside the
ordinary course of our 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 March 31, 2007, our executive officers and directors, their ages
and their positions are set forth below:

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

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

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

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

Randall A. Mackey, Esq. has been Chairman of the Board since August 20,
2002, and a director since January 2000. He had served as a director of the
company from November 1995 to September 1998. Mr. Mackey has been President of
the Salt Lake City law firm of Mackey Price Thompson & Ostler since 1992, and a
shareholder and director of the firm and its predecessor firms since 1989. Mr.
Mackey received a B.S. degree in Economics from the University of Utah in 1968,
an M.B.A. degree from the Harvard Business School in 1970, a J.D. degree from
Columbia Law School in 1975 and a B.C.L. degree from Oxford University in 1977.
Mr. Mackey had also served since September 2006 as a director of Star Bridge
Systems, Inc., which develops and manufactures high performance computers. Mr.
Mackey has additionally served as Chairman of the Board from June 2001 to May
2003, and as a director from 1998 to May 2003 of Cimetrix, Incorporated, a
software development company. Mr. Mackey has further served as Chairman of the
Board from July 2000 to July 2003 and as a trustee from 1993 to July 2003 of
Salt Lake Community College and a member of the Utah State Board of Education
since August 2005.

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

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

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

Appointment of New President and Chief Executive Officer

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

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

On March 20, 2006, Luis A. Mostacero was appointed as Vice President of
Finance. Mr. Mostacero previously served as Controller from June 20, 2000 to
September 15, 2005, when he resigned to pursue other opportunities. On January
4, 2006, Alfred B. Franklin was appointed as Vice President of Domestic Sales,
replacing Michael S. Austin who resigned as Vice President of Sales and
Marketing on November 28, 2006, to pursue other opportunities; Christina M.
O'Conner was appointed as Vice President of International Sales; and Julio C.
Maximo was appointed as Vice President of Operations.

Board Meetings and Committees

The Board of Directors held a total of four meetings during the fiscal
year ended December 31, 2006. No director attended fewer than 75% of all
meetings of the Board of Directors during the 2006 fiscal year. The Audit
Committee of the Board of Directors consists of directors Dr. David M. Silver,
Randall A. Mackey, Keith D. Ignotz and John C. Pingree. The Audit Committee met
one time during the fiscal year. The Audit Committee is primarily responsible
for reviewing the services performed by its independent public accountants and
internal audit department and evaluating its accounting principles and its
system of internal accounting controls. The Compensation Committee of the Board
of Directors consists of directors Dr. David M. Silver, Randall A. Mackey, Keith
D. Ignotz and John C. Pingree. The Compensation Committee met one time during
the fiscal year. The Compensation Committee is primarily responsible for
reviewing compensation of executive officers and overseeing the granting of
stock options.

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

Director Nominating Process

The process for identifying and evaluating nominees for directors
include the following steps: (1) the Nominating and Corporate Governance
Committee, Chairman of the Board or other board members identify a need to fill
vacancies or add newly created directorships; (2) the Chairman of the Nominating
and Corporate Governance Committee initiates a search and seeks input from board
members and senior management and, if necessary, obtains advice from legal or
other advisors (but does not hire an outside search firm); (3) director
candidates, including any candidates properly proposed by stockholders in
accordance with our bylaws, are identified and presented to the Nominating and
Corporate Governance Committee; (4) initial interviews with candidates are
conducted by the Chairman of the Nominating and Corporate Governance Committee;
(5) the Nominating and Corporate Governance Committee meets to consider and
approve final candidate(s) and conduct further interviews as necessary; and (6)
the Nominating and Corporate Governance Committee makes recommendations to the
board for inclusion in the slate of directors at the annual meeting. The
evaluation process will be the same whether the nominee is recommended by a
stockholder or by a member of the Board of Directors.

The Nominating and Corporate Governance Committee operates pursuant to
a written charter. The full text of the charter is published on the Company's
website at www.paradigm-medical.com. A copy of the charter may also be obtained
without charge by written request to the attention of Luis A. Mostacero,
Controller, Paradigm Medical Industries, Inc., 2355 South 1070 East, Salt Lake
City, Utah 84119.

Meetings of Non-Management Directors

Our non-management directors regularly meet without management
participation. In addition, an executive session including only the independent
directors is held at least annually.

Corporate Governance

Corporate Governance Guidelines. Our Board of Directors has adopted the
Paradigm Medical Industries, Inc. Corporate Governance Guidelines. These
guidelines outline the functions of the board, director qualifications and
responsibilities, and various processes and procedures designed to insure
effective and responsive governance. The guidelines are reviewed from time to
time in response to regulatory requirements and best practices and are revised
accordingly. The full text of the guidelines is published on our website at
www.paradigm-medical.com. A copy of the Corporate Governance Guidelines may also
be obtained at no charge by written request to the attention of Luis A.
Mostacero, Controller, Treasurer and Secretary, Paradigm Medical Industries,
Inc., 2355 South 1070 East, Salt Lake City, Utah 84119.

Code of Business Conduct. All of our officers, employees and directors
are required to comply with our Code of Business Conduct and Ethics to help
insure that our business is conducted in accordance with appropriate standards
of ethical behavior. Our Code of Business Conduct and Ethics covers all areas of
professional conduct, including customer relationships, conflicts of interest,
insider trading, financial disclosures, intellectual property and confidential
information, as well as requiring adherence to all laws and regulations
applicable to our business. Employees are required to report any violations or
suspected violations of the Code. The Code includes an anti-retaliation
statement. The full text of the Code of Business Conduct and Ethics is published
on our website at www.paradigm-medical.com. A copy of the Code of Business
Conduct and Ethics may also be obtained at no charge by written request to the
attention of Luis A. Mostacero, Controller, Treasurer and Secretary, Paradigm
Medical Industries, Inc., 2355 South 1070 East, Salt Lake City, Utah 84119.

Executive Compensation

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

Summary Compensation Table

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

Raymond P.L. 2006 $127,940 -- -- -- -- -- -- $127,940
Cannefax (1) 2005 64,285 -- -- -- -- -- -- 64,285
President and Chief 2004 0 -- -- -- -- -- -- 0
Executive Officer
______________________

(1) Mr. Cannefax has served as President and Chief Executive Officer since
January 5, 2006.

Supplemental All Other Compensation Table

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

Raymond P.L. 2006 -- -- -- -- -- -- -- --
Cannefax 2005 -- -- -- -- -- -- -- --
2004 -- -- -- -- -- -- -- --

Grants of Plan-Based Awards

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

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

Outstanding Equity Awards At Fiscal 2006 Year End

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

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

Option Exercises and Stock Vested for Fiscal 2006

Option Awards Stock Awards
Number of Number of
Shares Acquired Value Realized Shares Acquired Value Realized
on Exercise on Exercise on Vesting on Vesting
Name (#) ($) (#) ($)
---- --------------- -------------- --------------- --------------
Raymond P.L.
Cannefax 0 -- 0 --

Pension Benefits for Fiscal 2006

Number of
Years Present Value
Credited of Accumulated Payments During
Service Benefit Last Fiscal Year
Name Plan Name (#) ($) ($)
---- --------- --------- --------------- ----------------

Raymond P.L. Cannefax None -- -- --

Director Compensation

Outside directors are reimbursed for their expenses in attending board
and committee meetings. Directors are not precluded from serving the Company in
any other capacity and receiving compensation therefore. The directors were not
granted any options to purchase shares of the Company's common stock during 2005
or 2006. Moreover, we paid no other form of compensation to the directors.

Director Compensation

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

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

Employee 401(k) Plan

In October 1996, 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 plan.

1995 Stock Option Plan

We adopted a 1995 Stock Option Plan for the officers, employees,
directors and consultants of our company on November 7, 1995. The plan
authorized the granting of stock options to purchase an aggregate of not more
than 300,000 shares of 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
1995 plan to increase the number of shares of common stock reserved for issuance
thereunder from 1,700,000 shares to 2,700,000 shares. On June 13, 2003, our
shareholders approved an amendment to the plan to increase the number of shares
of common stock reserved for issuance thereunder from 2,700,000 shares to
3,700,000 shares. On July 11, 2005, our stockholders approved an amendment to
the plan to increase the number of shares of common stock reserved for issuance
thereunder from 3,700,000 to 5,000,000 shares. On August 31, 2006, our
stockholders approved an amendment to the plan to increase the number of shares
of common stock reserved for issuance thereunder from 5,000,000 shares to
8,000,000 shares.

The compensation committee administers the 1995 Stock Option Plan. In
general, the compensation committee will select the person to whom options will
be granted and will determine, subject to the terms of the plan, the number,
exercise, and other provisions of such options. Options granted under the plan
will become exercisable at such times as may be determined by the compensation
committee. Options granted under the plan may be either incentive stock options,
as such term is defined in the Internal Revenue Code, or non-incentive stock
options. Incentive stock options may only be granted to persons who are our
employees. Non-incentive stock options 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. The compensation committee determines the exercise price of options
granted under the 1995 Stock Option Plan, provided that, in the case of
incentive stock options, such price is not less than 100% (110% in the case of
incentive stock options granted to holders of 10% of voting power of 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 incentive stock options become exercisable
for the first time in any year cannot exceed $100,000.

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

Employment Agreements

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

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

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

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

Consulting Agreement

On April 3, 2003, we entered into a consultant agreement with Kinexsys
Corporation. Under the terms of the agreement, Kinexsys through its Senior
Partner, Timothy R. Forstrom, was to prepare a capital markets plan and a
corporate positioning and communications plan for us, for which Kinexsys was to
receive warrants to purchase up to 200,000 shares of our common stock at an
exercise price of $.16 per share. The capital markets plan was to include a
detailed analysis of our capital market structure in relation to current
investors, market trends and projected equity movements, and recommendations on
capital management strategies. The corporate positioning and communications plan
was to include a corporate positioning matrix for markets, analysts, customers
and partners, and a communications plan. The agreement was for a one-year term
but could be renewed at the option of both parties. The agreement expired on
April 3, 2004 as we elected not to exercise its renewal option.

Retirement Agreement

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

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

On May 30, 2006, we entered into an agreement with Mr. Hemmer in which
he acknowledged that we owed him a total of $12,500 for past services he
rendered to us, including as a consultant, and we agreed to pay him the sum of
$12,500 in twelve monthly installments of $1,000 each and a final monthly
payment of $500. We have currently paid a total of $8,000 to Mr. Hemmer under
this agreement.

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 that
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. Our Bylaws authorize
the use of indemnification agreements and we have entered into such agreements
with each of our directors and executive officers.

Except for these litigation matters, there is no pending litigation or
proceedings 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 of 1933 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 Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933, as amended,
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, as amended,
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 with the Securities and Exchange
Commission. 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 2006, or written representations from
certain reporting persons, we believe that all filing requirements applicable to
its directors, officers and greater than 10% beneficial owners complied with all
Section 16(a) filing requirements applicable to them.

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, 2007 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.

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

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

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.

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

SELLING STOCKHOLDERS

The table below sets forth information concerning the resale of the
shares of common stock by the selling stockholders. We will not receive any
proceeds from the resale of the common stock by the selling stockholders. We
will receive proceeds from the exercise of the warrants unless the selling
stockholders exercise the warrants on a cashless basis. Assuming all of the
shares registered below are sold by the selling stockholders, none of the
selling stockholders will continue to own any shares of our common stock.

The following table sets forth the name of each person who is offering
the resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering, and the number of shares of common
stock each person will own after the offering, assuming they sell all of the
shares offered.

Shares Beneficially
Owned Prior to Number of Shares Beneficially
Offering Shares Being Owned After Offering(2)
Shareholders Number Percent(1) Offered Number Percent
------------ ------ ---------- ------------ ------ ----------

AJW Offshore Ltd (3) 10,178,400 4.99% 30,000,000 0 *
AJW Qualified Partners (3) 10,178,400 4.99% 20,400,000 0 *
AJW Partners, LLC (3) 10,178,400 4.99% 8,400,000 0 *
New Millennium Capital
Partners, LLC (3) 10,178,400 4.99% 1,200,000 0 *
TOTAL

_______________________
* less than 1%

(1) Applicable percentage ownership is based on 203,986,625 shares of
common stock outstanding as of March 31, 2007, together with
securities exercisable or convertible into shares of common stock
within 60 days of March 31, 2007 for each stockholder. Beneficial
ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally include voting or
investment power with respect to securities.
(2) Assumes that all securities registered will be sold and that all
securities of common stock underlying the convertible notes and
warrants will be issued.
(3) Represents shares underlying convertible notes up to the maximum
permitted ownership under the convertible notes of 4.99% of our
outstanding common stock. The selling stockholders or affiliates
of each other because they are under common control. AJW Partners,
LLC is a private investment fund that is owned by its investors
and managed by SMS Group, LLC. SMS Group, LLC, of which Corey S.
Ribotsky is the fund manager, has voting and investment control
over the securities owned by AJW Partners, LLC. AJW Offshore, Ltd.
is a private investment fund that is owned by its investors and
managed by First Street Manager II, LLC. First Street Manager II,
LLC, of which Corey S. Ribotsky is the fund manager, has voting
and investment control over the securities owned by AJW Offshore,
Ltd. AJW Qualified Partners, LLC is a private investment fund that
is owned by its investors and managed by AJW Manager, LLC, of
which Corey S. Ribotsky and Lloyd A. Groveman are the fund
managers, have voting and investment control over the securities
owned by AJW Qualified Partners, LLC. New Millennium Capital
Partners II, LLC is a private investment fund that is owned by its
investors and managed by First Street Manager II, LLC. First
Street Manager II, LLC, of which Corey S. Ribotsky is the fund
manager, has voting and investment control over the securities
owned by New Millennium Capital Partners II, LLC. We have been
notified by the selling stockholders that they are not broker-
dealers or affiliates of broker-dealers.

Convertible Notes and Warrants

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

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

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

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

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

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

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

Simple Conversion Calculation

$3,145,080/$.012 = 262,090,000 shares.

With Number of
% Below Price Per 40% Shares % of
Market Share Discount Issuable Outstanding*
------- --------- -------- ------------- ------------
25% $.015 $.009 349,453,333 171.3%
50% $.01 $.006 524,180,000 257.0%
75% $.005 $.003 1,048,360,000 513.9%

*Based on 203,986,625 shares outstanding.

DESCRIPTION OF SECURITIES

Our authorized capital stock consists of 800,000,000 shares of common
stock, $.001 par value per share, of which 203,986,625 shares were issued and
outstanding as of March 31, 2007, and 5,000,000 shares of undesignated preferred
stock, $.001 par value per share. We have created seven 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, Series F convertible preferred stock and Series G
convertible preferred stock. The following is a summary of the material terms
and provisions of our capital stock and related securities. Because it is a
summary, it does not include all of the information that is included in our
certificate of incorporation. The text of our certificate of incorporation,
which is attached as an exhibit to this registration statement, is incorporated
into this section by reference.

Common Stock

Voting Rights. The holders of our common stock will have one vote per
share and are not entitled to vote cumulatively for the election of directors.
Generally, all matters to be voted on by stockholders must be approved by a
majority or, in the case of election of directors, by plurality of the votes
cast at a meeting at which a quorum is present and voting together as single
class, subject to any voting rights granted to the holders of any then
outstanding preferred stock.

Dividends. Holders of common stock are entitled to receive any
dividends declared by our board of directors, subject to the preferential rights
of any preferred stock then outstanding. Dividends consisting of shares of
common stock may be paid to holders of shares of common stock.

Other Rights. Upon our liquidation, dissolution or winding up, the
holders of common stock are entitled preferential to share ratably in any assets
available for distribution to holders of shares of common stock. No holders of
shares are subject to redemption or have preemptive rights to purchase
additional shares of common stock.

Preferred Stock

Our certificate of incorporation provides that 5,000,000 shares of
preferred stock may be issued from time to time in one or more series. Our board
of directors is authorized to fix the voting rights, if any, designations,
powers, preferences, qualifications, limitations and restrictions, applicable to
the shares of each series. Our board of directors may, without stockholder
approval, issue preferred stock with voting and other rights that could
adversely affect the voting power and other rights of the holders of the common
stock and could have anti- takeover effects, including preferred stock or rights
to acquire preferred stock in connection with implementing a stockholder rights
plan. The ability of our board of directors to issue preferred stock without
stockholder approval could have the effect of delaying, deferring or preventing
a change of control with respect to our company or the removal of existing
management. As of March 31, 2007, we have created and issued shares of seven
classes of preferred stock.

Series A, B, C, D, E, F and G Preferred Stock.

The Board of Directors has authorized the issuance of 500,000 shares of
Series A Preferred Stock, 500,000 shares of Series B Preferred Stock, 30,000
shares of Series C Preferred Stock, 1,140,000 shares of Series D Preferred
Stock, 50,000 shares of Series E Preferred Stock, 50,000 shares of Series F
Preferred Stock, and 2,000,000 shares of Series G Preferred Stock. Each of the
shares of preferred stock are convertible into shares of common stock at a
different conversion price. As of March 31, 2007, there were issued and
outstanding 5,627 shares of Series A Preferred Stock convertible into 6,753
shares of our common stock; 8,986 shares of Series B Preferred Stock convertible
into 10,783 shares of our common stock; no shares of Series C Preferred Stock;
5,000 shares of Series D Preferred Stock convertible into 8,750 shares of our
common stock; 250 shares of Series E Preferred Stock convertible into 13,333
shares of our common stock; 4,398.75 shares of Series F Preferred Stock
convertible into 234,550 shares of our common stock; and 588,235 shares of
Series G Preferred Stock convertible into 588,235 shares of our common stock The
voting rights, dividends, conversion rights, redemption rights, and liquidation
rights of the Series A, Series B, Series C, Series D, Series E, Series F and
Series G Preferred Stock are more fully described below.

Series A Preferred Stock

Voting Rights. Except as provided by applicable law, the Series A
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series A preferred stockholders is not required or authorized to
take any corporate action.

Dividends. Our Series A preferred stock is entitled to noncumulative
preferred dividends at $.24 per share per annum payable, at our option, in cash
from surplus earnings.

Conversion. At any time the Series A preferred stockholder may convert
each share of Series A preferred stock into 1.2 shares of our common stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions involving our common stock.

Other Rights. Upon our liquidation, dissolution, or sale of
substantially all of our assets, the Series A preferred stockholders are
entitled to distributions equal to $1.00 per share, plus accrued and unpaid
dividends. The shares of Series A preferred stock are subject to redemption but
have no preemptive rights to purchase additional shares of Series A preferred
stock or our common stock.

Series B Preferred Stock

Voting Rights. Except as provided by applicable law, the Series B
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series B preferred stockholders is not required or authorized to
take any corporate action.

Dividends. Our Series B preferred stock is entitled to noncumulative
preferred dividends at $.24 per share per annum payable, at our option, in cash
from surplus earnings.

Conversion. At any time the Series B preferred stockholder may convert
each share of Series B preferred stock into 1.2 shares of our common stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions involving our common stock.

Other Rights. Upon our liquidation, dissolution, or sale of
substantially all of our assets, the Series B preferred stockholders are
entitled to distributions equal to $4.00 per share, plus accrued and unpaid
dividends. The Series B preferred stockholders are entitled to preferential
distributions over all other classes of capital stock, other than Series A
preferred stock. The shares of Series B preferred stock are subject to
redemption but have no preemptive rights to purchase additional shares of Series
B preferred stock or our common stock.

Series C Preferred Stock

Voting Rights. Except as provided by applicable law, the Series C
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series C preferred stockholders is not required or authorized to
take any corporate action.

Dividends. Our Series C preferred stock is entitled to 12%
noncumulative preferred dividends payable, at our option, in common stock or
cash from surplus earnings.

Conversion. At any time the Series C preferred stockholder may convert
each share of Series C preferred stock into 57.14 shares of common stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions involving our common stock. Any shares of Series C
preferred stock outstanding after January 1, 2002, are automatically converted
into our shares to common stock at the conversion price then in effect.

Other Rights. Upon our liquidation, dissolution or sale of
substantially all of our assets, the Series C preferred stockholders are
entitled to distributions equal to the greater of (i) the amount of
distributions such shares would have received had such holders converted the
Series C preferred stock into common stock immediately prior to liquidation, or
(ii) the stated value of $100.00 per share, plus declared but unpaid dividends.
The Series C preferred stockholders are entitled to preferential distributions
over all other classes of capital stock, other than Series A and Series B
preferred stock. No shares of Series C preferred stock are subject to redemption
or have preemptive rights to purchase additional shares of Series C preferred
stock or our common stock.

Series D Preferred Stock

Voting Rights. Except as provided by applicable law, the Series D
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series D preferred stockholders is not required or authorized to
take any corporate action.

Dividends. Our Series D preferred stock is entitled to 8%noncumulative
preferred dividends payable, at our option, in common stock or cash from surplus
earnings.

Conversion. At any time the Series D preferred stockholder may convert
each share of Series D preferred stock into one share of common stock, subject
to adjustment for stock splits, stock dividends, recapitalizations and similar
transactions involving our common stock. Any shares of Series D preferred stock
outstanding after January 1, 2002, are automatically converted into our shares
of common stock at the conversion price then in effect.

Other Rights. Upon our liquidation, dissolution or sale of
substantially all of our assets, the Series D preferred stockholders are
entitled to distributions equal to the greater of (i) the amount of
distributions such shares would have received had such holders converted the
Series D preferred stock into common stock immediately prior to liquidation, or
(ii) the stated value of $1.75 per share, plus declared but unpaid dividends.
The Series D preferred stockholders are entitled to preferential distributions
over all other classes of capital stock, other than Series A, Series B and
Series C preferred stock. No shares of Series D preferred stock are subject to
redemption or have preemptive rights to purchase additional shares of Series D
preferred stock or our common stock.

Series E Preferred Stock

Voting Rights. Except as provided by applicable law, the Series E
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series E preferred stockholders is not required or authorized to
take any corporate action.

Dividends. Our Series E preferred stock is entitled to 8% noncumulative
preferred dividends payable, at our option, in common stock or cash from surplus
earnings.

Conversion. At any time the Series E preferred stockholder may convert
each share of Series E preferred stock into 53.33 shares of common stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions involving our common stock. Any shares of Series E
preferred stock outstanding are automatically converted into shares of our
common stock (i) after January 1, 2005, or (ii) after a registration statement
registering our common shares issuable upon conversion has been effective for a
least 30 days and the average closing price of our common stock for the 20-day
period is at least $3.50 per share.

Other Rights. Upon our liquidation, dissolution or sale of
substantially all of our assets, the Series E preferred stockholders are
entitled to distributions equal to the greater of (i) the amount of
distributions such shares would have received had such holders converted the
Series E preferred stock into common stock immediately prior to liquidation, or
(ii) the stated value of $100.00 per share, plus declared but unpaid dividends.
The Series E preferred stockholders are entitled to preferential distributions
over all other classes of capital stock, other than Series A, Series B, Series C
and Series D preferred stock. No shares of Series E preferred stock are subject
to redemption or have preemptive rights to purchase additional shares of Series
E preferred stock or our common stock.

Series F Preferred Stock

Voting Rights. Except as provided by applicable law, the Series F
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series F preferred stockholders is not required or authorized to
take any corporate action.

Dividends. Our Series F preferred stock is entitled to 8% noncumulative
preferred dividends payable, at our option, in common stock or cash from surplus
earnings.

Conversion. At any time the Series F preferred stockholder may convert
each share of Series F preferred stock into 53.33 shares of common stock,
subject to adjustment for stock splits, stock dividends, recapitalizations and
similar transactions involving our common stock. Any shares of Series F
preferred stock outstanding are automatically converted into shares of our
common stock (i) after January 1, 2005, or (ii) after a registration statement
registering our common shares issuable upon conversion has been effective for a
least 30 days and the average closing price of our common stock for the 20-day
period is at least $3.50 per share.

Other Rights. Upon our liquidation, dissolution or sale of
substantially all of our assets, the Series F preferred stockholders are
entitled to the greater of (i) the amount of distributions such shares would
have received had such holders converted the Series F preferred stock into
common stock immediately prior to liquidation, or (ii) the stated value of $1.00
per share, plus declared but unpaid dividends. The Series F preferred
stockholders are entitled to preferential distributions over all other classes
of capital stock, other than Series A, Series B, Series C, Series D and Series E
preferred stock. No shares of Series F preferred stock are subject to redemption
or have preemptive rights to purchase additional shares of Series F preferred
stock or our common stock.

Series G Preferred Stock

Voting Rights. Except as provided by applicable law, the Series G
preferred stockholders have neither voting power, nor the right to receive
notice of any meetings of our stockholders. Except as required by law, the
consent of the Series G preferred stockholders is not required or authorized to
take any corporate action.

Dividends. Our Series G preferred stock is entitled to 8% noncumulative
preferred dividends payable, at our option, in common stock or cash from surplus
earnings.

Conversion. At any time the Series G preferred stockholder may convert
each share of Series G preferred stock into one share of common stock, subject
to adjustment for stock splits, stock dividends, recapitalizations and similar
transactions involving our common stock. Any shares of Series G preferred stock
outstanding are automatically converted into shares of our common stock (i)
after August 1, 2005, or (ii) after a registration statement registering our
common shares issuable upon conversion has been effective for a least 30 days
and the average closing price of our common stock for the 20-day period is at
least $.50 per share.

Other Rights. Upon our liquidation, dissolution or sale of
substantially all of our assets, the Series G preferred stockholders are
entitled to the greater of (i) the amount of distributions such shares would
have received had such holders converted the Series G preferred stock into
common stock immediately prior to liquidation, or (ii) the stated value of $.25
per share, plus declared but unpaid dividends. The Series G preferred
stockholders are entitled to preferential distributions over all other classes
of capital stock, other than Series A, Series B, Series C, Series D, Series E
and Series F preferred stock. No shares of Series G preferred stock are subject
to redemption or have preemptive rights to purchase additional shares of Series
G preferred stock or our common stock. Under the terms of the private offering
of Series G preferred shares, we are required to file a registration statement
with the Securities and Exchange Commission to register the common shares
issuable to the Series G preferred stockholders upon conversion of their Series
G preferred shares and exercise of their warrants. If the registration statement
has not been declared effective within 120 days of the initial closing of such
offering on August 29, 2003, there is a penalty of 2% per month payable to the
Series G preferred stockholders in common shares (or 39,631 common shares per
month) until the registration statement is declared effective. As of September
30, 2004, we had recorded a liability of $43,000 related to the 356,682 common
shares to be issued to the Series G preferred stockholders because the
registration statement had not been declared effective as of that date.

Warrants

Between June 10, 1997 and March 31, 2007, we issued warrants to
individuals and entities that are currently outstanding to purchase a total of
25,059,392 shares of our common stock at exercise prices ranging from $.10 per
share to $6.75 per share. The warrants all contain provisions that protect the
holders 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 splits, stock dividends, 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 we will make a cash payment based upon the
current market value of such fractional shares. A holder of these warrants will
not possess any rights as a shareholder unless and until the holder exercises
the warrants.

The warrants that are currently issued and have not been exercised, and
the exercise price and expiration date of such warrants are as follows:

o Warrants issued to Dr. Michael B. Lindberg to purchase 300,000
shares of common stock at exercise prices ranging from $4.00 to
$6.75 per share, exercisable during the period of from December 1,
2008 through June 1, 2011.
o Warrants issued to Alpha Advisory Services, Inc. to purchase
25,000 shares of common stock at an exercise price of $.15 per
share, exerciseable through September 28, 2007.
o Warrants issued to Valvidia Trading, Inc. to purchase 200,000
shares of common stock at an exercise price of $.15 per share,
exerciseable through January 14, 2008.
o Warrants issued to AJW Partners, LLC, AJW Offshore, Ltd., AJW
Qualified Partners, LLC and New Millennium Capital Partners II,
LLC to purchase 16,534,392 shares of common stock at an exercise
price of $.20 per share, exercisable through the period from April
27, 2010 to June 30, 2010.
o Warrants issued to AJW Partners, LLC, AJW Offshore, Ltd., AJW
Qualified Partners, and New Millennium Capital Partners II, LLC to
purchase 8,000,000 shares of common stock at an exercise price of
$.10 per share, exercisable through February 28, 2011.

The Class A Warrants to purchase 1,000,000 shares of common stock at an
exercise price of $7.50 per share expired on July 11, 2006.

Convertible Notes and Warrants

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

As of June 22, 2005, the average of the three lowest intraday trading
prices of our common stock during the preceding 20 trading days as reported on
the Over-the-Counter Bulletin Board was $.05 and, therefore, the conversion
price for the convertible notes was $.03. Based on this conversion price, the
$2,500,000 in convertible notes, excluding interest, would be convertible into
83,333,333 shares of our common stock. As of June 26, 2006, a total of $842,830
in convertible notes have been converted into 166,666,667 shares of our common
stock pursuant to conversion notices from the noteholders.

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

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

See the "Offering -- Convertible Notes and Warrants," "Risk Factors"
and "Selling Stockholders" sections for a complete description of the
convertible notes and warrants.

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 our
common stock and the Warrant Agent for the Class A warrants is Continental Stock
Transfer & Trust Company, New York, New York.

PLAN OF DISTRIBUTION

The selling stockholders may, from time to time, sell any or all of
their shares of common stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:

o ordinary brokerage transactions and transaction in which the
broker-dealer solicits the purchaser;

o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;

o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;

o an exchange distribution in accordance with the rules of the
applicable exchange;

o privately negotiated transactions;

o short sales;

o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;

o a combination of any such method of sales; and

o any other method permitted pursuant to applicable law.

The selling stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended, if available, rather than under this
prospectus. The selling stockholders may also engage in puts and calls and other
transactions in our securities or derivatives of our securities and may sell or
deliver shares in connection with these trades.

During the period from November 23, 2005 to July 5, 2006, a total of
$440,214 in notes were converted into 121,541,030 shares of our common stock
pursuant to notices of conversion by the selling stockholders. During that
period, the selling stockholders generally converted some of their notes into
shares of our common stock every seven to ten days and then sold such shares

immediately after conversion. In this offering we are limited to registering for
resale 60,000,000 shares of our common stock issuable upon conversion of the
notes. As a result, the notes are expected to be converted over a longer period
of time because, after the 60,000,000 shares being registered for resale are
sold, the shares issuable upon conversion of the notes could only be sold
pursuant to an exemption available under the Securities Act of 1933, as amended,
particularly Rule 144 thereunder. Generally, under Rule 144, a person holding
restricted shares for a period of one year may, every three months, sell in
ordinary brokers' transactions or in transactions directly with a market maker,
a number of such shares equal to the greater of (i) one percent of the then
outstanding shares of common stock, or (ii) the average weekly trading volume of
common stock during the four calendar weeks preceding the sale of such shares.

The selling stockholders plan, in some instances, to sell their shares
immediately after conversion but not prior to conversion. However, the selling
stockholders have an incentive not to convert and sell the underlying shares too
quickly in this offering because the effect of such action might be to drive the
price of our common stock down further to the point that a greater number of
conversion shares would not be covered by the registration statement. Moreover,
if the volume of our shares traded in the market increases, the selling
stockholders would more likely convert their notes into our common shares and
then sell the shares immediately after conversion because such action would not
as likely have a depressive effect on the price of our common stock due to a
larger volume of our shares being traded. Furthermore, the greater the volume of
our shares being traded, the more shares the selling stockholders could sell
without such sales having an adverse effect on our stock price.

The selling stockholders or their respective pledgees, donees,
transferees or other successors-in-interest, may also sell the shares directly
to market makers acting a principals and/or broker-dealers acting as agents for
themselves or the customers. Such broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their risk. It is possible that a selling stockholder will attempt to sell
shares of common stock at block transaction to market makers or other purchasers
at a price per share which may be below the then market price.

The selling stockholders cannot assure that all or any of the shares
offered in this prospectus will be issued to, or sold by, the selling
stockholders. The selling stockholders and any brokers, dealers or agents, upon
effecting the sale of any of the shares offered in this prospectus, may be
deemed to be "underwriters" as that term is defined in the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, or the
rules and regulations under such acts. In such event, any commissions received
by any such broker dealers or agents and any profit on the resale of the shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act of 1933, as amended.

We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling stockholders, but excluding brokerage commissions or underwriter
discounts.

The selling stockholders, alternatively, may sell all or any part of
the shares offered in this prospectus through an underwriter. No selling
stockholder has entered into any agreement with a prospective underwriter and
there is no assurance that any such agreement will be entered into.

The selling stockholders may pledge their shares to the brokers under
the margin provisions of customer agreements. If a selling stockholder defaults
on a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.

Furthermore, under Regulation M, the persons engaged in a distribution
of securities are prohibited from simultaneously engaging in market making and
certain other activities with respect to such securities for a specified period
of time prior to the commencement of such distributions, subject to specified
exceptions or exemptions. In regards to short sales, the selling stockholder can
only cover its short position with the securities it receives from us upon
conversion. In addition, if such short sale is deemed to be a stabilizing
activity, then the selling stockholder will not be permitted to engage in a
short sale of our common stock. All of these limitations will affect the
marketability of the shares.

We have agreed to indemnity the selling stockholders, or their
transferees or assignees, against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments to
the selling stockholders or their respective pledgees, donees, transferees or
other successors-in-interest, may be required to make in respect to such
liabilities.

If the selling stockholders notify us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
will be required to amend the registration statement of which this prospectus is
a part, and file a prospectus supplement to describe the agreements between the
selling stockholders and the broker-dealer.

From time to time this prospectus will be supplemented and amended as
required by the Securities Act of 1933, as amended. During any time when a
supplement or amendment is so required, the Selling Securityholders are to cease
sales until the prospectus has been supplemented or amended. Pursuant to the
registration rights granted to certain of the Selling Securityholders, we have
agreed to update and maintain the effectiveness of this prospectus. Certain of
the Selling Securityholders also may be entitled to sell their shares without
the use of this prospectus, provided that they comply with the requirements of
Rule 144 promulgated under the Securities Act.

EXPERTS

Our consolidated financial statements for the years ended December 31,
2005 and 2006 included in this prospectus have been audited by Chisholm,
Bierwolf & Nilson, independent auditors, as stated in their report appearing
herein. We have included consolidated financial statements in this prospectus in
reliance on such report given upon their authority s experts in auditing and
accounting.

LEGAL MATTERS

The validity of the shares of common stock in this offering will be
passed upon for us by Mackey Price Thompson & Ostler, Salt Lake City, Utah.
Randall A. Mackey, the President, a director and a shareholder of the law firm
of Mackey Price Thompson & Ostler is our Chairman of the Board. Legal fees and
expenses paid to Mackey Price Thompson & Ostler for legal services during the
fiscal years ended December 31, 2006 and 2005 totaled $148,000 and $220,000,
respectively. As of December 31, 2006, we owed the firm $133,850, which is
included in the accounts payable.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission, or SEC, a
registration statement on Form SB-2 (including the exhibits and schedules
thereto) under the Securities Act of 1933 and the rules and regulations
promulgated thereunder, for the registration of the common stock offered hereby.
This prospectus is part of the registration statement. This prospectus does not
contain all the information included in the registration statement because we
have omitted certain parts of the registration statement as permitted by the SEC
rules and regulations. For further information about us and our common stock,
you should refer to the registration statement. Statements contained in this
prospectus as to any contract, agreement or other document referred to are not
necessarily complete. Where the contract or other document is an exhibit to the
registration statement, each statement is qualified by the provisions of that
exhibit.

You can inspect and copy the registration statement and the exhibits
and schedules thereto at the public reference facility maintained by the SEC at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
regional offices at 233 Broadway, New York, New York 10279, and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. You may call the SEC at
1-800-732-0330 for further information about the operation of the public
reference rooms. Copies of all or any portion of the registration statement can
be obtained from the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition, the registration
statement is publicly available through the SEC's site on the Internet at
www.sec.gov.

We also file annual, quarterly and current reports, proxy statements
and other information with the SEC. You can also request copies of these
documents, for a copying fee, by writing to the SEC. Our SEC filings are also
available to the public from the SEC's website at www.sec.gov. We furnish to our
stockholders annual reports containing audited financial statements for each
fiscal year.

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

PARADIGM MEDICAL INDUSTRIES, INC.
INDEX TO FINANCIAL STATEMENTS

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

PAGE
----

Report of Independent Registered Public Accounting Firm F-2

Balance Sheet F-3

Statements of Operations F-4

Statements of Stockholders' Equity F-5

Statements of Cash Flows F-6

Notes to Financial Statements F-7

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

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

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

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

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

F-2

PARADIGM MEDICAL INDUSTRIES, INC.
BALANCE SHEET

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

ASSETS
------

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

Total current assets 1,572,000

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

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

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

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

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

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

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

Commitments and contingencies -

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF OPERATIONS

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

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

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

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

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

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

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

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

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

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY

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

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

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

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

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

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

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

Conversion of preferred stock
- 39,999 - - -

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

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

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

PARADIGM MEDICAL INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS

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

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

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

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

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

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

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

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

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

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

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

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

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

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

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

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

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

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED

trade receivables previously written off are recorded when received.

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

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

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

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

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

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

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

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

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED

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

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

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

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

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

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

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

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED

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

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

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

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

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

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

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED

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

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

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

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

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

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

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

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

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

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

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

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

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

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED

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

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

FOR THE YEAR ENDED DECEMBER 31, 2005

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

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

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

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

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

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED

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

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

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

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

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

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

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

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

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

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

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED

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

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

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

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

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

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

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

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

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED

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

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

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

Less: Reductions for payments (10,000)

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

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

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

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

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

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

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

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES CONTINUED

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

2. GOING CONCERN

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

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

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

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

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

3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

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

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

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

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

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

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

4. INTANGIBLE ASSETS

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

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

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

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

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

4. INTANGIBLE ASSETS CONTINUED

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

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

5. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

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

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

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

6. LEASE OBLIGATIONS

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

Computer and other equipment $ 291,000

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

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

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

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

6. LEASE OBLIGATIONS CONTINUED

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

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

2006 $ 14,000

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

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

Present value of future minimum lease payments 13,000

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

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

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

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

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

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

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

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

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

7. INCOME TAXES

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

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

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

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

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

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

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

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

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

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

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

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

7. INCOME TAXES CONTINUED

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

8. CAPITAL STOCK

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

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

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

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

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

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

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

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

8. CAPITAL STOCK - CONTINUED

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

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

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

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

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

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

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

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

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

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

8. CAPITAL STOCK CONTINUED

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

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

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

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

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

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

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

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

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

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

8. CAPITAL STOCK CONTINUED

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

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

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

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

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

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

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

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

8. CAPITAL STOCK CONTINUED

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

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

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

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

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

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

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

8. CAPITAL STOCK CONTINUED

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

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

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

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

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

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

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

8. CAPITAL STOCK CONTINUED

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

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

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

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

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

8. CAPITAL STOCK CONTINUED

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

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

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

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

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

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

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

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

SERIES G
SHARES AMOUNT

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

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

Issuance of
Series G
preferred
stock
for cash - -

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

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

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

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

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

9. CONVERTIBLE NOTES

CONVERTIBLE NOTES

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

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

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

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

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

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

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

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

9. CONVERTIBLE NOTES CONTINUED

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

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

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

The warrants are exercisable until five years from the date of

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

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

9. CONVERTIBLE NOTES CONTINUED

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

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

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

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

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

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

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

9. CONVERTIBLE NOTES CONTINUED

conversion of the convertible notes.

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

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

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

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

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

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

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

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

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

9. CONVERTIBLE NOTES CONTINUED

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

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

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

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

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

9. CONVERTIBLE NOTES CONTINUED

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

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

10. STOCK OPTION PLAN AND WARRANTS

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

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

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

10. STOCK OPTION PLAN AND WARRANTS CONTINUED

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

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

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

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

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

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

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

A schedule of the options and warrants is as follows:

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

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

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

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

10. STOCK OPTION PLAN AND WARRANTS CONTINUED

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

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

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

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

11. GAIN ON SETTLEMENT OF LIABILITIES

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

12. RELATED PARTY TRANSACTIONS

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

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

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

13. SUPPLEMENTAL CASH FLOW INFORMATION

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

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

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

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

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

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

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

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

14. EXPORT SALES

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

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

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

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

15. SAVINGS PLAN

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

16. COMMITMENTS AND CONTINGENCIES CONTINUED

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

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

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

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

16. COMMITMENTS AND CONTINGENCIES CONTINUED

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

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

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

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

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

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

16. COMMITMENTS AND CONTINGENCIES CONTINUED

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

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

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

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

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

16. COMMITMENTS AND CONTINGENCIES CONTINUED

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

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

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

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

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

16. COMMITMENTS AND CONTINGENCIES CONTINUED

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

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

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

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

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

16. COMMITMENTS AND CONTINGENCIES CONTINUED

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

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

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

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

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

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

16. COMMITMENTS AND CONTINGENCIES CONTINUED

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

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

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

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

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

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

16. COMMITMENTS AND CONTINGENCIES CONTINUED

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

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

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

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

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

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

16. COMMITMENTS AND CONTINGENCIES CONTINUED

Convertible preferred stock on or about July 11, 2001.

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

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

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

17. RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

17. RECENT ACCOUNTING PRONOUNCEMENTS CONTINUED

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

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

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

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

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

17. RECENT ACCOUNTING PRONOUNCEMENTS CONTINUED

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

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

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

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

17. RECENT ACCOUNTING PRONOUNCEMENTS CONTINUED

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

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

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

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

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

17. RECENT ACCOUNTING PRONOUNCEMENTS CONTINUED

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

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

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

18. SUBSEQUENT EVENTS

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

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

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

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

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

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

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

No dealer, salesperson or other person 60,000,000 Shares of Common Stock
is authorized to give any information or
to represent anything not contained in
this prospectus. This prospectus is an
offer to sell only the shares offered
hereby, but only under circumstances and
in jurisdictions where it is lawful to
do so. The information contained in this PARADIGM MEDICAL INDUSTRIES, INC.
prospectus is current only as of its
date. _________________

_____________________ PROSPECTUS
_________________
TABLE OF CONTENTS
Page
Prospectus Summary......................
Risk Factors ..........................
Use of Proceeds.........................
Dividend Policy.........................
Capitalization..........................
Market for Common Equity and April __, 2007
Related Shareholder Matters..........
Selected Financial Data.................
Management's Discussion and Analysis
or Plan of Operation.................
Business ...............................
Management .............................
Security Ownership of Certain
Beneficial Owners and Management ....
Certain Transactions....................
Selling Stockholders....................
Description of Securities...............
Plan of Distribution....................
Experts.................................
Legal Matters...........................
Where You Can Find More Information.....

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

II-1

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
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....... $ 39
Legal fees and expenses................................ 21,000
Accounting fees and expenses........................... 5,500
----------
Total expenses......................................... $ 26,539

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. These
shares were issued, unless otherwise indicated, without registration in reliance
upon the exemption provided by Section 4(2) of the Securities Act of 1933, as
amended 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 January 14, 2005, the Company issued 2,000,000 shares of common
stock to Dr. Endre Bodnar, an accredited investor, as defined in Section 2(15)
of the Securities Act of 1933 and Rule 501 of Regulation D thereunder, through a
private placement under Section 4(2) of the Securities Act of 1933 and Rule 506
of Regulation D thereunder at a price of $.075 per share. The Company received a
total of $150,000 in cash from the private placement transaction and issued as a
commission warrants to purchase 200,000 shares of the Company's common stock at
$.15 per share.

On February 1, 2005, the Company issued a total of 515,206 shares of
common stock to Crescent International, Ltd. and Otape Investments, Ltd. that
had purchased a total of 1,981,560 shares of the Company's Series G convertible
preferred stock in a private placement transaction, which was initially closed
on September 29, 2003. Under the terms of the private offering, the Company was
required to file a registration statement with the Securities and Exchange
Commission to register the common shares issuable to the Series G preferred
stockholders upon conversion of their Series G preferred shares and exercise of
their warrants. The 515,206 shares represented a penalty for the Company not
having a registration statement declared effective within 120 days of the
initial closing of the offering.

On April 7, 2005, the Company issued 250,000 shares of common stock to
the law firm of Mackey Price Thompson & Ostler for legal services rendered in
the amount of $22,500 pursuant to the terms of a stock purchase agreement dated
April 7, 2005, between Mackey Price Thompson & Ostler and the Company. Randall
A. Mackey, Chairman of the Company, is President and a shareholder of Mackey
Price Thompson & Ostler.

On October 10, 2006, the Company issued a total of 1,999,566 shares of
common stock to four accredited investors, as defined in Section 2(15) of the
Securities Act of 1933 and Rule 501 of Regulation D thereunder, pursuant to the
conversion of $5,059 in convertible notes by the four noteholders at a price of
$.0253 per share. The Company had sold the notes to the noteholders during the
period from April 27, 2005 to June 30, 2005 through a private placement under
Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D
thereunder.

II-2

On January 31, 2007, the Company issued a total of 2,012,564 shares of
common stock to four accredited investors, as defined in Section 2(15) of the
Securities Act of 1933 and Rule 501 of Regulation D thereunder, pursuant to the
conversion of $1,711 in convertible notes by the four noteholders at a price of
$.000847 per share. The Company had sold the notes to the noteholders during the
period from April 27, 2005 to June 30, 2005 through a private placement under
Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D
thereunder.

II. Series G Preferred Stock

During the period from August 24, 2003 to September 15, 2003, the
Company sold a total of 1,981,560 shares of Series G convertible preferred stock
to two accredited investors, as defined in Section 2(15) of the Securities Act
of 1933 and Rule 501 of Regulation D thereunder, through a private placement
under Regulation D promulgated under the Securities Act of 1933 at a price of
$.17 per share. The Company received $300,000 in cash as a result of the private
placement transaction and paid $30,000 in commissions and expenses. In addition,
the Company issued warrants to purchase 88,236 shares of its common stock at an
exercise price of $.50 per share for commissions and expenses. The Series G
convertible preferred stock is convertible into shares of common stock at a
conversion price equal to one share of common stock for each share of Series G
preferred stock. The accredited investors also received warrants to purchase a
total of 382,353 shares of common stock at an exercise price of $.50 per share.

These shares of Series G convertible preferred stock were issued
without registration in reliance upon Section 4(2) of the Securities Act of 1933
and Rule 506 of Regulation D promulgated thereunder. Moreover, the Company
issued an additional 515,206 shares of common stock to the investors. Under the
terms of the private offering, the Company was required to file a registration
statement with the Securities and Exchange Commission to register the common
shares issuable to the Series G preferred stockholders upon conversion of their
Series G preferred shares and exercise of their warrants. If the registration
statement was not declared effective within 120 days of the initial closing of
the offering on August 29, 2003, there was a penalty of 2% per month payable to
the investors in common shares (or 39,631 common shares per month) until the
registration statement was declared effective. The registration Statement was
declared effective on February 10, 2005.

III. Convertible Notes

During the period from April 27, 2005 to June 30, 2005, the Company
sold a total of $2,500,000 in convertible notes to four accredited investors, as
defined in Section 2(15) of the Securities Act of 1933 and Rule 501 of
Regulation D thereunder, through a private placement under Regulation D
promulgated under the Securities Act of 1933. In addition, the Company issued
warrants to purchase 16,534,392 shares of its common stock at an exercise price
of $.20 per share, exercisable through the period from April 27, 2010 to June
23, 2010.

The $2,500,000 in convertible notes bear interest at 8% per annum,
payable quarterly in cash, with six months of interest payable up front. The
interest rate resets to zero percent for any month in which the stock price is
greater than 125% of the initial market price, or $.0945, for each trading date
during that month. The convertible notes mature in three years from the date of
issuance, and are convertible into common stock, at the noteholder's option, at
the lower of (i) $.09 or (ii) 60% of the average of the three lowest intraday
trading prices for the common stock on the OTC Bulletin Board for the 20 days
before but not including the conversion date.

The $2,500,000 in convertible notes are secured by the Company's
assets, including its inventory, accounts receivable and intellectual property.
Moreover, the Company has a call option under the terms of the notes. The call
option provides the Company with the right to repay all of the outstanding
convertible notes at any time, provided there is no event of default by the
Company and the common stock is trading at or below $.09 per share. Prepayment
of the convertible notes is to be made in cash equal to either (i) 125% of the
outstanding principal and accrued interest for prepayments occurring within 30
days following the issue date of the notes; (ii) 130% of the outstanding
principal and accrued interest for prepayments occurring between 31 and 60 days
following the issue date of the notes; and (iii) 145% of the outstanding
principal and accrued interest for prepayments occurring after the 60th day
following the issue date of the notes.

During the period from February 28, 2006 to June 28, 2006, the Company
sold a total of $1,000,000 in convertible notes to four accredited investors, as
defined in Section 2(15) of the Securities Act of 1933 and Rule 501 of
Regulation D thereunder, through a private placement under Regulation D

II-3

promulgated under the Securities Act of 1933. In addition, the Company issued
warrants to purchase 8,000,000 shares of its common stock at an exercise price
of $.10 per share, exercisable through the period from February 28, 2011 to June
28, 2011.

The $1,000,000 in convertible notes bear interest at 8% per annum,
payable quarterly in cash, with six months of interest payable up front. The
interest rate resets to zero percent for any month in which the stock price is
greater than 125% of the initial market price, or $.0275, for each trading date
during that month. The convertible notes mature in three years from the date of
issuance, and are convertible into common stock, at the noteholder's option, at
the lower of (i) $.02 or (ii) 60% of the average of the three lowest intraday
trading prices for the common stock on the OTC Bulletin Board for the 20 days
before but not including the conversion date.

The $1,000,000 in convertible notes are secured by the Company's
assets, including its inventory, accounts receivable and intellectual property.
Moreover, the Company has a call option under the terms of the notes. The call
option provides the Company with the right to repay all of the outstanding
convertible notes at any time, provided there is no event of default by the
Company and the common stock is trading at or below $.02 per share. Prepayment
of the convertible notes is to be made in cash equal to either (i) 125% of the
outstanding principal and accrued interest for prepayments occurring within 30
days following the issue date of the notes; (ii) 130% of the outstanding
principal and accrued interest for prepayments occurring between 31 and 60 days
following the issue date of the notes; and (iii) 145% of the outstanding
principal and accrued interest for prepayments occurring after the 60th day
following the issue date of the notes.

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(21)
3.3 Bylaws(1)
4.1 Specimen Common Stock Certificate (2)
4.2 Specimen Class A Warrant Certificate(2)
4.3 Form of Class A Warrant Agreement(2)
4.4 Underwriter's Warrant with Kenneth Jerome & Co.,
Inc.(3)
4.5 Specimen Series C Convertible Preferred Stock
Certificate(4)
4.6 Certificate of the Designations, Powers, Preferences
and Rights of the Series C Convertible Preferred
Stock(4)
4.7 Specimen Series D Convertible Preferred Stock
Certificate (5)
4.8 Certificate of the Designations, Powers, Preferences
and Rights of the Series D Convertible Preferred Stock
(6)
4.9 Warrant to Purchase Common Stock with Dr. Michael B.
Limberg (6)
4.10 Certificate of Designations, Powers, Preferences and
Rights of the Series G Convertible Preferred Stock (7)
5.1 Opinion of Mackey Price Thompson & Ostler
10.1 Exclusive Patent License Agreement with PhotoMed(1)
10.2 Consulting Agreement with Dr. Daniel M. Eichenbaum(1)
10.3 1995 Stock Option Plan (1)
10.4 License Agreement with Sunnybrook Health Science
Center(8)
10.5 Employment Agreement with John Y. Yoon(9)
10.6 Stock Purchase and Sale Agreement with William Ungar
(10)
10.7 Employment Agreement with Aziz A. Mohabbat (11)
10.8 Investment Banking Agreement with Alpha Advisory
Services, Inc. (12)
10.9 Manufacturing and Distribution Agreement with
E-Technologies, Inc. (12)

II-4

10.10 Settlement Agreement with Innovative Optics, Inc.,
Barton Dietrich Investments, L.P. and United States
Fire Insurance Company (13)
10.11 Stipulation and Agreement of Settlement (14)
10.12 Supplemental Agreement (14)
10.13 Stipulation of Settlement (14)
10.14 Supplemental Agreement (14)
10.15 Securities Purchase Agreement with AJW Partners, LLC,
AJW Offshore, Ltd., AJW Qualified Partners, LLC and New
Millennium Capital Partners II, LLP (the
"Purchasers")(15)
10.16 Form of Convertible Note with each purchaser(15)
10.17 Form of Stock Purchase Warrant with each purchaser(15)
10.18 Security Agreement with Purchasers(15)
10.19 Intellectual Property Security Agreement with
Purchasers(15)
10.20 Registration Rights Agreement with Purchasers(15)
10.21 Stock Purchase Agreement with Mackey Price Thompson &
Ostler(16)
10.22 Employment Agreement with Raymond P.L. Cannefax(17)
10.23 Securities Purchase Agreement with AJW Partners, LLC,
AJW Offshore, Ltd., AJW Qualified Partners, LLC and New
Millennium Capital Partners II, LLP(18)
10.24 Form of Convertible Note with each purchaser(18)
10.25 Form of Stock Purchase Warrant with each purchaser(18)
10.26 Security Agreement with Purchasers(18)
10.27 Intellectual Property Security Agreement with
Purchasers(18)
10.28 Registration Rights Agreement with Purchasers(18)
10.29 Settlement Agreement with Dr. Joseph W. Spadafora(19)
10.30 Worldwide OEM Agreement with MEDA Co., Ltd.(20)
10.31 Second Amendment to the Registration Rights Agreement
dated April 27, 2005
10.32 Second Amendment to the Registration Rights Agreement
dated February 28, 2006
23.1 Consent of Mackey Price Thompson & Ostler (See Exhibit
5.1)
23.2 Consent of Chisholm, Bierwolf & Nilson, LLC
-----------------
(1) Incorporated by reference from Registration Statement
on Form SB-2, as filed on March 19, 1996.
(2) Incorporated by reference from Amendment No. 1 to
Registration Statement on Form SB-2, as filed on May
14, 1996.
(3) Incorporated by reference from Amendment No. 2 to
Registration Statement on Form SB-2, as filed on June
3, 1996.
(4) Incorporated by reference from Annual Report on Form
10-KSB, as filed on April 16, 1998.
(5) Incorporated by reference from Registration Statement
on Form SB-2, as filed on April 29, 1999.
(6) Incorporated by reference from Report on Form 10-QSB,
as filed on August 16, 2000.
(7) Incorporated by reference from Report on Form 10-QSB,
as filed on November 14, 2003.
(8) Incorporated by reference from Amendment No. 2 to
Registration Statement on Form SB-2, as filed on
December 15, 2003.
(9) Incorporated by reference from Current Report on Form
8-K, as filed on March 23, 2004.
(10) Incorporated by reference from Quarterly Report on Form
10-QSB, as filed on August 16, 2004.
(11) Incorporated by reference from Amendment No. 6 to
Registration Statement on Form SB-2, as filed on
October 20, 2004.
(12) Incorporated by reference from Report on Form 10-QSB,
as filed on November 15, 2004.
(13) Incorporated by reference from Current Report on Form
8-K, as filed on January 27, 2005.
(14) Incorporated by reference from Current Report on Form
8-K, as filed on February 23, 2005.
(15) Incorporated by reference from Current Report on Form
8-K, as filed on May 18, 2005.
(16) Incorporated by reference from Registration Statement
on Form SB-2, as filed on June 22, 2005.
(17) Incorporated by reference from Current Report on Form
8-K, as filed on January 18, 2006.
(18) Incorporated by reference from Current Report on Form
8-K, as filed on March 1, 2006.
(19) Incorporated by reference from Registration Statement
on Form SB-2, as filed on June 15, 2006.
(20) Incorporated by reference from Current Report on Form
8-K, as filed on June 19, 2006.
(21) Incorporated by reference from Registration Statement
on Form SB-2, as filed on September 15, 2006.

II-5

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

Current Report on Form 8-K, as filed on January 18, 2006.
Current Report on Form 8-K, as filed on March 1, 2006.
Current Report on Form 8-K, as filed on June 19, 2006.

Item 28. Undertakings

(a) The undersigned registrant hereby undertakes:

(1) To file, during any period in which it offers or sells
securities, a post -effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933 (the "Securities Act");

(ii) To reflect in the prospectus any facts or events
which, individually or together, represent a fundamental change in
the information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low
or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
and

(iii) To include any additional or changed material
information on the plan of distribution.

(2) That, for determining liability under the Securities Act,
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.

(3) To file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.

(b) Insofar as indemnification for liabilities arising under 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, treat the information omitted from the form of prospectus filed as part of
this 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, treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in the
registration statement, and the offering of the securities at that time as the
initial bona fide offering of those securities.

II-6

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 13th day of April, 2007.

PARADIGM MEDICAL INDUSTRIES, INC.

By:/s/ Raymond P.L. Cannefax
-------------------------
Raymond P.L. Cannefax
Its: President and Chief Executive
Officer

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/ Raymond P.L. Cannefax President and Chief April 13, 2007
---------------------------- Executive Officer
Raymond P.L. Cannefax (Principal Executive
Officer)

/s/ Randall A. Mackey Chairman of the Board April 13, 2007
----------------------------
Randall A. Mackey

/s/ David M. Silver * Director April 13, 2007
----------------------------
David M. Silver

/s/ Keith D. Ignotz * Director April 13, 2007
----------------------------
Keith D. Ignotz

/s/ John C. Pingree * Director April 13, 2007
----------------------------
John C. Pingree

/s/ Luis A. Mostacero Vice President of April 13, 2007
---------------------------- Finance, Treasurer
Luis A. Mostacero and Secretary
(Principal Financial
and Accounting Officer)

* By: /s/ Raymond P.L. Cannefax
--------------------------
Raymond P.L. Cannefax
Attorney-in-Fact

II-7