As filed with the Securities and Exchange Commission on October 23, 2006
                                                  Commission File No. 333-137334
--------------------------------------------------------------------------------



                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             _______________________


                                 AMENDMENT NO. 1
                                       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 of       (Primary Standard Industrial   (I.R.S. Employer
incorporation or organization)    Classification Code Number)     Identification
                                                                      Number)
                              2355 South 1070 West
                           Salt Lake City, Utah 84119
                                 (801) 977-8970
        (Address and telephone number of registrant's principal executive
                    offices and principal place of business)

          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
                                                                                    
Common Stock, $.001 par value per share....     60,000,000      .006           $ 360,000        $  38.52
=========================================== ==============  ===============  =============== ===============


(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 OCTOBER    , 2006
---------------------------------------------------------------------





                     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 October 13, 2006,  the last  reported  sale
price of our common stock was $.005 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 October __, 2006.



                                        1


                               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,
2005 and  2004,  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 six months ended
June 30, 2006,  46% of our revenues were derived from the  Dicon(TM)  diagnostic
products  sales (the  perimeter  and corneal  topographer),  7% of revenues from
Blood  Flow  Analyzer(TM)  sales,  22% of  revenues  from  P40,  P45 and P60 UBM
Ultrasound Biomicroscope sales, 12% of revenues from Humphrey Systems diagnostic
product sales (the P55  pachymetric  analyzer and the P37  Ultrasonic A/B Scan),
and 13% of revenues from services, disposables and other sales.


                                       2


         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.

         For the fiscal year ended  December 31, 2004,  34% of our revenues were
derived from the Dicon (TM) diagnostic products sales (the perimeter and corneal
topographer),  18% of  revenues  from  Blood  Flow  Analyzer(TM)  sales,  27% of
revenues from P40 and P45 UBM Ultrasound  Biomicroscope  sales,  12% of revenues
from Humphrey Systems  diagnostic  product sales (the P55 pachymetric  analyzer,
the P20  A-Scan  and  the  P37 A/B  Scan),  and 9% 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,  2005 were
$2,201,000 as compared to $3,062,000 for the comparable  period for fiscal 2004.
Unaudited  revenues  for the six months ended June 30, 2006 were  $1,182,000  as
compared to $1,413,000 for the comparable period of 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.

 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) ........       199,956,828 shares.

 Common stock outstanding
 after the offering(1)............       Up to 259,956,828 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


                                       3


 ___________________________

(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,
         245,217  shares of common stock  issuable  upon  conversion of 4,598.75
         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)                         1,050,616,667
                Warrants (2)                         25,059,392
                Preferred Stock (3)                     873,071
                Stock Options (4)                     7,075,500
                                                  -------------
                       Total                      1,083,624,630

(1)      Assumes full  conversion of $3,151,850 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 $.003 per
         share (based upon a market price of $.005 as of October 13, 2006 with a
         40% discount).
(2)      Consisting  of warrants  exerciseable  at prices  ranging from $.10 per
         share to $6.75 per share,  including  warrants  issued to AJW Partners,
         LLC,  AJW  Offshore,   Ltd.,  AJW  Qualified  Partners,  LLC,  and  New
         Millennium  Capital Partners II, LLC to purchase  16,534,392  shares of
         common  stock at an  exercise  price of $.20  per  share,  exerciseable
         through the period from April 27, 2010 to June 30,  2010,  and warrants
         to purchase  8,000,000 shares of common stock at an exerciseable  price
         of $.10 per share,  exerciseable  through the period from  February 28,
         2011 to June 28, 2011.
(3)      Consisting of 6,753 shares of common stock issuable upon  conversion of
         5,627 shares of Series A preferred stock, 10,783 shares of common stock
         issuable upon  conversion of 8,986 shares of Series B preferred  stock,
         8,750 shares of common stock  issuable upon  conversion of 5,000 shares
         of Series D preferred  stock,  13,333  shares of common stock  issuable
         upon  conversion  of 250 shares of Series E  preferred  stock,  245,217
         shares of common stock issuable upon  conversion of 4,598.75  shares of
         Series F preferred  stock,  and 588,235 shares of common stock issuable
         upon conversion of 588,235 shares of Series G preferred stock.
(4)      Consisting of stock options granted to executive officers and employees
         to purchase 4,825,500 shares of common stock at exercise prices ranging
         from $.01 per share to $2.75 per share,  and stock  options  granted to
         directors  to  purchase  2,250,000  shares of common  stock at exercise
         prices ranging from $.09 per share to $2.75 per share.

         There are a total of  1,083,624,630  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.


                                       4


         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.

         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  September  30,  2006,  a total of  $848,150 in  convertible  notes have 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;

                                       5


         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  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.

         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.

         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


                                       6



example,  assuming  conversion of the  $3,151,850  principal  amount of notes on
September 30, 2006 (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 $848,150 in
notes that were converted  during the period from June 30, 2005 to September 30,
2006) and a conversion  price of $.003 per share,  the number of shares issuable
upon conversion would be:

                    $3,151,850/$.003 = 1,050,616,667 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 $3,151,850  principal
amount of our  convertible  notes based on market prices 25%, 50%, and 75% below
the market price, as of October 13, 2006 of $.005.

 % Below      Price Per        With 40%         Number of            % of
 Market         Share          Discount       Shares Issuable    Outstanding*
 --------     ---------        --------       ---------------    ------------
   25%        $.00375          $.00225        1,400,822,222          700.6%
   50%        $.0025           $.0015         2,101,233,333        1,050.8%
   75%        $.00125          $.00069        4,567,898,550        2,284.4%


 *Based on 199,956,828 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       For the six months ended
                                       December 31,                 June 30,
                                 -----------------------   ---------------------------
Statement of Operations Data:       2004         2005           2005         2006
-----------------------------       ----         ----           ----         ----
                                                             
Net Sales....................... $3,062,000   $2,201,000   $ 1,413,000   $ 1,182,000
Net cost of sales...............  1,217,000    1,599,000       692,000       638,000
Operating expenses..............  2,237,000    2,782,000     1,476,000       956,000
Operating loss..................   (392,000)  (2,180,000)     (755,000)     (412,000)
Other income (expense)..........    456,000   (3,209,000)   (2,846,000)   (1,099,000)
Net income (loss)...............     64,000   (5,389,000)   (3,601,000)   (1,511,000)
Net income (loss) applicable
   to common shareholders.......     10,000   (5,389,000)   (3,601,000)   (1,511,000)
Net income (loss) per common
   share........................      $0.00       $(0.13)       $(0.13)       $(0.01)
Shares used in computing net
   loss per share............... 25,405,000   42,033,000    27,745,000   150,164,000


                                               As of                As of
 Balance Sheet Data:                      December 31, 2005    June 30, 2006
 -------------------                      -----------------    -------------

 Current assets......................         $1,331,000            $1,912,000
 Current liabilities.................          1,177,000             1,239,000
 Working capital (deficit)...........            154,000               673,000
 Total assets........................          1,702,000             2,275,000
 Accumulated deficit.................        (62,196,000)          (63,705,000)
 Stockholder's equity ...............         (1,513,000)           (1,634,000)

                                  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.

                                       7


                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 June
30,  2006,  our  working  capital  was  $673,000.  Our  accumulated  deficit was
$62,196,000 as of December 31,2005,  and $63,705,000 as of June 30, 2006. We had
net income of $64,000 for the fiscal year ended December 31, 2004, a net loss of
$5,389,000  for the  fiscal  year ended  December  31,  2005,  and a net loss of
$1,511,000  for the six months  ended June 30,  2006.  Our losses have  resulted
principally  from costs  incurred in connection  with research and  development,
including  clinical trials, of the laser surgery system. 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

                                       8


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 September  30,  2006,  we had  $2,651,850  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
$1,651,850  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


                                       9



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 September 30, 2006, we had 199,956,828 shares of our common stock
issued and outstanding and $2,651,850 in convertible  notes outstanding that may
be  converted  into an estimated  883,950,000  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 166,666,667 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.


         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 $3,151,850  principal
amount of our convertible  notes, based on market prices 25%, 50%, and 75% below
the market price, as of October 13, 2006 of $.005.

% Below        Price Per        With 40%        Number of             % of
Market           Share          Discount     Shares Issuable      Outstanding*
-------        ---------        --------     ---------------      ------------
  25%          $.00375         $.00225       1,400,822,222          700.6%
  50%          $.0025          $.0015        2,101,233,333         1,050.8%
  75%          $.00125         $.00069       4,567,898,550         2,284.4%


*Based on 199,956,828 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.


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  $3,151,850  principal  amount of the notes on
September 30, 2006 (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 $848,150 in notes that were
converted  during the period  from June 30, 2005 to  September  30,  2006),  the
number of shares  issuable upon  conversion of the notes would be  1,050,616,667
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  873,071  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.

                                       10


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 September  30, 2006, a total of $848,150 of these  convertible  notes have
been  converted  into  shares of our  common  stock,  reducing  the  outstanding
principal  amount of the notes to  $1,651,850.  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.

                                       11


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.

                                       12


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.

                                       13


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.

                                       14


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

                                       15


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 September 30, 2006, 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;
4,598.75  shares of Series F preferred  stock  convertible  into 245,267  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 September  30, 2006,  we had issued and  outstanding  199,956,828
shares of our common stock, shares of Series A, B, D, E, F and G preferred stock
convertible  into 873,071 shares of common stock,  and  outstanding  options and
warrants to purchase 36,166,892 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


                                       16



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 September 30, 2006, 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.

                                       17


                                 CAPITALIZATION

         The following table sets forth our capitalization on an actual basis as
of December 31, 2005 and June 30, 2006.


                                                     December 31,     June 30,
                                                          2005          2006
                                                    -------------  -------------

Long-term obligations.............................. $   2,038,000  $  2,670,000

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         1,000

  Common Stock, $.001 par value per share;
  250,000,000 shares authorized, 96,389,295
  and 199,956,828 issued and outstanding,
  respectively.....................................        96,000       197,000

  Additional paid-in-capital, common stock.........    60,586,000    61,873,000

  Accumulated deficit..............................   (62,196,000)  (63,705,000)

Total stockholders' equity ........................    (1,513,000)     (634,000)

Total capitalization...............................  $    525,000  $    673,000

            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 October 13, 2006, the closing sale price
of the common stock was $.005 per share. The following are the high and low sale
prices for the common  stock by quarter as reported  by Nasdaq  from  January 1,
2000 to June 25, 2003 and by the Over-the-Counter  Bulletin Board since June 25,
2003.




                                       18


                                                             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  (through October 13, 2006) ....         .005          .004



         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
September 30, 2006,  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, 2004 and 2005,  and the six months ended June 30, 2005
and 2006.  The selected  financial  data as of and for the six months ended June
30, 2005 and 2006 are derived from our unaudited quarterly financial statements,
which  have  been  reviewed  by  Chrisholm,  Bierwolf  & Nilson.  The  following
financial   information  should  be  read  in  conjunction  with  the  Financial
Statements, and related notes thereto.


                                       19


                          Summary Financial Information




                                    For the year ended     For the six months ended
                                      December 31,                 June 30,
                                    ------------------     -------------------------

Statement of Operations Data:        2004          2005       2005         2006
-----------------------------        ----          ----       ----         ----
                                                            
Net Sales........................ $3,062,000   $2,201,000  $1,413,000   $1,182,000
Net cost of sales................  1,217,000    1,599,000     692,000      638,000
Operating expenses...............  2,237,000    2,782,000   1,476,000      956,000
Operating loss...................   (392,000)  (2,180,000)   (755,000)    (412,000)
Other income (expense)...........    456,000   (3,209,000) (2,846,000)  (1,099,000)
Net income (loss)................     64,000   (5,389,000) (3,601,000)  (1,511,000)
Net income (loss) applicable
 to common shareholders..........     10,000   (5,389,000) (3,601,000)  (1,511,000)
Net income (loss) per common
 share...........................      $0.00       $(0.13)     $(0.13)      $(0.01)
Shares used in computing net
 loss per share.................. 25,405,000   42,033,000  27,745,000  150,164,000



                                           As of                  As of
Balance Sheet Data:                 December 31,  2005        June 30, 2006
-------------------                 ------------------        -------------
Current assets....................         $1,331,000            $1,912,000
Current liabilities...............          1,177,000             1,239,000
Working capital (deficit).........            154,000               673,000
Total assets......................          1,702,000             2,275,000
Accumulated deficit...............        (62,196,000)          (63,705,000)
Stockholder's equity .............         (1,513,000)           (1,634,000)


                           MANAGEMENT'S DISCUSSION AND
                          ANALYSIS OR PLAN OF OPERATION

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

Critical Accounting Policies

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

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

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

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


                                       20


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

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

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

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

General

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

         The Company is engaged in the design, development, manufacture and sale
of high technology  diagnostic and surgical eye care products.  Given the "going
concern" status of the Company, management has focused efforts on those products
and activities  that will, in its opinion,  achieve the most resource  efficient
short-term cash flow. As seen in the results for the three months ended June 30,
2006, diagnostic products have been the major focus and the Photon(TM) and other
extensive research and development projects have been put on hold pending future
evaluation when the Company's financial position improves.  The Company does not
focus on a specific  diagnostic product or products but, instead,  on the entire
diagnostic product group.

Results of Operations

         Six Months Ended June 30,  2006,  Compared to Six Months Ended June 30,
2005

         Net sales for the six months ended June 30, 2006 decreased by $231,000,
or 16%, to  $1,182,000  as compared to  $1,413,000  for the same period of 2005.
This  reduction in sales was  primarily due to reduced sales of the P40, P45 and
P60  UBM  Ultrasound  Biomicroscopes  and the P37  A/B  Scan  Ocular  Ultrasound
Diagnostics.

         For the six months  ended  June 30,  2006,  sales  from our  diagnostic
products totaled $1,026,000,  or 87% of total revenues,  compared to $1,172,000,
or 83% of total  revenues  for the same  period of 2005.  The  remaining  13% of
sales,  or  $156,000  during the six months  ended June 30, 2006 was from parts,
disposables, and service revenue.

         Sales of the P40, P45 and P60 UBM Ultrasound  Biomicroscopes  decreased
to $253,000 during the six months ended June 30, 2006, or 21% of total quarterly
revenues for the period, compared to $677,000, or 48% of total revenues, for the
same period last year. Sales of the Blood Flow Analyzer(TM) increased by $23,000
to $85,000,  or 7% of total  revenues,  for the six months  ended June 30, 2006,
compared  to net sales of  $63,000,  or 4% of total  revenues,  during  the same
period  in  2005.  Sales  from  the P37 A/B Scan  Ocular  Ultrasound  Diagnostic
increased to $120,000, or 10% of total revenues,  for the six month period ended


                                       21


June 30, 2006, down compared to $80,000,  or 6% of total revenues,  for the same
period last year.  Combined sales of the LD 400 and TKS 5000  autoperimeters and
the CT 200 Corneal Topographer were $540,000, or 46% of the total revenues,  for
the six months  ended  June 30,  2006,  compared  to  $352,000,  or 25% of total
revenues, for the same period of 2005.

         Our sales have been lower during the six months ended June 30, 2006 due
to a  variety  of  reasons.  Sales  of the  P40,  P45  and  P60  UBM  Ultrasound
Biomicroscope  decreased  primarily as a result of ongoing software  development
and hardware  configuration problems with the new P60, which received FDA 510(k)
premarket  approval  on May 26,  2005 that  allows  the device to be sold in the
United States. The hardware  configuration problems have since been resolved and
we  continue  to  work  on  resolving  the  software  development  problems.  We
anticipate  reversing the downward trend in sales through  additional efforts to
gain  more  widespread  support  for the P60 as a result of  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 six month period ended June 30, 2006, we
realized no sales in the surgical line  consisting of the  Precissionist  Thirty
Thousand(TM)  and the Photon(TM)  laser system.  There were also no sales in the
surgical line for the comparable period of 2005.

         Gross profit for the six months ended June 30, 2006  decreased by 5% to
46% of total revenues,  compared to 51% of total revenues for the same period in
2005.  The  decrease in gross  profit was mainly due to the ongoing  development
expenses of the new P60 UBM and the costs  associated  with the physical move of
our  production and warehouse  operations  and corporate  offices into a reduced
area in our leased office and warehouse space in order to realize savings in the
monthly  rent of such  facilities.  There was no increase or decrease to cost of
sales as a result of a change to the reserve for obsolete inventory in 2006.

         Marketing  and  selling  expenses  decreased  by  $180,000,  or 49%, to
$185,000,  for the six  months  ended  June  30,  2006,  from  $365,000  for the
comparable  period in 2005.  The 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 $138,000,  or 21%, to
$514,000  for  the six  months  ended  June  30,  2006,  from  $652,000  for the
comparable period in 2005. The decrease in general and  administrative  expenses
was primarily due to the expenses associated with the financing obtained in June
2006.

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

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

         Research,  development and service expenses  decreased by $202,000,  or
44%, to $257,000 for the six months ended June 30, 2006, compared to $459,000 in
the  same  period  of  2005.  Most  of the  increase  was  due to the  costs  of
development and compliance with regulatory requirements in releasing the new P60
UBM.

         Due to our  ongoing  cash flow  difficulties,  most of our  vendors and
suppliers were contacted during 2004 and 2005 with attempts to negotiate reduced
payments and  settlement of  outstanding  accounts  payable.  While some vendors
refused to negotiate and demanded  payment in full, some vendors were willing to
settle for a reduced  amount.  The  accounts  payable  forgiven  by vendors  and
suppliers  resulted  in a gain of $12,000  and  $206,000  during the years ended
December  31,  2005  and  2004,  respectively.  In  2006 we are  continuing  our
negotiations with some vendors and suppliers.

Liquidity and Capital Resources

         We used  $445,000 in cash in  operating  activities  for the six months
ended June 30, 2006,  compared to  $1,665,000  for the six months ended June 30,
2005.  The  decrease in cash used for  operating  activities  for the six months
ended June 30, 2006 was primarily  attributable to our net loss and decreases in
accounts  payable  and  accrued   liabilities  and  an  increase  in  inventory,
specifically  for the P60 UBM. We used $16,000 in investing  activities  for the
six months ended June 30,  2006,  compared to zero for the six months ended June
30, 2005.  Net cash  received in financing  activities  was $986,000 for the six


                                       22


months ended June 30, 2006,  versus cash provided from  financing  activities of
$2,622,000 in the same period in 2005. We had working  capital of $673,000 as of
June 30, 2006, compared to working capital of $1,565,000 as of June 30, 2005. 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 June 30, 2006, we had net operating loss carry-forwards (NOLs) of
approximately  $53 million.  These loss carry-  forwards are available to offset
future taxable  income,  if any, and have begun to expire in 2001 and extend for
twenty years.  Our ability to use net  operating  loss  carryforwards  (NOLs) to
offset future income is dependant  upon certain  limitations  as a result of the
pooling  transaction  with  Vismed and the tax laws in effect at the time of the
NOLs can be utilized. The Tax Reform Act of 1986 significantly limits the annual
amount that can be utilized  for certain of these  carryforwards  as a result of
change of ownership.

         As of June 30, 2006, we had accounts payable of $390,000, a significant
portion  of which was over 90 days past due,  compared  to  accounts  payable of
$346,000 as of June 30, 2005. 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  non-cancelable
capital lease  obligations  and operating  lease  obligations  that required the
payment of approximately $194,000 in 2005, and $14,000 in 2006.

         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  its 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 17% of total  outstanding  receivables as of June 30, 2006
and 20% as of December 31, 2005 compared to 3% of total outstanding  receivables
as of June 30, 2005. The allowance for doubtful accounts increased from $100,000
at December 31, 2005 to $101,000 at June 30, 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 six months  ended June 30, 2006,  we
added a net of $1,000 to the allowance for doubtful accounts. 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 $1,324,000 at June 30, 2006 and $1,371,000 at June 30, 2005, or 63%
and 65% 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 was 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.

                                       23



         As of September  30,  2006,  we had  $2,651,850  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

                                       24


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.

                                    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 Photon(TM) laser system,
is a laser cataract  surgery system  marketed as the next generation of cataract
removal.  Because of the "going concern"  status of the company,  management has
focused  efforts on those  products and  activities  that will,  in its opinion,
achieve the most  resource  efficient  short-term  cash flow to the company.  As
reflected in the results for the fiscal year ended December 31, 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.


                                       25


         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.


                                       26


         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.

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

         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.

         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.


                                       27


         The agreement  provides  that we and MEDA agree to jointly  develop and
collaborate  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 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.

         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.

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.


                                       28


         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).


                                       29


         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 2005 and 2004, and 0%
of the total revenues for the three months ended March 31, 2006.

         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, 2005 and the three months ended March 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


                                       30


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, 2005, 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  approximately
0% of the total  revenues for both 2005 and 2004,  and 0% of the total  revenues
for the six months ended June 30, 2006.


                                       31


         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 4%
and 18% of total revenues for the fiscal years ended December 31, 2005 and 2004,
respectively, and 7% of total revenues for the six months ended June 30, 2006.

         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 28% and 27% of
the total  revenues for both 2005 and 2004,  respectively,  and 41% of the total
revenues for the six months ended June 30, 2006.


                                       32


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

         Dicon(TM) Corneal Topographers:  Dicon(TM) corneal topographers include
the CT 200(TM) and the CT 50.  Corneal  topographers  are used to determine  the
shape and  integrity of the cornea,  the anterior  surface of the eye.  Clinical
applications for corneal topographers include refractive surgery that eliminates
the need for  eyeglasses  and  optometric  applications  including  contact lens
fitting. Revenues from the topographer and related accessories were 3% and 7% of
the total revenues for 2005 and 2004, respectively, and 5% of the total revenues
for the six months  ended June 30, 2006.  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  2% and 3% of the total  revenues  for 2005 and 2004,
respectively,  and 2% of the total  revenues  for the six months  ended June 30,
2006.

         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  approximately 8% and 9% of the total
revenues for 2005 and 2004, respectively,  and 10% of the total revenues for the
six months ended June 30, 2006.

         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 9% and 11% of the total revenues for 2005 and 2004, respectively, and 6% of
the  total  revenues  for  the six  months  ended  June  30,  2006.  The P45 UBM
Ultrasound  Biomicroscope and related  accessories sales contributed 13% and 16%
of the  total  revenues  for 2005 and  2004,  respectively,  and 6% of the total
revenues for the six months ended June 30, 2006.

         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.

                                       33


         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 21% and 0% of total revenues
for 2005 and  2004,  respectively,  and 10% of the  total  revenues  for the six
months ended June 30, 2006.

         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.

         The agreement  provides  that we and MEDA agree to jointly  develop and
collaborate  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.

         Parts and Services:  The parts and services revenue from the repair and
service of equipment sold accounted for 12% and 9% of the total revenues in both
2005 and 2004,  and 13% of the total  revenues for the six months ended June 30,
2006.

         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(2)           Approvals

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

P37 A/B Scan             Transducer, Ultrasound       Complete              Yes             8%         10%     FDA 510(K) K844299*
Ocular Ultrasound              Diagnostic                                                                      ISO 9001: 1994,
Diagnostic                                                                                                     EN ISO 9001**

P40 UBM                 System, Imaging, Pulsed       Complete              Yes             9%         6%      FDA 510(K) K844299*
Ultrasound                  Echo Ultrasound                                                                    ISO 9001: 1994,
Biomicroscope                  Diagnostic                                                                      EN ISO 9001**

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



                                       34


                                                                                             

P60 UBM                 System, Imaging, Pulsed       Complete              Yes            21%         10%     FDA 510(K) K844299*
Ultrasound                  Echo Ultrasound                                                                    ISO 9001: 1994,
Biomicroscope,                 Diagnostic                                                                      EN ISO 9001**
Workstation Plus
BFA Ocular Blood           Tonometer, Manual          Complete              Yes****         4%         7%      FDA 510(K) K844299*
Flow Analyzer(TM)                 Diagnostic                                                                      ISO 9001: 1994,
and Disposables                                                                                                EN ISO 9001**

CT 200 Corneal            Topographer Corneal         Complete              Yes             3%         5%      FDA 510(K) K844299*
Topography System              AC-Powered                                                                      ISO 9001: 1994,
                               Diagnostic                                                                      EN ISO 9001**

LD 400                    Perimeter, Automatic        Complete              Yes            23%        41%      FDA 510(K) K844299*
Autoperimetry                  AC-Powered                                                                      ISO 9001: 1994,
System                         Diagnostic                                                                      EN ISO 9001**

TKS 5000                  Perimeter, Automatic        Complete              Yes             5%         0%      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                                                                                                        EN ISO 9001**
Workstation with
Surgical Equipment
and
Disposables

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%         13%     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)      Sales for 2006 are for the six months ended June 30, 2006.
(3)      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.
(4)      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.
(5)      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.


                                       35


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
September 30, 2006, 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.


                                       36


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)  increased by
$87,000, or 11%, to $855,000 for the twelve months ended December 31, 2005, from
$768,000  for the  same  period  in 2004.  None of the  costs  of  research  and
development activities during 2005 and 2004 was borne directly by customers.

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

         During the period in which  Thomas F.  Motter  served as  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.


                                       37


         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.


                                       38


         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.


                                       39


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


                                       40


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


                                       41


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.

                                       42


Employees


         As of September  30, 2006, we had 24 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 dispute the amount  allegedly  owed 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. We have been
working with PhotoMed and Dr.  Eichenbaum to ensure that the  calculations  have
been  correctly  made on the  royalties  paid as well as the  proper  method  of
calculation for the future.

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

         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 or about April of 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.  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.

         On August 20, 2003, a complaint was filed against us by Corinne Powell,
a former employee, in the Third Judicial District Court, Salt Lake County, State
of Utah (Civil No.  030918364).  Defendants consist of us and Randall A. Mackey,
Dr.  David M. Silver,  Keith D. Ignotz and John Does I through V. The  complaint
alleges that at the time we laid off Ms. Powell on March 25, 2003,  she was owed
$2,030 for business  expenses,  $11,063 for accrued  vacation days,  $12,818 for
unpaid commissions,  the fair market value of 50,000 stock options in early 2000
(ranging  from a low  of  $7.00  per  share  to a  high  of  $13.21  per  share)
exercisable  at  $5.00  per  share  that  she  claims  she  was  prevented  from
exercising,  attorney's  fees and a continuing  wage penalty  under Utah law. On
March 29,  2005,  we agreed to a  settlement  with Ms.  Powell of her claims for
unpaid  business  expenses,  accrued  vacation days,  and unpaid  commissions by
agreeing to pay her the sum of $13,000.  We made  payment to Ms.  Powell for the
agreed upon settlement  amount. As to the remaining claims, the trial is set for
March 12, 2007.  We filed a motion for summary  judgment on August 21, 2006.  If
the motion is denied,  we still believe the  remaining  claims are without merit
and intend to vigorously defend against such claims.

         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 that monthly payments of $3,083 are due for the months of October 2002 to

                                       43


October 2003 under the consulting agreement and, if the agreement is terminated,
for the sum of  $110,000  minus  whatever  we have paid Mr.  Hicks prior to such
termination,  plus costs,  attorney's  fees and a wage penalty  pursuant to Utah
law.  We have filed an answer in which it denies  any  liability  to Mr.  Hicks.
Formal  discovery in the matter has commenced.  A case schedule is to be set. We
dispute the amount  allegedly owed and intend to vigorously  defend against such
action.

         On November 7, 2003, a complaint was filed against us by Todd Smith,  a
former employee,  in the Third Judicial District Court, Salt Lake County,  State
of Utah (Civil No. 030924951 CN). Defendants consist of us and Randall Mackey, a
director of the  company.  The first  amended  complaint  alleges  that while an
employee of the company,  Mr. Smith was granted stock options to purchase 16,800
shares of common stock  exercisable at $5.00 per share.  Mr. Smith claims unpaid
wages in the amount of the fair market value of the stock options that he claims
he was  prevented  from  exercising,  which in the first  amended  complaint  is
alleged to be $86,250, attorney's fees, and a continuing wage penalty under Utah
law. The court,  upon  stipulation of the parties,  struck the case schedule and
scheduled a hearing on October 23,  2006 to set new dates for  discovery  cutoff
and the trial.  We believe the claims are without merit and intend to vigorously
defend against such action.

         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 September 30, 2006, 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.      60      Chairman of the Board
     David M. Silver, PhD.        64      Director
     Keith D. Ignotz              59      Director
     John C. Pingree              65      Director

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

         Raymond  P.L.  Cannefax  has served as  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.


         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

                                       44


Institute of  Technology,  an M.A.  degree from Johns Hopkins  University  and a
Ph.D. degree from Iowa State University before holding a postdoctoral fellowship
at Harvard  University  and a visiting  scientist  position at the University of
Paris.

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

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

Appointment of New President and Chief Executive Officer

         On January 5, 2006,  Raymond P.L.  Cannefax was  appointed as 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 and New Vice President of Sales and
Marketing

         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 April 10,
2006, Michael S. Austin was appointed as Vice President of Sales and Marketing.

Board Meetings and Committees

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

         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;

                                       45


(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 John Y. Yoon,  former President and Chief
Executive  Officer,  and other executive officers whose salary and bonus for all
services in all capacities  exceed  $100,000 for the fiscal years ended December
31, 2005, 2004 and 2003.


                                       46




                                              Summary Compensation Table


                                                   Annual Compensation               Long Term Compensation
                                                   -------------------               ----------------------
                                                                               Awards                        Payouts
                                                                               ------                        -------
                                                             Other                      Securities
                                                             Annual      Restricted     Underlying    Long-term      All Other
Name and                                                     Compen-     Stock           Options/     Incentive      Compensa-
Principal Position      Year        Salary$      Bonus($)    sation($)   Awards($)       SARs(#)      Payouts($)     tion($)
------------------      ----        -------      -------     ---------   ----------     ----------    ----------     ----------
                                                                                             
John Y. Yoon            2005(1)     $165,881(5)      0      $ 2,257(5)      0                0             0         $5,927(8)
Former President and    2004(2)     $110,961(6)      0      $18,494(6)      0        1,000,000(7)          0              0
Chief Executive
Officer(4)

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

____________________

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



                                       47


Options

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



                             Option Grants in Last Fiscal Year


                                                       Individual Grants
                       -------------------------------------------------------------------
                                              Percentage of
                                              Total Options
                       Number of Securities     Granted to     Exercise Price
                       Underlying Options     Employees in       Per Share     Expiration
Name                      Granted (#)         Fiscal Year(%)      ($/Sh)          Date
----                   --------------------   --------------   --------------  -----------

                                                                        
John Y. Yoon.........            0                  0                N/A            N/A
Aziz A. Mohabbat.....            0                  0                N/A            N/A


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



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

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


Director Compensation

         On April 19, 2004,  John C.  Pingree,  a director of our  company,  was
granted  options to purchase  125,000  shares of our common stock at an exercise
price of $.12 per share. On September 30, 2004,  Messrs.  Randall A. Mackey, Dr.
David M. Silver and Keith D. Ignotz, directors of our company, were each granted
options to purchase  125,000  shares of our common stock at an exercise price of
$.13 per share.  The  options  were not issued at a discount  to the then market
price.  The directors were not granted any options to purchase  shares of common
stock  during  2005.  Moreover,  we paid no other  form of  compensation  to the
directors  other than stock options  during 2005 and 2004. In addition,  outside
directors  are also  reimbursed  for  their  expenses  in  attending  board  and
committee  meetings.  Directors are not  precluded  from serving us in any other
capacity and receiving compensation therefore.

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


                                       48



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


                                       49


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 paid $5,000 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

                                       50


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  2005,  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 September  30, 2006 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.


       Name and Address(1)            Number of Shares     Percent of Ownership
       -------------------            ----------------     --------------------
       Raymond P.L. Cannefax (2)            3,750,000           1.9%
       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)                       6,193,375           3.1%
         _________________
         *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 September 30, 2006 through the exercise of
              stock options are follows:  Mr. Cannefax,  3,000,000  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, 2005 and 2004,  totaled  $220,000 and $100,000,
respectively,  and for the six  months  ended  June 30,  2006 were  $83,000.  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, 2005, we owed this firm $93,000, which is included in accounts payable.



                                       51


                              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(1)
        ------------          ------  ----------   ------------     ------  ----------

                                                                   
AJW Offshore Ltd (3)         2,994,000   4.99%       30,000,000       0           *
AJW Qualified Partners (3)   2,994,000   4.99%       20,400,000       0           *
AJW Partners, LLC (3)        2,994,000   4.99%        8,400,000       0           *
New Millennium Capital
  Partners, LLC (3)          2,994,000   4.99%        1,200,000                   *
        TOTAL
 _______________________
* less than 1%



         (1)  Applicable  percentage ownership is based on 199,956,828 shares of
              common stock  outstanding as of September 30, 2006,  together with
              securities  exercisable or convertible into shares of common stock
              within  60  days of  September  30,  2006  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.  Shares of
              common  stock  that are  currently  exercisable  within 60 days of
              September  30,  2006 are  deemed to be  beneficially  owned by the
              person  holding such  securities  for the purpose of computing the
              percentage  ownership of such person,  but are not for the purpose
              of computing the percentage ownership of any other person.
         (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 and warrants, up to
              the maximum  permitted  ownership under the convertible  notes and
              warrants 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

         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:

                                       52


         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.

         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.

         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  September  30,  2006,  a total of  $848,150 in  convertible  notes have 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:



                                       53


         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  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, 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 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

                                       54


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.

         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


         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  $3,171,850  principal  amount of notes on
September 30, 2006 (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 $848,150 in
notes that were converted  during the period from June 30, 2005 to September 30,
2006) and a conversion  price of $.003 per share,  the number of shares issuable
upon conversion would be:

                    $3,151,850/$.005 = 1,050,616,667 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 $3,151,850  principal
amount of our convertible  notes, based on market prices 25%, 50%, and 75% below
the market price, as of October 13, 2006 of $.005.

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



         25%       $.00375           $.00225     1,400,822,222          700.6%
         50%       $.0025            $.0015      2,101,233,333        1,050.8%
         75%       $.00125           $.00069     4,567,898,550        2,284.4%


       *Based on 199,956,828 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 dissolution to our existing stockholders.

                            DESCRIPTION OF SECURITIES


         Our authorized  capital stock consists of 800,000,000  shares of common
stock,  $.001 par value per share, of which  199,956,828  shares were issued and
outstanding  as of September  30, 2006,  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.


                                       55


         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 September 30, 2006, 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 September  30, 2006,  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;  4,598.75  shares  of  Series F  Preferred  Stock
convertible  into  245,267  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.


                                       56


         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.

                                       57


         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

                                       58


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  September  30, 2006,  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

         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.

         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


                                       59



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.

         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.

         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.

         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 and any of their respective pledgees,  donees,
assignees and other  successors-in-interest  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:

                                       60


         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  a
              broker-dealer for its account;
         o    An  exchange  distributions  in  accordance  with the rules of the
              applicable exchange;
         o    Privately-negotiated transactions;
         o    Short sales that are not violations of laws and regulations of any
              state or the United States;
         o    Broker-dealers  may agree with the selling  stockholders to sell a
              specified number of such shares at a stipulated price per share;
         o    Through the writing of options on the shares;
         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 shall have the sole and absolute discretion
not to  accept  any  purchase  order or make any sale of sales if they  deem the
purchase price to be unsatisfactory at any particular time.

         The selling  stockholders  may also  engage in short sales  against the
box, 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.

         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 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 selling
stockholders  or  their  respective  pledgees,   donees,  transferees  or  other
successors-in-interest, may be required to make in respect to such liabilities.

                                       61


         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,
2004 and 2005  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, 2005 and 2004  totaled  $220,000 and  $100,000,
respectively. Legal fees and expenses paid to Mackey Price Thompson & Ostler for
legal services during the six months ended June 30, 2006 totaled $83,000.  As of
December 31, 2005, we owed the firm  $93,000,  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.


                                       62





                                      INDEX

PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements................................................ 1

         Condensed Balance Sheet (unaudited) - June 30, 2006................. 1

         Condensed Statements of Operations (unaudited)
            for the six months ended June 30, 2006 and June 30,
            2005............................................................. 2

         Condensed Statements of Cash Flows (unaudited)
            for the six months ended June 30, 2006
            and June 30, 2005 ............................................... 3

         Notes to Condensed Financial Statements (unaudited)................. 4


                                       i


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


                                                                  June 30,  2006
                                                                  --------------
ASSETS
Current Assets
  Cash and Cash Equivalents                                       $     591,000
  Receivables, Net                                                      486,000
  Inventory                                                             786,000
  Prepaid Expenses                                                       49,000
                                                                  --------------
              Total Current Assets                                    1,912,000

Intangibles, Net                                                        339,000
Property and Equipment, Net                                              24,000
                                                                  --------------
              Total Assets                                        $   2,275,000
                                                                  ==============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Trade Accounts Payable                                          $     390,000
  Accrued Expenses                                                      848,000
  Current Portion of Long-term Debt                                       1,000
                                                                  --------------
              Total Current Liabilities                               1,239,000
  Convertible Notes Payable                                           2,670,000
                                                                  --------------
  Total Long-term Liabilities                                         2,670,000
                                                                  --------------
              Total Liabilities                                       3,909,000
                                                                  --------------

Stockholders' Equity:
Preferred Stock, Authorized:
5,000,000 shares, $.001 par value
     Series A
        Authorized:  500,000 shares; issued and
        outstanding: 5,627 shares at June 30, 2006                            -
     Series B
        Authorized:  500,000 shares; issued and
        outstanding: 8,986 shares at June 30, 2006                            -
     Series C
        Authorized:  30,000 shares; issued and
        outstanding: zero shares at June 30, 2006                             -
     Series D
        Authorized:  1,140,000 shares; issued and
        outstanding: 5,000 shares at June 30, 2006                            -
     Series E
        Authorized:  50,000 shares; issued and
        outstanding: 250 shares at June 30, 2006                              -
     Series F
        Authorized:  50,000 shares; issued and
        outstanding: 4,598.75 shares at June 30, 2006                         -
     Series G
        Authorized:  2,000,000 shares; issued and
        outstanding: 588,235 shares at June 30, 2006                      1,000
Common Stock, Authorized:
250,000,000 shares, $.001 par value; issued and
    outstanding: 196,956,828 at June 30, 2006                           197,000
Additional Paid-in-capital                                           61,873,000
Accumulated Deficit                                                 (63,705,000)
                                                                  --------------
              Total Stockholders' Equity                             (1,634,000)
                                                                  --------------

              Total Liabilities and Stockholders' Equity          $   2,275,000
                                                                  ==============



                   The accompanying notes are an integral part
                    to these condensed financial statements

                                       1




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



                                                            Three Months Ended               Six Months Ended
                                                                June 20,                        June 20,
                                                          2006            2005            2006              2005
                                                     --------------   -------------  --------------   --------------
                                                                                          
Sales                                                $     718,000    $    885,000   $   1,182,000    $    1,413,000
Cost of Sales                                              416,000         478,000         638,000           692,000
                                                     --------------   -------------  --------------   --------------
           Gross Profit                                    302,000         407,000         544,000           721,000

Operating Expenses:
  Marketing and Selling                                    108,000         187,000         185,000           365,000
  General and Administrative                               263,000         390,000         514,000           652,000
  Research, development and service                        132,000         248,000         257,000           459,000
                                                     --------------   -------------  --------------   --------------
           Total Operating Expenses                        503,000         825,000         956,000         1,476,000
                                                     --------------   -------------  --------------   --------------

Operating Income (Loss)                                   (201,000)       (418,000)       (412,000)         (755,000)

Other Income and (Expenses):
  Interest Expense                                          (1,000)        (16,000)         (4,000)          (20,000)
  Financing Costs                                         (553,000)     (2,851,000)     (1,097,000)       (2,854,000)
  Other Income                                                  --          (9,000)          2,000            28,000
                                                     --------------   -------------  --------------   --------------
         Total Other Income and Expenses                  (554,000)     (2,858,000)     (1,099,000)       (2,846,000)
                                                     --------------   -------------  --------------   --------------

Net income (Loss) Before Provision
     for Income Taxes                                     (755,000)     (3,276,000)     (1,511,000)       (3,601,000)
Provision (Benefit for Income Taxes)                            --              --              --                --
                                                     --------------   -------------  --------------   --------------
         Net Loss                                    $    (755,000)   $ (3,276,000)  $  (1,511,000)   $    3,601,000
                                                     ==============   =============  ==============   ==============

Net Loss Per Common Share - Basic and Diluted        $       (0.00)   $      (0.12)  $       (0.01)   $        (0.13)
                                                     --------------   -------------  --------------   --------------
Weighted Average Outstanding Shares - Basic
     and Diluted                                       175,402,000      28,362,000     150,164,000        27,745,000
                                                     --------------   -------------  --------------   --------------



                The accompanying notes are an integral part to these condensed financial statements






                                                           2


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


                                                      Six Months Ended June 30,
                                                        2006            2005
                                                    ------------   -------------

Cash Flows from Operating Activities
------------------------------------
Net Loss                                            $ (1,511,000)  $ (3,601,000)
Adjustment to Reconcile Net Loss to Net Cash
  Used in Operating Activities:
    Depreciation and Amortization                         24,000         43,000
    Issuance of Common Stock for Satisfaction
      of Penalty                                               -         52,000
    Issuance of Common Stock for Services                      -         22,000
    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                    1,000        (81,000)

(Increase) Decrease from Changes is:
    Accounts Receivable                                  (86,000)       (36,000)
    Inventories                                           67,000        (27,000)
    Prepaid and Other Expenses                           (38,000)       (35,000)
Increase (Decrease) from Changes in:
    Trade Accounts Payable                               (69,000)      (406,000)
    Accrued Liabilities                                  144,000        (96,000)
                                                    ------------   -------------

    Net Cash Provided By (Used in)
      Operating Activities                              (445,000)    (1,665,000)
                                                    ------------   -------------

Cash Flow from Investing Activities:
------------------------------------
    Cash proceeds from sales of investment               (16,000)            --
                                                    ------------   -------------
    Net Cash Provided by (Used in)
      Investing Activities                               (16,000)            --
                                                    ------------   -------------

Cash Flows from Financing Activities:
-------------------------------------
    Principal Payments on Notes Payable and
      Long-term Debt                                     (14,000)       (28,000)
    Proceeds from Issuance of Common Stock                     -        150,000
    Proceeds from Issuance of Convertible Notes        1,000,000      2,500,000
                                                    ------------   -------------

    Net Cash Provided by (Used in)Financing
      Activities                                         986,000      2,622,000
                                                    ------------   -------------

    Net Change in Cash                                   525,000        957,000

    Cash and Cash Equivalents,
        Beginning of Period                               66,000        131,000

    Cash and Cash Equivalents,
        End of Period                               $    591,000   $  1,088,000
                                                    ============   =============
Supplemental Disclosure of Cash
  Flow Information:
    Cash Paid for Interest                          $      2,000   $      7,000
                                                    ============   =============
    Cash Paid for Income Taxes                      $          -   $          -
                                                    ============   =============


                   The accompanying notes are an integral part
                     to these condensed financial statements

                                       3



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



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

         The  accompanying  condensed  financial  statements of the Company have
been  prepared  by  the  Company,  without  audit,  pursuant  to the  rules  and
regulations of the Securities and Exchange  Commission.  Certain information and
disclosures  normally  included in financial  statements  prepared in accordance
with  accounting  principles  generally  accepted in the United States have been
condensed or omitted  pursuant to such rules and  regulations.  These  condensed
financial  statements  reflect  all  adjustments   (consisting  only  of  normal
recurring  adjustments)  that,  in the opinion of  management,  are necessary to
present  fairly  the  results  of  operations  of the  Company  for the  periods
presented.  These condensed  financial  statements should be read in conjunction
with the financial  statements  and the notes thereto  included in the Company's
Form 10-KSB for the year ended  December 31, 2005. The results of operations for
the six months  ended  June 30,  2006,  are not  necessarily  indicative  of the
results that may be expected for the fiscal year ending December 31, 2006.

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.  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 options to obtain additional capital and financing.

         In addition,  the Company has taken  significant  steps to reduce costs
and increase operating efficiencies. Specifically, the Company has significantly
reduced  the use of  consultants,  which has  resulted  in a large  decrease  in
expenses.  In  addition,  the Company has reduced the number of its direct sales
representatives,  which has resulted in less payroll, travel and other 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.

Net Loss Per Share
------------------

         Net loss per common share is computed on the weighted average number of
common and common equivalent shares outstanding during each period. Common stock
equivalents  consist of convertible  preferred  stock,  common stock options and
warrants.  Common equivalent shares are excluded from the computation when their
effect is anti-dilutive.  Other common stock  equivalents  consisting of options
and warrants to purchase  32,878,595 and  25,295,000  shares of common stock and
preferred stock convertible into 869,000 and 2,047,000 shares of common stock at
June 30, 2006 and 2005,  respectively,  have not been  included in loss  periods
because they are anti-dilutive.

         For the three months  ended June 30, 2006,  the options and warrants to
purchase 32,878,595 shares of common stock were excluded because of the treasury
stock method.

         The following  table is a  reconciliation  of the net loss numerator of
basic and diluted net loss per common share for the three and six month  periods
ended June 30, 2006 and June 30, 2005:

                                       4


                                Three Months Ended        Six Months Ended
                                    June 30,                    June 30,
                                 2006         2005         2006         2005
                              -----------   ----------  -----------   ----------

Basic weighted average
  shares outstanding          175,402,000   28,362,000  150,164,000   27,745,000
Common stock equivalents -
  convertible preferred stock     869,000    2,047,000           --           --
                              -----------   ----------  -----------   ----------
Diluted weighted average
  shares outstanding          176,271,000   30,049,000  150,164,000   27,745,000
                              ===========   ==========  ===========   ==========

Convertible Notes
-----------------

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

         o    $850,000 was disbursed on April 27, 2005;
         o    $800,000 was  disbursed on June 23, 2005 after the Company filed a
              registration  statement that registered the shares of common stock
              issuable upon conversion of the callable secured convertible notes
              and exercise of the warrants; an
         o    $850,000 was disbursed on June 30, 2005, the effective date of the
              registration statement.

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

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

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

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

                                       5


for prepayments occurring between 31 and 60 days following the issue date of the
notes;  or (c)  145% of the  outstanding  principal  and  accrued  interest  for
prepayments occurring after the 60th day following the issue date of the notes.

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

         The noteholders  have agreed to restrict their ability to convert their
callable secured convertible notes or exercise their warrants and receive shares
of our common  stock such that the number of shares of common stock held by them
in the aggregate and their affiliates after such conversion or exercise does not
exceed 4.99% of the then issued and outstanding shares of common stock. However,
the  noteholders  may repeatedly  sell shares of common stock in order to reduce
their ownership percentage, and subsequently convert additional callable secured
convertible  notes. As of June 30, 2006, a total of $842,830 in callable secured
convertible  notes have been converted into 166,666,667  shares of the Company's
common stock pursuant to conversion notices from the four accredited investors.

         February 28, 2006 Sale of  $1,500,000 in Callable  Secured  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
callable  secured  convertible  notes and (ii)  warrants to purchase  12,000,000
shares of its common stock. The sale of the callable secured  convertible  notes
and warrants is to occur in three  traunches  and the investors are obligated to
provide the Company with an aggregate of $1,500,000 as follows:

         o    $500,000 was disbursed on February 28, 2006;
         o    $500,000 was  disbursed on June 28, 2006 after the Company filed a
              registration  statement on June 15, 2006 to register the shares of
              common stock  issuable  upon  conversion  of the callable  secured
              convertible notes and exercise of the warrants.  The Company filed
              an  application  for withdrawal of the  registration  statement on
              July 26, 2006,  with the intention of filing another  registration
              to  register  shares  issuable  upon  conversion  of the notes and
              exercise of the warrants if the Company's  shareholders approve at
              the Annual  Shareholders  Meeting the  amendment to the  Company's
              Certificate of  Incorporation to increase the number of authorized
              shares of common stock to 800,000,000 shares; and
         o    $500,000  will  be  disbursed  upon  the   effectiveness   of  the
              registration statement.

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

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

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

         In  addition,  the Company  agreed not to conduct any equity  financing
(including debt financing with an equity  component) during the period beginning
February 28, 2006 and ending two years after the end of the above lock-up period
unless it first  provided each investor an option to purchase its pro-rata share

                                       6


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

         The $1,500,000 in callable secured convertible notes are secured by the
Company's assets,  including the Company's  inventory,  accounts  receivable and
intellectual  property.  Moreover, the Company has a call option under the terms
of the notes.  The call option provides the Company with the right to prepay all
of the outstanding  callable  secured  convertible  notes at any time,  provided
there is no event of default by the Company and the  Company's  stock is trading
at or below $.02 per  share.  An event of default  includes  the  failure by the
Company to pay the  principal  or interest on the callable  secured  convertible
notes when due or to timely  file a  registration  statement  as required by the
Company or obtain  effectiveness with the Securities and Exchange  Commission of
the registration statement. Prepayment of the callable secured convertible notes
is to be made in cash equal to either (a) 125% of the outstanding  principal and
accrued  interest for prepayments  occurring  within 30 days following the issue
date of the notes;  (b) 130% of the outstanding  principal and accrued  interest
for prepayments occurring between 31 and 60 days following the issue date of the
notes;  or (c)  145% of the  outstanding  principal  and  accrued  interest  for
prepayments occurring after the 60th day following the issue date of the notes.

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

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

         The  Company is required  to  register  the shares of its common  stock
issuable upon conversion of the callable secured  convertible notes and exercise
of the warrants that were issued to the  noteholders  pursuant to the securities
purchase   agreement  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 callable secured  convertible notes
plus accrued  interest are to be applied for each month the  registration is not
effective  within the required time. The penalty may be paid in cash or stock at
our option.

         The  Company's  obligation  to  issue  shares  upon  conversion  of the
callable secured convertible notes is essentially limitless. The following is an
example  of the  amount  of  shares  of  common  stock  that are  issuable  upon
conversion of $3,175,170  principal amount of callable secured convertible notes
(excluding accrued interest), based on market prices 25%, 50%, and 75% below the
market price, as of June 26, 2006 of $.007.


                                       7


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

      25%        $.00525        $.00315       1,002,276,190        516.8%
      50%        $.0035         $.0021        1,503,414,286        775.1%
      75%        $.00175        $.00105       3,006,828,571       1,550.3%

*Based on 199,956,828 shares outstanding.

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

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

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

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

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

         Under  the  Company's  Certificate  of  Incorporation,  holders  of the
Company's  Class A and Class B  preferred  stock have the right to convert  such
stock into  shares of the  Company's  common  stock at the rate of 1.2 shares of
common  stock for each share of preferred  stock.  During the three months ended
June 30, 2006,  no shares of Series A preferred  stock and no shares of Series B
preferred stock were converted to the Company's common stock.

         Holders of Series D preferred have the right to convert such stock into
shares of the  Company's  common  stock at the rate of one share of common stock
for each share of preferred stock.  During the three months ended June 30, 2006,
no shares of Series D preferred  stock were  converted to the  Company's  common
stock.

         Holders of Series E preferred have the right to convert such stock into
shares of the Company's  common stock at the rate of 53.3 shares of common stock
for each share of preferred stock.  During the three months ended June 30, 2006,
no shares of Series E preferred  stock were  converted to the  Company's  common
stock.

                                       8



         Holders of Series F preferred have the right to convert such stock into
shares of the Company's  common stock at the rate of 53.3 shares of common stock
for each share of preferred stock.  During the three months ended June 30, 2006,
no shares of Series F preferred  stock were converted to shares of the Company's
common stock.

         Holders of Series G preferred have the right to convert such stock into
shares of the  Company's  common  stock at the rate of one share of common stock
for each share of preferred stock.  During the three months ended June 30, 2006,
no shares of Series G preferred  stock were converted to shares of the Company's
common stock.

Warrants
--------

         The fair value of warrants  granted as described herein is estimated at
the date of grant using the  Black-Scholes  option pricing  model.  The exercise
price per share is reflective of the then current market value of the stock.  No
grant exercise price was  established at a discount to market.  All warrants are
fully vested,  exercisable and  nonforfeitable as of the grant date. As a result
of the financing the Company  completed on April 27, 2005  involving the sale of
$2,500,000 in callable secured  convertible  notes, the Company granted warrants
to the  noteholders  to  purchase  16,534,392  shares of its common  stock.  The
warrants have an exercise  price of $.20 per share and expire on April 27, 2010.
As a result  of the  financing  the  Company  completed  on  February  28,  2006
involving the sale of  $1,000,000 in callable  secured  convertible  notes,  the
Company granted warrants to the noteholders to purchase  8,000,000 shares of its
common stock.  The warrants have an exercise  price of $.10 per share and expire
on February 27, 2011.

Stock - Based Compensation
--------------------------

         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 June 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 June 30, 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:



                                         Three Months Ended June 30  Six Months Ended June 30,
                                             2006         2005           2006          2005
                                         -----------  ------------  ------------  ------------
                                                                      
  Net income (loss) - as reported        $ (718,000)  $ (3,276,000) $ (1,182,000) $ (3,601,000)
  Plus stock-based employee
     compensation expense included
     in reported net loss, net related
     tax effects
  Less stock-based employee
     compensation expense determined
     under fair value based method
     for all awards, net of related
     tax effects                            (78,000)      (573,000)      (78,000)     (657,000)
                                         -----------  ------------  ------------  ------------
     Pro forma net loss                  $ (796,000)  $ (3,849,000) $ (1,260,000) $ (4,258,000)
                                         ===========  ============  ============  ============

  Basic and diluted net loss per common
  share, as reported                         $(0.00)  $      (0.12) $      (0.01) $      (0.13)
  Basic and diluted net loss per share,
    pro forma                                $(0.01)  $      (0.14) $      (0.01) $      (0.15)




                                       9


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

         Payments for legal services to the firm of which the Company's Chairman
of the Board of  Directors  is  President,  a director  and a  shareholder  were
$83,000  and  $180,000  for the  three  months  ended  June 30,  2006 and  2005,
respectively.  In  addition,  on April  7,  2005,  the  Company  issued  250,000
registered  shares of common  stock to such law firm in payment  for  $22,500 in
legal services

Accrued Expenses
----------------

         Accrued expenses consist of the following at June 30, 2006:

     Accrued consulting and litigation reserve                     $    624,000
     Accrued payroll and employee benefits                               50,000
     Sales taxes payable                                                 10,000
     Customer deposits                                                   22,000
     Warranty and return allowance                                      118,000
     Other accrued expenses                                              23,000
                                                                   ------------
     Total                                                         $    847,000
                                                                   ============
Stockholders' Equity
--------------------

         On January 14,  2005,  the Company  issued  2,000,000  shares of common
stock to an accredited  investor through a private placement at a price of $0.75
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 two  accredited  investors  that had  purchased  shares  of the
Company's  Series  G  convertible   preferred  stock  in  a  private   placement
transaction.  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. The value of these shares was $52,000.

         On April 7, 2005,  the  Company  issued  250,000  registered  shares of
common  stock to the law firm of Mackey  Price  Thompson  & Ostler in payment of
legal  services  that the law firm  provided  to the  Company  in the  amount of
$22,500.

                                       10


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





                                               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,  2005,  and the related  statements  of
operations, stockholders' equity and cash flows for the years ended December 31,
2005  and  2004.  These  financial  statements  are  the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of Paradigm Medical  Industries,
Inc. as of December 31, 2005, and the results of their operations and their cash
flows  for the years  ended  December  31,  2005 and 2004,  in  conformity  with
accounting principles generally accepted in the United States of America.

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

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

                                                                             F-2


                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                                   Balance Sheet

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

              Assets
              ------

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

                  Total current assets                                1,331,000

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

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

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

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

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

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

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

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

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

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


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

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





                                                                         PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                  Statements of Operations

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

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

                                                                                      
Sales                                                                   $       2,201,000   $    3,062,000
Cost of sales                                                                   1,599,000        1,217,000
                                                                        ----------------------------------

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

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

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

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

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

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

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

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

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

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

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





                                                                                        PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                       Statements of Stockholders' Equity

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

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

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

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

registration rights

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

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

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

Issuance of common stock for:
-----------------------------
Cash                                       -      2,000,000         2,000        148,000            -                   -

Services                                   -        228,000             -         22,000            -                   -

Conversion of convertible
debentures                                 -     66,880,000        67,000        395,000            -                   -

Value attribute to discount                -              -             -      2,009,000            -                   -
on note payable

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

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

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

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


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

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






                                                                          PARADIGM MEDICAL INDUSTRIES, INC.
                                                                                   Statements of Cash Flows

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

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

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

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

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

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

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

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

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

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

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



                                               PARADIGM MEDICAL INDUSTRIES, INC.
                                                   Notes to Financial Statements

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

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

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

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

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

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

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


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


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


1.   Organization       Inventories
     and Significant    Inventories  are  stated at the lower of cost or market,
     Accounting         cost is determined using the weighted average method.
     Policies
     Continued          Property and Equipment
                        Property  and  equipment  are  recorded  at  cost,  less
                        accumulated  depreciation.  Depreciation on property and
                        equipment is determined using the  straight-line  method
                        over the  estimated  useful lives of the assets or terms
                        of the lease.  Expenditures  for maintenance and repairs
                        are  expensed   when   incurred  and   betterments   are
                        capitalized.  Gains and losses on sale of  property  and
                        equipment are reflected in operations.  During the years
                        2005  and  2004  depreciation  expense  was  77,000  and
                        132,000 respectively.

                        Intangible Assets
                        As of December 31, 2005,  intangible assets consisted of
                        goodwill  related to the  purchase of Ocular Blood Flow,
                        Ltd.,   product   rights,    capitalized   payments   to
                        manufacturers  for  engineering  and design services and
                        patent costs. In accordance with SFAS 142, "Goodwill and
                        Other  Intangible  Assets,"  the  Company  performed  an
                        impairment test on all intangible assets at December 31,
                        2005. As a result an  impairment  change of $340,000 was
                        recognized  on the Company's  statements of  operations.
                        The  impairment  was based on a significant  decrease in
                        sales of the Blood Flow Analyzer during 2005.

                        Intangible  assets  determined to have indefinite useful
                        lives  are  not   amortized.   The  Company  tests  such
                        intangible  assets  with  indefinite  useful  lives  for
                        impairment  annually  or more  frequently  if  events or
                        circumstances  indicate that an asset might be impaired.
                        Intangible  assets determined to have definite lives are
                        amortized  on a  straight-line  basis over their  useful
                        lives.  Product  rights,  capitalized  engineering,  and
                        patents  were fully  amortized  as of December 31, 2005.
                        The Company reviews such intangible assets with definite
                        lives for  impairment  to ensure they are  appropriately
                        valued  if  conditions   exist  that  may  indicate  the
                        carrying value may not be  recoverable.  Such conditions
                        may include an economic  downturn in a geographic market
                        or a change in the assessment of future operations.

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


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


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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

                                                    2005             2004


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

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


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


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

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

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


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


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

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

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

                        The nature of the Company's  business exposes it to risk
                        from product  liability  claims.  The Company  maintains
                        product liability  insurance providing coverage up to $2
                        million per claim with an  aggregate  policy limit of $2
                        million. Any losses that the Company may suffer from any
                        product  liability  litigation  could  have  a  material
                        adverse effect on the Company.  As of December 31, 2005,
                        the company maintained the policy in placed.

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

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


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

1.   Organization       Concentration of Risk - Continued
     and Significant    During the years ended  December  31, 2005 and 2004,  no
     Accounting         single  customer  represented  more than 10  percent  of
     Policies           total  net  sales.  Accounts  receivable  are  due  from
     Continued          medical   distributors,   surgery  centers,   hospitals,
                        optometrists and ophthalmologists located throughout the
                        U.S. and a number of foreign countries.  The receivables
                        are  generally  due  within  thirty  days  for  domestic
                        customers   with   extended   terms   offered  for  some
                        international   customers.   The  Company  maintains  an
                        allowance   for  estimated   potentially   uncollectible
                        amounts.

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

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

                        Reclassifications
                        No amounts in the 2005  financial  statements  have been
                        reclassified  to  conform  to  the  presentation  of the
                        current year financial statements.

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

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


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

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

                        In  addition,  during  the first  quarter  of 2005,  the
                        Company  issued  515,206  shares of common  stock to two
                        shareholders  that had purchased shares of the Company's
                        Series  G  convertible  preferred  stock  in  a  private
                        offering.  Under the terms of the private offering,  the
                        Company was  required to file a  registration  statement
                        with the  Securities  and  Exchange  Commission  for the
                        purpose of registering the common shares issuable to the
                        Series G preferred stockholders upon conversion of their
                        Series  G  preferred   shares  and   exercise  of  their
                        warrants.  The shares  were  issued as a penalty for the
                        Company  not having a  registration  statement  declared
                        effective  within 120 days of the initial closing of the
                        private  offering.  These shares were value at $0.10 per
                        share.

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

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

                        In addition,  the Company has taken significant steps to
                        reduce  costs  and  increase   operating   efficiencies,
                        including the  consolidation  of several  manufacturing,
                        accounting   and   management   responsibilities.   Such
                        consolidation    resulted   in   significant   headcount
                        reductions as well as savings in other  overhead  costs.
                        The  Company has also  significantly  reduced the use of
                        consultants,  which has resulted in a large  decrease in
                        expenses,  and reduced the direct  sales force from five
                        to three  representatives,  which has  resulted  in less
                        payroll,  travel and other  selling  expenses.  Although
                        these  cost  savings  have  significantly   reduced  the
                        Company's  losses  and ongoing  cash flow  needs, if the

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


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

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


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

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

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

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


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


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

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

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

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

                        During the year ended December 31, 2005, the Company has
                        no  carrying  value of its  unissued  patent  costs  and
                        product and technology rights for  recoverability.  This
                        analysis,  based  on the  estimated  future  cash  flows
                        associated  with such assets,  resulted in an impairment
                        expense of zero value related to patents and product and
                        technology rights.

                        The  Company   performed  an  impairment   test  on  all
                        intangible  assets at December 31, 2005.  As a result an
                        impairment  change  of  $340,000  was  recognize  in the
                        Company's  statements of operations.  The impairment was
                        based on a  significant  decrease  in sales of the Blood
                        Flow Analyzer during 2005.

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

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

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

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


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


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

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

                        Computer and other equipment         $        291,000

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

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


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


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

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

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


         2006                                               $        14,000

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

                                                                     14,000

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

Present value of future minimum lease payments                       13,000

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

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

                        The Company  leases office and warehouse  space under an
                        operating   lease   agreement.   Future  minimum  rental
                        payments under the noncancellable  operating lease as of
                        December 31, 2005 are approximately as follows:

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

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

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

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

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


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


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

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

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

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

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

                                                                 16,963,000

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

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

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



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


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


7.   Income             At December 31, 2005, the Company had net operating loss
     Taxes              carryforwards   of   approximately   $38.6  million  and
     Continued          research and  development  tax credit  carryforwards  of
                        approximately $56,000. These carryforwards are available
                        to  offset  future  taxable  income  and  expire in 2006
                        through 2021. The  utilization of the net operating loss
                        carryforwards  is dependent  upon the tax laws in effect
                        at the time the net operating loss  carryforwards can be
                        utilized.  The  Tax  Reform  Act of  1986  significantly
                        limits  the  annual  amount  that  can be  utilized  for
                        certain of these carryforwards as a result of the change
                        in ownership.

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

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

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

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

                          2.  Upon the  liquidation of the Company,  the holders
                              of the Series A  Preferred  Stock are  entitled to
                              receive,  prior to any  distribution of any assets
                              or  surplus  funds to the  holders  of  shares  of
                              common stock or any other  stock,  an amount equal
                              to $1.00 per share,  plus any  accrued  and unpaid
                              dividends related to the fiscal year in which such
                              liquidation occurs.  Total liquidation  preference
                              at December 31, 2005 was $6,000.

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

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


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

8.   Capital            Series A Preferred Stock - Continued
     Stock
     Continued            4.  The holders of the shares have no voting rights.

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

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

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

                        Upon the liquidation of the Company,  the holders of the
                        Series B Preferred Stock are entitled to receive,  prior
                        to any  distribution  of any assets or surplus  funds to
                        the  holders  of  shares  of  common  stock or any other
                        stock,  an  amount  equal to $4.00 per  share,  plus any
                        accrued and unpaid dividends  related to the fiscal year
                        in which such liquidation occurs.  Such right,  however,
                        is  subordinate to the rights of the holders of Series A
                        Preferred  Stock to receive a distribution  of $1.00 per
                        share  plus   accrued   and  unpaid   dividends.   Total
                        liquidation preference at December 31, 2005 was $36,000.

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

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

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


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


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


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

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

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

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

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

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

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


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

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


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


8.   Capital  Stock           of (a) the amount  they would  have  received  had
     Continued                they   converted  the  shares  into  Common  Stock
                              immediately  prior  to such  liquidation  plus all
                              declared but unpaid  dividends;  or (b) the stated
                              value,  subject to adjustment.  Total  liquidation
                              preference at December 31, 2005 was $9,000.

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

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

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

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

                          2.  Upon the  liquidation of the Company,  the holders
                              of the Series E  Preferred  Stock are  entitled to
                              receive an amount per share  equal to the  greater
                              of (a) the amount  they would  have  received  had
                              they   converted  the  shares  into  Common  Stock
                              immediately  prior  to such  liquidation  plus all
                              declared but unpaid  dividends;  or (b) the stated
                              value,  subject to adjustment.  Total  liquidation
                              preference at December 31, 2005 was $53,000.


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


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

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

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

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

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

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


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


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

8.   Capital  Stock       2.  Upon the  liquidation of the Company,  the holders
     Continued                of the Series F  Preferred  Stock are  entitled to
                              receive an amount per share  equal to the  greater
                              of (a) the amount  they would  have  received  had
                              they   converted  the  shares  into  Common  Stock
                              immediately  prior  to such  liquidation  plus all
                              declared but unpaid  dividends;  or (b) the stated
                              value,  subject to adjustment.  Total  liquidation
                              preference at December 31, 2005 was $245,000.

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

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

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

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

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


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


8.   Capital  Stock       2.  Upon the  liquidation of the Company,  the holders
     Continued                of the Series G  Preferred  Stock are  entitled to
                              receive an amount per share  equal to the  greater
                              of (a) the amount  they would  have  received  had
                              they   converted  the  shares  into  Common  Stock
                              immediately  prior  to such  liquidation  plus all
                              declared but unpaid  dividends;  or (b) the stated
                              value of $.25 per share plus  declared  but unpaid
                              dividends.   Total   liquidation   preference   at
                              December 31, 2005 was $147,000.

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

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


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


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


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




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

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

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

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

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

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

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

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

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



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

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

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

                        o $800,000 was disbursed on June 23, 2005 after filing a
                        registration   statement   on  June  22,   2005,   which
                        registered  the shares of common  stock  underlying  the
                        callable secured convertible notes and the warrants; and

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

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

                        o The Company  delivered to the investors  duly executed
                        callable secured convertible notes and warrants;

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

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

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

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


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

9.   Convertible        270 days from April 27,  2005,  or (b) 180 days from the
     Notes              date the registration statement is declared effective.
     Continued
                        In  addition,  the  Company  agreed not to  conduct  any
                        equity  financing  (including  debt  financing  with  an
                        equity  component) during the period beginning April 27,
                        2005 and  ending  two  years  after the end of the above
                        lock-up period unless it first provided each investor an
                        option to  purchase  its  pro-rata  share  (based on the
                        ratio of each  investor's  purchase under the Securities
                        Purchase  Agreement) of the securities  being offered in
                        any proposed  equity  financing.  Each  investor must be
                        provided  written notice  describing any proposed equity
                        financing at least 20 business days prior to the closing
                        of such proposed equity financing and the option must be
                        extended  to each  investor  during  the  15-day  period
                        following delivery of such notice.

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

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

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


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

9.   Convertible        within 30 days  following  the issue  date of the notes;
     Notes              (b)  130%  of  the  outstanding  principal  and  accrued
     Continued          interest  for  prepayments  occurring  between 31 and 60
                        days following the issue date of the notes;  or (c) 145%
                        of the  outstanding  principal and accrued  interest for
                        prepayments  occurring after the 60 day of the following
                        the issue date of the notes.

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

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

                        The Company is  required  to register  the shares of its
                        common  stock   issuable  upon  the  conversion  of  the
                        callable secured  convertible  notes and the exercise of
                        the warrants.  The registration  statement must be filed
                        with the  Securities and Exchange  Commission  within 60
                        days  of  the  April  27,  2005  closing  date  and  the
                        effectiveness  of the  registration  is to be within 135
                        days  of  such  closing  date.  Penalties  of 2% of  the
                        outstanding  principal  balance of the callable  secured
                        convertible  notes  plus  accrued  interest  are  to  be
                        applied for each month the registration is not effective
                        within the  required  time.  The  penalty may be paid in
                        cash  or  stock  at our  option.  The  Company  filed  a
                        registration  statement with the Securities and Exchange
                        Commission  on June 22, 2005 to  register  the shares of
                        common  stock   issuable  upon  the  conversion  of  the
                        callable secured  convertible  notes and the exercise of
                        the warrants.  The  registration  statement was declared
                        effective on June 29, 2005.

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


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

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

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

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

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

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

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


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


10.  Stock Option       The Company  granted the following  options and warrants
     Plan and           to  non-employees  during  the year ended  December  31,
     Warrants           2005:
     Continued
                          o   Options to  employees,  officers  and the board of
                              directors to purchase  1,250,000  shares of common
                              stock at an exercise  price  ranging from $0.09 to
                              $0.10.

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

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

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


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

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

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

     Expired                       (187,500)         (161,019)      2.38 - 4.00
     Forfeited                   (1,369,750)         (200,000)      0.16 - 5.00
                              --------------------------------------------------
Outstanding at
  December 31, 2004               3,846,206         2,446,964      0.10 - 12.98
     Granted                      1,250,000        16,734,392       0.09 - 0.20

     Exercised                            -                 -                -

     Expired                       (274,603)          (10,048)      0.50 - 7.50
     Forfeited                     (889,103)          410,882      0.22 - 12.98
                              --------------------------------------------------
Outstanding at
  December 31, 2005               3,932,500        19,582,190 $    0.10 - 12.98
                              --------------------------------------------------

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

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

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

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


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


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

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

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

12.  Gain on            Due to the  Company's  ongoing  cash flow  difficulties,
     Settlement of      during  2005 and 2004 most  vendors and  suppliers  were
     Liabilities        contacted  with attempts to negotiate  reduced  payments
                        and  settlements  of  outstanding  accounts  payable and
                        accrued   expenses.   While  some  vendors   refused  to
                        negotiate  and  demanded  payment in full,  some vendors
                        were  willing  to  settle  for  a  reduced  amount.  The
                        accounts  payable  forgiven by vendors and suppliers and
                        accrued  expenses  settled resulted in a gain of $12,000
                        and $206,000 in 2005 and 2004, respectively.

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

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

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


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


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

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

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

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

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

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

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

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


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


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

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

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

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

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


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


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

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

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

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


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


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

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

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

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

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


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


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

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

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

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

                        Completion  of  Settlement  of Federal  and State  Class
                        Action Lawsuits

                        On August 26, 2005,  the federal  court entered an order
                        and  final  judgment  granting  final  approval  of  the
                        settlement agreement reached on February 22, 2005 in the
                        federal court class action  lawsuit and  dismissing  the
                        complaint filed in the lawsuit with prejudice as against
                        the Company and its former executive officers, Thomas F.
                        Motter,  Mark R. Miehle and John W. Hemmer. In addition,

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


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

17.  Commitments and    the court  permanently  enjoined  class  members  in the
     Contingencies      lawsuit   and  their   successors   and   assigns   from
     Continued          instituting  any other  actions  against the Company and
                        its  former  executive  officers  that had been or could
                        have been  asserted  by the class  members  against  the
                        Company and its former executive officers in the federal
                        court class action lawsuit.

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

                        On August  23,  2005,  the state  court  entered a final
                        judgment and order of dismissal with prejudice, granting
                        final  approval  of the terms of  settlement  reached on
                        February  23,  2005  in the  state  court  class  action
                        lawsuit,  dismissing  the state class action lawsuit and
                        all claims contained therein against the Company and its
                        former  executive  officers,  and  enjoining  the  class
                        members in the  lawsuit  from  prosecuting  the  settled
                        claims  against  the  Company  and its former  executive
                        officers.  Following the entry of the final judgment and
                        order of  dismissal  with  prejudice  in the state court
                        class  action  lawsuit,  there  was a 30 day  period  to
                        appeal the final  judgment and order.  The 30 day period
                        has now  lapsed  and no  appeal  was  made of the  final
                        judgment and order. Consequently, the final judgment and
                        order entered by the state court is nonappealable. Under
                        the terms of  settlement of the state court class action
                        lawsuit,  U.S. Fire agreed to pay the sum of $625,000 in
                        cash to the  class  members  that  purchased  shares  of
                        Series E  Convertible  preferred  stock on or about July
                        11, 2001.

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


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

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

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

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

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

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

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


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


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

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

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

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


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


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

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

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

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


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


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


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

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

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

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

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

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


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

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

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

                          o   The  Company   delivered  to  the  investors  duly
                              executed  callable secured  convertible  notes and
                              warrants;

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

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

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

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

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


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

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

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

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


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


19.  Subsequent         prepayments  occurring  after the 60th day following the
     Events             issue date of the notes.  The warrants  are  exercisable
     Continued          until five years from the date of issuance at a purchase
                        price of $.10 per share.  The investors may exercise the
                        warrants  on a  cashless  basis if the  shares of common
                        stock  underlying  the warrants are not then  registered
                        pursuant to an effective registration  statement. In the
                        event the investors  exercise the warrants on a cashless
                        basis,  then the Company  will not receive any  proceeds
                        therefrom.  In  addition,  the  exercise  price  of  the
                        warrants  will be  adjusted  in the  event  the  Company
                        issues  common stock at a price below  market,  with the
                        exception of any securities issued as of the date of the
                        warrants  or  issued  in  connection  with the  callable
                        secured   convertible   notes  issued  pursuant  to  the
                        Securities Purchase Agreement.

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

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

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

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


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

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

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

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

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

                            *Based on 160,959,428 shares outstanding.

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

                        The callable secured  convertible  notes are convertible
                        into  shares  of the  Company's  common  stock  at a 40%
                        discount to the trading  price of the common stock prior
                        to the conversion.  The significant downward pressure on
                        the price of the common stock as the noteholders convert
                        and  sell   material   amounts  of  common  stock  could
                        encourage  short  sales by  investors.  This could place
                        further  downward  pressure  on the price of the  common
                        stock. The noteholders  could sell common stock into the

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


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

19.  Subsequent         market in  anticipation  of  covering  the short sale by
     Events             converting  their  securities,  which  could  cause  the
     Continued          further  downward   pressure  on  the  stock  price.  In
                        addition,  not  only  the  sale of  shares  issued  upon
                        conversion  or exercise of notes,  warrants and options,
                        but also the mere  perception  that  these  sales  could
                        occur, may have a depressive  effect on the market price
                        of the common stock.

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

                        On April 27, 2005, the Company entered into a securities
                        purchase  agreement  for  the  sale of an  aggregate  of
                        $2,500,000   principal   amount  of   callable   secured
                        convertible  notes.  On February 28,  2006,  the Company
                        entered into another  securities  purchase agreement for
                        the sale of an aggregate of $1,500,000  principal amount
                        of callable secured  convertible  notes.  These callable
                        secured convertible notes are all due and payable,  with
                        8%  interest,  three  years  from the date of  issuance,
                        unless sooner converted into shares of our common stock.
                        Although  the  Company   currently  has   $2,411,439  in
                        callable  secured  convertible  notes  outstanding,  the
                        noteholders   are   obligated  to  purchase   additional
                        callable  secured  convertible  notes  in the  aggregate
                        amount of  $1,000,000.  Any event of default such as the
                        Company's  failure to repay the  principal  or  interest
                        when due on the notes,  the  Company's  failure to issue
                        shares  of  common   stock   upon   conversion   by  the
                        noteholders,  the  Company's  breach  of  any  covenant,
                        representation  or warranty in the  securities  purchase

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


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

19.  Subsequent         agreement or related  convertible  notes, the assignment
     Events             or  appointment  of a receiver to control a  substantial
     Continued          part of our property or business,  the filing of a money
                        judgment, writ or similar process against the Company in
                        excess of $50,000,  the  commencement  of a  bankruptcy,
                        insolvency,  reorganization  or  liquidation  proceeding
                        against the Company,  and the delisting of the Company's
                        common  stock could  require the early  repayment of the
                        callable secured convertible notes,  including a default
                        interest  rate  of  15%  on  the  outstanding  principal
                        balance of the notes if the default is not cured  within
                        the specified grace period.

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

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

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


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


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

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

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


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







No  dealer,   salesperson  or  other
person  is  authorized  to give  any
information or to represent anything
not  contained  in this  prospectus.
This  prospectus is an offer to sell         60,000,000 Shares of Common Stock
only the shares offered hereby,  but
only  under   circumstances  and  in
jurisdictions  where it is lawful to
do so. The information  contained in
this  prospectus  is current only as
of its date.
                                             PARADIGM MEDICAL INDUSTRIES, INC.
     _____________________
                                                     _________________
        TABLE OF CONTENTS
                                Page                    PROSPECTUS
Prospectus Summary..................                 _________________
Risk Factors  ......................
Use of Proceeds.....................
Dividend Policy.....................
Capitalization......................
Market for Common Equity and
   Related Shareholder Matters......
Selected Financial Data.............
Management's Discussion and                          October __, 2006
   Analysisor 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
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.

                                      II-1


         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.............................           10,000
      Accounting fees and expenses........................            2,500
                                                                 ----------
      Total expenses......................................       $   12,539


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.

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.

                                      II-2


         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
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.


                                      II-3



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)
      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)


                                      II-4



      10.30   Worldwide OEM Agreement with MEDA Co., Ltd.(20)
      10.31   Amendment to the  Registration  Rights  Agreement  dated April 27,
              2005
      10.32   Amendment to the Registration  Rights Agreement dated February 28,
              2006
      23.1    Consent of Mackey Price Thompson & Ostler
      23.2    Consent of Chisholm, Bierwolf & Nilson, LLC
      31.1    Certification  pursuant to 18 U.S.C.  Section  1350, as enacted by
              Section 302 of the Sarbanes-Oxley Act of 2002
      31.2    Certification  pursuant to 18 U.S.C.  Section  1350, as enacted by
              Section 302 of the Sarbanes-Oxley Act of 2002
      32.1    Certification  pursuant  to 18 U.S.C.  Section  1350,  as  adopted
              pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
      32.2    Certification  pursuant  to 18 U.S.C.  Section  1350,  as  adopted
              pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
      -----------------
      (1)     Incorporated  by  reference  from  Registration  Statement on Form
              SB-2, as filed on March 19, 1996.
      (2)     Incorporated  by reference  from  Amendment No. 1 to  Registration
              Statement on Form SB-2, as filed on May 14, 1996.
      (3)     Incorporated  by reference  from  Amendment No. 2 to  Registration
              Statement on Form SB-2, as filed on June 3, 1996.
      (4)     Incorporated  by reference  from Annual Report on Form 10-KSB,  as
              filed on April 16, 1998.
      (5)     Incorporated  by  reference  from  Registration  Statement on Form
              SB-2, as filed on April 29, 1999.
      (6)     Incorporated by reference from Report on Form 10-QSB,  as filed on
              August 16, 2000.
      (7)     Incorporated by reference from Report on Form 10-QSB,  as filed on
              November 14, 2003.
      (8)     Incorporated  by reference  from  Amendment No. 2 to  Registration
              Statement on Form SB-2, as filed on December 15, 2003.
      (9)     Incorporated  by  reference  from  Current  Report on Form 8-K, as
              filed on March 23, 2004.
      (10)    Incorporated by reference from Quarterly Report on Form 10-QSB, as
              filed on August 16, 2004.
      (11)    Incorporated  by reference  from  Amendment No. 6 to  Registration
              Statement on Form SB-2, as filed on October 20, 2004.
      (12)    Incorporated by reference from Report on Form 10-QSB,  as filed on
              November 15, 2004.
      (13)    Incorporated  by  reference  from  Current  Report on Form 8-K, as
              filed on January 27, 2005.
      (14)    Incorporated  by  reference  from  Current  Report on Form 8-K, as
              filed on February 23, 2005.
      (15)    Incorporated  by  reference  from  Current  Report on Form 8-K, as
              filed on May 18, 2005.
      (16)    Incorporated  by  reference  from  Registration  Statement on Form
              SB-2, as filed on June 22, 2005.
      (17)    Incorporated  by  reference  from  Current  Report on Form 8-K, as
              filed on January 18, 2006.
      (18)    Incorporated  by  reference  from  Current  Report on Form 8-K, as
              filed on March 1, 2006.
      (19)    Incorporated  by  reference  from  Registration  Statement on Form
              SB-2, as filed on June 15, 2006.
      (20)    Incorporated  by  reference  from  Current  Report on Form 8-K, as
              filed on June 19, 2006.
      (21)    Incorporated  by  reference  from  Registration  Statement on Form
              SB-2, as filed on September 15, 2006.


         (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

                                      II-5



         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 20th day of October, 2006.


                                         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 Executive     October 20, 2006
--------------------------    Officer (Principal Executive
Raymond P.L. Cannefax         Officer)




 /s/ Randall A. Mackey        Chairman of the Board             October 20, 2006
--------------------------
Randall A. Mackey



 /s/ David M. Silver          Director                          October 20, 2006
--------------------------
David M. Silver



 /s/ Keith D. Ignotz   *      Director                          October 20, 2006
--------------------------
Keith D. Ignotz



 /s/ John C. Pingree          Director                          October 20, 2006
--------------------------
John C. Pingree



 /s/ Luis A. Mostacero        Vice President of Finance,        October 20, 2006
--------------------------    Treasurer and Secretary
Luis A. Mostacero             (Principal Financial and
                              Accounting Officer)

* By: /s/ Raymond P.L. Cannefax
     --------------------------
         Raymond P.L. Cannefax
         Attorney-in-Fact




                                      II-8