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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                     For the fiscal year ended June 30, 2006

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

           For the transition period from ____________ to ____________

                         Commission File Number 0-20127

                              ESCALON MEDICAL CORP.
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

<TABLE>
<S>                                                          <C>
          PENNSYLVANIA                                            33-0272839
(STATE OR OTHER JURISDICTION OF                                (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                              IDENTIFICATION NO.)
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              565 EAST SWEDESFORD ROAD, SUITE 200, WAYNE, PA 19087
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE'S INCLUDING ZIP CODE)

                                  610 688-6830
                           (ISSUER'S TELEPHONE NUMBER)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                    COMMON STOCK, $0.001 PAR VALUE PER SHARE

Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act [ ]

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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no discloser will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

Indicate by check mark whether registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X]

The revenues for the fiscal year ended June 30, 2006, the most recent fiscal
year, were $29,791,000.

The aggregate market value of the common voting stock held by non-affiliates of
the Registrant was approximately $27,710,483 as of September 20, 2006, based
upon the closing sale price of the Common Stock as quoted on the NASDAQ Capital
Market.

The number of shares of the Registrant's Common Stock outstanding as of
September 20, 2006 is 6,344,657.

                       DOCUMENTS INCORPORATED BY REFERENCE


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<PAGE>

Certain information required by Part III of this Annual Report on Form 10-KSB
will be set forth in, and is incorporated by reference from the Registrant's
Proxy Statement for the 2006 Annual Meeting of Stockholders.

Transitional Small Business Disclosure Format (Check one). Yes [ ] No [X]

                              ESCALON MEDICAL CORP.
                          ANNUAL REPORT ON FORM 10-KSB
                     FOR THE FISCAL YEAR ENDED JUNE 30, 2006

                                TABLE OF CONTENTS

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                                     PART I

Item 1.  Description of Business                                              3
Item 2.  Description of Properties                                           15
Item 3.  Legal Proceedings                                                   15
Item 4.  Submission of Matters to a Vote of Security Holders                 18

                                     PART II

Item 5.  Market for Common Equity, Related Stockholder Matters and
         Small Business Issuer Purchases of Equity Securities                18
Item 6.  Management's Discussion and Analysis or Plan of Operations          18
Item 7.  Financial Statements                                                31
Item 8.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure                                                31
Item 8A. Controls and Procedures                                             31
Item 8B. Other Information                                                   32

                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act                   32
Item 10. Executive Compensation                                              32
Item 11. Security Ownership of Certain Beneficial Owners and Management
         and Related Stockholder Matters                                     32
Item 12. Certain Relationships and Related Transactions                      32

                                     PART IV

Item 13. Exhibits and Financial Statement Schedules                          32
Item 14. Principal Accounting Fees and Services                              34
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                                       2
<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

COMPANY OVERVIEW

     Escalon Medical Corp. ("Escalon") is a Pennsylvania corporation initially
incorporated in California in 1987, and reincorporated in Pennsylvania in
November 2001. Within this document, the "Company" collectively shall mean
Escalon and its wholly owned subsidiaries: Sonomed, Inc. ("Sonomed"), Escalon
Vascular Access, Inc. ("Vascular"), Escalon Medical Europe GmbH ("EME"), Escalon
Digital Vision, Inc. ("EMI"), Escalon Pharmaceutical, Inc. ("Pharmaceutical"),
Escalon Holdings, Inc. ("EHI") and Drew Scientific Group, Plc ("Drew") and its
subsidiaries. The Company operates in the healthcare market specializing in the
development, manufacture, marketing and distribution of medical devices and
pharmaceuticals in the areas of ophthalmology, diabetes, hematology and vascular
access. The Company and its products are subject to regulation and inspection by
the United States Food and Drug Administration (the "FDA") and other regulatory
authorities in other jurisdictions. The FDA and other governmental authorities
require extensive testing of new products prior to sale and has jurisdiction
over the safety, efficacy and manufacture of products, as well as product
labeling and marketing. The Company's Internet address is www.escalonmed.com.

     On July 23, 2004, the Company acquired 67% of the outstanding ordinary
shares of Drew, a United Kingdom company, pursuant to the Company's exchange
offer for all of the outstanding ordinary shares of Drew, and since that date
has acquired all of the Drew shares.

DREW BUSINESS

     Drew is a diagnostics company specializing in the design, manufacture and
distribution of instruments for blood cell counting and blood analysis. Drew is
focused on providing instrumentation and consumables for the physician office
and veterinary office laboratories. Drew also supplies the reagent and other
consumable materials needed to operate the instruments.

     DIABETES TESTING

     Drew sells two diabetic testing products: the DS5 and the Hb-Gold. The DS5
instrument, dispenser and associated reagent kit measure long-term glucose
control in diabetic patients. The system's small size and ease of use make it
ideal for main laboratory, clinic or satellite laboratory settings. The Hb-Gold
instrument and associated reagent kit provides for the in vitro measurement of
certain genetic diseases of the blood. In the United States, this instrument is
available for research only.

     HEMATOLOGY

     Drew offers a broad array of equipment for use in the field of human and
veterinary hematology. Drew's Excell and HC product lines are for use in the
field of human hematology, whereas the Hemavet product line is for use in the
veterinary field.

SONOMED BUSINESS

     Sonomed develops, manufactures and markets ultrasound systems for
diagnostic or biometric applications in ophthalmology. The systems are of four
types: A-Scans, B-Scans, High Frequency B-Scans ("UBMs") and pachymeters.

     A-SCANS


                                        3

<PAGE>

     The A-Scan provides information about the internal structure of the eye by
sending a beam of ultrasound along a fixed axis through the eye and displaying
the various echoes reflected from the surfaces intersected by the beam. The
principal echoes occur at the cornea, both surfaces of the lens and the retina.
The system displays the position and magnitudes of the echoes on an electronic
display. The A-Scan also includes software for measuring distances within the
eye. This information is primarily used to calculate lens power for implants.

     B-SCANS

     The B-Scan is primarily a diagnostic tool which supplies information to
physicians where the media within the eye are cloudy or opaque. Whereas
physicians normally use light, which cannot pass through such media, the
ultrasound beam is capable of passing through the opacity and displaying an
image of the internal structures of the eye. Unlike the A-Scan, the B-Scan
transducer is not in a fixed position; it swings through a 60 degree sector to
provide a two-dimensional image of the eye.

     PACHYMETERS

     The pachymeter uses the same principles as the A-Scan, but the system is
tailored to measure the thickness of the cornea. With the advent of refractive
surgery (where the cornea is actually cut and reshaped) this measurement has
become critical. Surgeons must know the precise thickness of the cornea so as to
set the blade to make a cut of approximately 20% of the thickness of the cornea.

     UBM

     A high frequency / high resolution ultrasound device, designed to provide
highly detailed information of the anterior segment of the eye. The UBM is used
for glaucoma evaluation, tumor evaluation and differentiation, pre-and
post-intraocular lense implantation and corneal refractive surgery. The device
allows the surgeons to do precise measurements.

VASCULAR BUSINESS

     Vascular develops, manufactures and markets vascular access products. These
products are Doppler-guided vascular access assemblies used to locate desired
vessels for access. Primary specialty groups that use the device are cardiac
catheterization labs and interventional radiologists. The Company's vascular
products include the PD Access(TM) and SmartNeedle(TM) lines of monitors,
Doppler-guided bare needles and Doppler-guided infusion needles.

     PD ACCESS(TM) AND SMARTNEEDLE(TM) MONITORS, NEEDLES AND CATHETER PRODUCTS

     These patented devices detect blood flow using Doppler ultrasound
technology and differentiate between a venous and arterial vessel. The devices
utilize a miniature Doppler ultrasound probe that is positioned within the lumen
of a vascular access needle. When a Doppler-guided needle pierces the skin of a
patient, the probe and monitor can determine if the user is approaching an
artery or vein, guiding them to a successful access.

MEDICAL/TREK/EMI BUSINESS

     Medical/Trek/EMI develops, manufactures and distributes ophthalmic surgical
products under the Escalon Medical Corp. and/or Trek Medical Products names.
Vitreoretinal ophthalmic surgeons primarily utilize the products. EMI markets a
CFA (Color/Fluorescein Angiography) digital imaging system, designed
specifically for ophthalmology. This diagnostic tool, ideal for use in detecting
retinal problems in diabetic and elderly patients, provides a high-resolution
image, far superior to conventional film in image quality, processing and
capture. The instant image display provides users with the necessary clinical
information that allows treatment to be performed while the patient is still in
the office. On January 30, 2006 EMI acquired substantially all of the assets of
MRP Group, Inc. ("MRP") in exchange for 250,000 shares of the Company's common
stock and approximately $47,000 in cash. The MRP business consists of ophthalmic
technology solutions offering two retinal imaging systems. Approximately 200 of
these systems have been installed at leading medical and retinal care centers.
The operating results of MRP are included as part of the Medical/Trek/EMI
business unit as of January 30, 2006.


                                        4

<PAGE>

     ADATOSIL(R) 5000 SILICONE OIL ("SILICONE OIL")

     Silicone Oil is a specialty product used in worst-case detached retina
surgery as a mechanical aid in the reattachment procedure. The Company
distributed Silicone Oil until August 13, 1999, at which time the license and
distribution rights for the product were sold to Bausch & Lomb Surgical, Inc.
for $2.1 million and additional cash consideration based on future sales through
August 12, 2005. (See note 11 of the notes to consolidated financial statements
for additional details.) Since August 12, 2005 the Company is no longer
receiving any revenue from this product.

     ISPAN INTRAOCULAR GASES

     The Company distributes two intraocular gas products C3F8 and SF6, which
are used by vitreoretinal surgeons as a temporary tamponade in detached retina
surgery. Under a non-exclusive distribution agreement with Scott Medical
Products ("Scott"), Escalon distributes packages of Scott gases in canisters
containing up to 25 grams of gas. Along with the intraocular gases, the Company
manufactures and distributes a patented disposable universal gas kit, which
delivers the gas from the canister to the patient.

     VISCOUS FLUID TRANSFER SYSTEMS

     The Company markets viscous fluid transfer systems and related disposable
syringe products, which aid surgeons in the process of injecting and extracting
Silicone Oil. Adjustable pressures and vacuums provided by the equipment allow
surgeons to manipulate the flow of Silicone Oil during surgery.

     FIBER OPTIC LIGHT SOURCES

     Light source and fiber optic products are widely used by vitreoretinal
surgeons during surgery. The Company offers surgeons a complete line of light
sources along with a variety of fiber optic probes and illuminated tissue
manipulators.

     CFA CAMERA BACK AND MRP RETINAL IMAGING SYSTEMS

     The images furnished by the CFA and MRP imaging systems provide a very high
level of detail. The systems are being marketed to medical institutions,
educational institutions and ophthalmologists for use in connection with the
diagnosis of retinal disorders.

RESEARCH AND DEVELOPMENT

     The Company conducts development of medical devices for the diagnosis and
monitoring of medical disorders in the areas of diabetes, cardiovascular
diseases and hematology at the Company's Dallas, Texas, Oxford, Connecticut and
Barrow-in-Furness, United Kingdom facilities. The Company conducts medical
device and vascular access product development at its New Berlin, Wisconsin
facility located near Milwaukee. The development of ultrasound ophthalmic
equipment is performed at the Company's Lake Success, New York facility on Long
Island. Company-sponsored research and development expenditures for the fiscal
years ended June 30, 2006, 2005 and 2004 were approximately $2,828,000,
$1,893,000 and $776,000, respectively.

MANUFACTURING AND DISTRIBUTION

     The Company leases an aggregate of approximately 69,700 square feet of
space at its facilities in Texas, Connecticut and the United Kingdom. These
sites are currently used for engineering, product design and development and
product assembly. All of the Company's medical devices and consumables for the
diagnosis and monitoring of medical disorders in the areas of diabetes,
cardiovascular diseases and hematology are distributed from the Company's
Dallas, Texas, Oxford, Connecticut and Barrow-in-Furness, United Kingdom
facilities (see Business Conditions in liquidity section for additional
information).

     The Company leases 13,500 square feet of space in New Berlin, Wisconsin,
near Milwaukee, for its surgical products and vascular access operations. The
facility is currently used for engineering, product


                                        5

<PAGE>

design and development, manufacturing and product assembly. The Company
subcontracts component manufacture, assembly and sterilization to various
vendors. The New Berlin manufacturing facility includes a class 10,000 clean
room. A class 10,000 clean room is a controlled environment for producing
devices while avoiding any significant contaminants. The cleanliness provided by
the clean room exceeds the requirements of the FDA. All of the Company's
ophthalmic surgical products and vascular access products are distributed from
the Company's Wisconsin facility.

     The Company designs, develops and services its ultrasound ophthalmic
products at its 12,000 square foot facility in Lake Success, New York. The
Company has achieved ISO9001 certification at all of its manufacturing
facilities for all medical devices, ultrasound devices and consumables the
Company produces. ISO9001 requires an implemented quality system that applies to
product design. These certifications can be obtained only after a complete audit
of a company's quality system by an independent outside auditor. These
certifications require that facilities undergo periodic reexamination. European
Community ("CE") certification has been obtained for disposable delivery
systems, fiber optic light probes, medical devices and consumables for the
diagnosis and monitoring of medical disorders in the areas of diabetes,
cardiovascular diseases and hematology, vascular access products and certain
ultrasound models.

     The manufacture, testing and marketing of each of the Company's products
entails risk of product liability. Product liability insurance is carried by the
Company to cover primary risk.

GOVERNMENTAL REGULATIONS

     The Company's products are subject to stringent ongoing regulation by the
FDA and similar health authorities, and if these governmental approvals or
clearances of the Company's products are restricted or revoked the Company could
face delays that would impair the Company's ability to generate funds from
operations.

     The Company has received the necessary FDA clearances and approvals for all
products that the Company currently markets. The FDA and comparable agencies in
state and local jurisdictions and in foreign countries impose substantial
requirements upon the manufacturing and marketing of pharmaceutical and medical
device equipment and related disposables, including the obligation to adhere to
the FDA's Good Manufacturing Practice regulations. Compliance with these
regulations requires time-consuming detailed validation of manufacturing and
quality control practices, FDA periodic inspections and other procedures. If the
FDA finds any deficiencies in the validation processes, for example, the FDA may
impose restrictions on marketing the specific products until such deficiencies
are corrected.

     The FDA and similar health authorities in foreign countries extensively
regulate the Company's activities. The Company must obtain either 510(K)
clearances or pre-market approvals and new drug application approvals prior to
marketing a product in the United States. Foreign regulation also requires that
the Company obtain other approvals from foreign government agencies prior to the
sale of products in those countries. Also, the Company may be required to obtain
FDA clearance or approval before exporting a product or device that has not
received FDA marketing clearance or approval.

     The Company has received CE approval on several of the Company's products
that allows the Company to sell the products in the countries comprising the
European community. In addition to the CE mark, however, some foreign countries
may require separate individual foreign regulatory clearances.

MARKETING AND SALES

     The Drew business unit sells its products through internal sales and
marketing employees located in the United States and in the United Kingdom as
well as through a large network of distributors, both domestic and
international. The Sonomed product line is sold through internal sales employees
as well as independent sales representatives located in the United States and
Europe, to a large network of distributors and directly to medical institutions.
Vascular business unit products are marketed domestically through internal sales
and marketing employees located in the United States as well as through an
independent sales representative in Europe and a network of domestic and foreign
distributors that are managed by the Company's sales team. The Medical/Trek/EMI
business unit sells its ophthalmic devices and instruments directly to end users
through internal sales and marketing employees located at the Company's
Wisconsin facility. Sales are primarily made to teaching institutions, key
hospitals and eye surgery centers focusing


                                        6

<PAGE>

primarily on physicians and operating room personnel performing vitreoretinal
surgery. The EMI product line is sold through internal sales employees and
independent sales representatives in the United States.

SERVICE AND SUPPORT

     The Company maintains a full-service program for all products sold. Limited
warranties are given on all products against defects and performance. Product
repairs are made at the Wisconsin facility for surgical devices, vascular access
products and EMI devices. Sonomed's products are serviced at the Company's New
York facility. Drew's products are serviced at its Connecticut facility.

THIRD-PARTY REIMBURSEMENT

     It is expected that physicians and hospitals will purchase certain of the
Company's products and that they in turn will bill various third party payers
for health care services provided to their patients using these products. These
payers include Medicare, Medicaid and private insurers. Government agencies
generally reimburse health care providers at a fixed rate based on the procedure
performed. Third party payers may deny reimbursement if they determine that a
procedure performed using any one of the Company's products was unnecessary,
inappropriate, not cost-effective, experimental, or used for a non-approved
indication.

PATENTS, TRADEMARKS AND LICENSES

     The pharmaceutical and medical device communities place considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes for the purpose of strengthening the Company's position
in the market place and protecting the Company's economic interests. The
Company's policy is to protect its technology by aggressively obtaining patent
protection for substantially all of its developments and products, both in the
United States and in selected countries outside the United States. It is the
Company's policy to file for patent protection in those foreign countries in
which the Company believes such protection is necessary to protect its economic
interests. The duration of the Company's patents, trademarks and licenses vary
through 2020. The Company has 21 United States patents and 19 patents issued
abroad that cover the Company's surgical products and pharmaceutical technology.
With respect to the Company's ultrafast laser technology (licensed to IntraLase
Corp. ("IntraLase")), 16 patents have been issued in the United States and 11
overseas. Vascular access products are covered by 18 patents, which provide
protection in the United States, Europe, Japan and other countries overseas.
Drew has approximately 60 patents related to its technology. The Company intends
to vigorously defend its patents if the need arises.

     While in the aggregate the Company's patents are of material importance to
its business taken as a whole, the patents, trademarks and licenses that are the
most critical to the Company's ability to generate revenues are the following:

     -    The Escalon trademark is due for renewal on January 19, 2013, and the
          Company intends to renew the trademark. The Sonomed trademark was due
          for renewal on April 16, 2006 and the Company is in the process of
          renewing the trademark.

     -    In the Vascular business unit, the Company has two patents that are of
          material importance. The first patent is an apparatus for the
          cannulation of blood vessels. This patent will expire on February 23,
          2011. The second patent is also an apparatus for the cannulation of
          blood vessels. This patent will expire on January 11, 2009. The
          Vascular unit has also one patent application pending for the
          cannulation of blood vessels with a hypodermic needle.

     -    The Company licensed its ultrafast laser system technology to
          IntraLase. The material terms of the license of the Company's laser
          patents to IntraLase, which expires in 2013, provide that in exchange
          for the use of the Company's licensed laser patents, Escalon will
          receive a 2.5% royalty on product sales that are based on the licensed
          laser patents, subject to deductions for royalties payable to third
          parties up to a maximum of 50% of royalties otherwise due and payable
          to the Company and a 1.5% royalty on product sales that are not based
          on the licensed laser patents. The Company receives a minimum annual
          license fee of $15,000 per year during the term of the license that is
          offset against the royalty payments. The material termination
          provisions of the license of the laser technology are as follows:


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     1.   Termination by the Company if IntraLase defaults in the payment of any
          royalty to the Company;

     2.   Termination by the Company if IntraLase makes any false report to the
          Company;

     3.   Termination by the Company in IntraLase defaults in the making of any
          required report to the Company;

     4.   Termination by either party due to the commission of any material
          breach of any covenant or promise by the other party under the license
          agreement; or

     5.   Termination of the license by IntraLase after 90 days notice. If
          IntraLase were to terminate, it would not be permitted to utilize the
          licensed technology necessary to manufacture its current products.

     See note 9 of the notes to consolidated financial statements for a
description of the Company's legal proceedings with IntraLase.

COMPETITION

     There are numerous direct and indirect competitors of the Company in the
United States and abroad. These companies include ophthalmic-oriented companies
that market a broad portfolio of products including prescription ophthalmic
pharmaceuticals, ophthalmic devices, consumer products (such as contact lens
cleaning solution) and other eye care products; large integrated pharmaceutical
companies that market a limited number of ophthalmic pharmaceuticals in addition
to many other pharmaceuticals; and smaller specialty pharmaceutical and
biotechnology companies that are engaged in the development and
commercialization of prescription ophthalmic pharmaceuticals and products and,
to some extent, drug delivery systems. The Company's competitors for medical
devices and ophthalmic pharmaceuticals include, but are not limited to Bausch &
Lomb, Inc., Alcon Laboratories, Inc., Paradigm Medical, Inc., Quantel, Inc. and
Accutome, Inc.

     Several large companies dominate the ophthalmic market, with the balance of
the industry being highly fragmented. The Company believes that these large
companies capture approximately 85% of the overall ophthalmic market. The
balance of the market is comprised of smaller companies ranging from start-up
entities to established market players. The ophthalmic market in general is
intensely competitive, with each company eager to expand its market share. The
Company's strategy is to compete primarily on the basis of technological
innovation to which it has proprietary rights. The Company believes, therefore,
that its success will depend in large part on protecting its intellectual
property through patents and other governmental regulations. The Company
recognizes that there are other innovative companies that may develop
competitive strategies.

     Sonomed's principal competitors are Alcon Laboratories, Inc, Quantel, Inc.
and Accutome, Inc. Management believes that the Company is in a market
leadership position. Sonomed has had a leading presence in the ophthalmic
ultrasound industry for over 30 years. Management believes that this has helped
the Company build a reputation as a long-standing operation that provides a
quality product, which has enabled the Company to establish effective
distribution coverage within the United States market. The Company seeks to
preserve its position in the market through continued product enhancement.
Various competitors offering similar products at a lower price could threaten
Sonomed's market position. The development of laser technologies for ophthalmic
biometrics and imaging may also diminish the Company's market position. This
equipment can be used instead of ultrasound equipment in most, but not all,
patients. Such equipment, however, is more expensive.

     The Medical/Trek/EMI business sells a broad range of ophthalmic surgical
and diagnostic products. The more significant products are ISPAN(R) gases and
delivery systems. Medical/Trek/EMI also manufactures various ophthalmic surgical
products for major ophthalmic companies to be sold under their names. To remain
competitive, the Company needs to maintain a low cost operation. There are
numerous other companies that can provide this manufacturing service. There are
a variety of other devices that directly compete with the camera back marketed
by Medical/Trek/EMI.

     The Vascular access product line is comprised of disposable devices, and
currently Vascular has no direct competition. However, a significantly higher
priced non-disposable device that facilitates vascular access is currently being
marketed. Vascular produces the only device that can be accommodated within a
standard needle for assisting medical practitioners in gaining access to a
vessel in the human vascular system. There are no similar devices in the market
that enable medical practitioners in gaining access using their normal
procedures. The only similar product utilizes a separate ultrasound monitor, but


                                        8

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no disposables are utilized. When using the competing device, medical
practitioners need to look at the monitor while advancing the needle into the
patient. The perceived disadvantage of the Company's vascular product is that
the retail price is substantially greater than the cost of a traditional needle.

     Drew is a diagnostics company specializing in the design, manufacture and
distribution of instruments for blood cell counting and blood analysis. Drew is
focused on the market for the physician office and veterinary office
laboratories. Drew's principal competition is Beckman Coulter and Bayer
Diagnostics in the human market and IDDEX in the veterinary market. Currently
Drew has only a nominal share of these markets, and the Company will seek to
increase Drew's market share. The Company's strategy is to market instruments
and consumables that are competitive for the low volume users in the domestic
and overseas markets. Drew's success will depend on its ability to enhance its
current product range and control its production costs. Drew recognizes that
other companies may adopt similar strategies which could hinder Drew's ability
to increase market share.

HUMAN RESOURCES

     As of June 30, 2006, the Company employed 174 full-time employees and five
part-time employees. 98 of the Company's employees are employed in
manufacturing, 30 are employed in general and administrative positions, 42 are
employed in sales and marketing and 9 are employed in research and development.
Escalon's employees are not covered by a collective bargaining agreement, and
the Company considers its relationship with its employees to be good.

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

     Certain statements contained in, or incorporated by reference in, this
report are forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, which
provide current expectations or forecasts of future events. Such statements can
be identified by the use of terminology such as "anticipate," "believe,"
"could," "estimate," "expect," "forecast," "intend," "may," "plan," "possible,"
"project," "should," "will," "would," and similar words or expressions. The
Company's forward-looking statements include certain information relating to
general business strategy, growth strategies, financial results, liquidity,
product development, the introduction of new products, the potential markets and
uses for the Company's products, the Company's regulatory filings with the FDA,
acquisitions, the development of joint venture opportunities, intellectual
property and patent protection and infringement, the loss of revenue due to the
expiration on termination of certain agreements, the effect of competition on
the structure of the markets in which the Company competes, increased legal,
accounting and Sarbanes-Oxley compliance costs, defending the Company in
litigation matters and the Company's cost saving initiatives. The reader must
carefully consider forward-looking statements and understand that such
statements involve a variety of risks and uncertainties, known and unknown, and
may be affected by assumptions that fail to materialize as anticipated.
Consequently, no forward-looking statement can be guaranteed, and actual results
may vary materially. It is not possible to foresee or identify all factors
affecting the Company's forward-looking statements, and the reader therefore
should not consider the following list of such factors to be an exhaustive
statement of all risks, uncertainties or potentially inaccurate assumptions.

     The Company cautions the reader to consider carefully these factors as well
as the specific factors discussed with each specific forward-looking statement
in this annual report and in the Company's other filings with the SEC. In some
cases, these factors have impacted, and in the future (together with other
unknown factors) could impact, the Company's ability to implement the Company's
business strategy and may cause actual results to differ materially from those
contemplated by such forward-looking statements. Any expectation, estimate or
projection contained in a forward-looking statement may not be achieved.

     The Company also cautions the reader that forward-looking statements speak
only as of the date made. The Company undertakes no obligation to update any
forward-looking statement, but investors are advised to consult any further
disclosures by the Company on this subject in the Company's filings with the
SEC, in which the Company discusses in more detail various important factors
that could cause actual results to differ from expected or historical results.
Although it is not possible to create a comprehensive list of all factors that
may cause actual results to differ from the Company's forward-looking
statements, the material factors include, without limitation, the following:


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     ANY ACQUISITIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES THAT
     THE COMPANY EFFECTS COULD RESULT IN FINANCIAL RESULTS THAT DIFFER FROM
     MARKET EXPECTATIONS.

     In the normal course of business, the Company engages in discussions with
third parties regarding possible acquisitions, strategic alliances, joint
ventures and divestitures. As a result of any such transactions, the Company's
financial results may differ from the investment community's expectations in a
given quarter. In addition, acquisitions and alliances may require the Company
to integrate a different company culture, management team, business
infrastructure, accounting systems and financial reporting systems, although
such acquisitions or alliances may not occur. The Company may have difficulty
developing, manufacturing and marketing the products of a newly acquired company
in a way that enhances the performance of the Company's combined businesses or
product lines to realize the value from expected synergies. Depending on the
size and complexity of an acquisition, the Company's successful integration of
the entity depends on a variety of factors including the retention of key
employees and the management of facilities and employees in separate
geographical areas. These efforts require varying levels of management
resources, which may divert the Company's attention from other business
operations. The Company acquired Drew during the first quarter of fiscal 2005.
Drew does not have a history of producing positive operating cash flows and, as
a result, at the time of acquisition, was operating under financial constraints
and was under-capitalized and has continued to negatively impact the Company's
financial results. As Drew is integrated into the Company, management will be
working to reverse the situation, while at the same time seeking to strengthen
Drew's market position. The Company loaned approximately $11,087,000 to Drew.
The funds have been primarily used to procure components to build up inventory
to support the manufacturing process, to pay off accounts payable and debt of
Drew, and to expand the sales and marketing and research and development
efforts, to fund new product development and underwrite operating losses since
its acquisition. The Company anticipates that further working capital will
likely be required by Drew. If the Company does not realize the expected
benefits or synergies of such transactions, the Company's consolidated financial
position, results of operations and stock price could be negatively impacted.
Also, the Company's results may be adversely impacted because of
acquisition-related costs, amortization costs for certain intangible assets and
impairment losses related to goodwill in connection with such transactions.
Finally, acquisitions or alliances by Escalon may not continue to occur, which
could impair the Company's growth.

     COSTS ASSOCIATED WITH INTRALASE LITIGATION MAY ADVERSELY IMPACT EARNINGS IN
     THE NEAR TERM.

     The Company is cognizant of the escalating legal expenses and costs
associated with the IntraLase matter. The Company, however, is taking all
necessary actions to protect its rights and interests under the License
Agreement. The Company expects expenses associated with this litigation to
adversely impact earnings in the near term.

     THE COMPANY'S RESULTS FLUCTUATE FROM QUARTER TO QUARTER.

     The Company has experienced quarterly fluctuations in operating results and
anticipates continued fluctuations in the future. A number of factors contribute
to these fluctuations:

     -    Acquisitions, such as Drew, and subsequent integration of the acquired
          company, although such acquisitions may not occur;

     -    The timing and expense of new product introductions by the Company or
          its competitors, although the Company might not successfully develop
          new products and any such new products may not gain market acceptance;

     -    The cancellation or delays in the purchase of the Company's products;

     -    Fluctuations in customer demand for the Company's products;

     -    Fluctuations in royalty income;

     -    The gain or loss of significant customers;

     -    Changes in the mix of products sold by the Company;

     -    Competitive pressures on prices at which the Company can sell its
          products; and

     -    Announcements of new strategic relationships by the Company or its
          competitors.

     The Company sets its spending levels in advance of each quarter based, in
part, on the Company's expectations of product orders and shipments during that
quarter. A shortfall in revenue, therefore, in any particular quarter as
compared to the Company's plan could have a material adverse impact on the


                                       10

<PAGE>

Company's results of operations and cash flows. Also, the Company's quarterly
results could fluctuate due to general market conditions in the healthcare
industry or global economy generally, or market volatility unrelated to the
Company's business and operating results.

     COST SAVING INITIATIVES

     The Company has initiated cost saving initiatives that may not be effective
in returning the Company to profitability (see Business Conditions section in
the liquidity section for information). If these initiatives are insufficient,
additional measures may be necessary.

     FAILURE OF THE MARKET TO ACCEPT THE COMPANY'S PRODUCTS COULD ADVERSELY
     IMPACT THE COMPANY'S BUSINESS AND FINANCIAL CONDITION.

     The Company's business and financial condition will depend in part upon the
market acceptance of the Company's products. The Company's products may not
achieve market acceptance. Market acceptance depends on a number of factors
including:

     -    The price of the products;

     -    The receipt of regulatory approvals for multiple indications;

     -    The establishment and demonstration of the clinical safety and
          efficacy of the Company's products; and

     -    The advantages of the Company's products over those marketed by the
          Company's competitors.

     Any failure to achieve significant market acceptance of the Company's
products will have a material adverse impact on the Company's business.

     THE COMPANY'S PRODUCTS ARE SUBJECT TO STRINGENT ONGOING REGULATION BY THE
     FDA AND SIMILAR HEALTH CARE REGULATORY AUTHORITIES, AND IF THE FDA'S
     APPROVALS OR CLEARANCES OF THE COMPANY'S PRODUCTS ARE RESTRICTED OR
     REVOKED, THE COMPANY COULD FACE DELAYS THAT WOULD IMPAIR THE COMPANY'S
     ABILITY TO GENERATE FUNDS FROM OPERATIONS.

     The FDA and similar health care regulatory authorities in foreign countries
extensively regulate the Company's activities. The Company must obtain either
510(K) clearances or pre-market approvals and new drug application approvals
prior to marketing a product in the United States. Foreign regulation also
requires that the Company obtain other approvals from foreign government
agencies prior to the sale of products in those countries. Also, the Company may
be required to obtain FDA approval before exporting a product or device that has
not received FDA marketing clearance or approval.

     The Company has received the necessary FDA approvals for all products that
the Company currently markets in the United States. Any restrictions on or
revocation of the FDA approvals and clearances that the Company has obtained,
however, would prevent the continued marketing of the impacted products and
other devices. The restrictions or revocations could result from the discovery
of previously unknown problems with the product. Consequently, FDA revocation
would impair the Company's ability to generate funds from operations.

     The FDA and comparable agencies in state and local jurisdictions and in
foreign countries impose substantial requirements upon the manufacturing and
marketing of pharmaceutical and medical device equipment and related
disposables, including the obligation to adhere to the FDA's Good Manufacturing
Practice regulations. Compliance with these regulations requires time-consuming
detailed validation of manufacturing and quality control processes, FDA periodic
inspections and other procedures. If the FDA finds any deficiencies in the
validation processes, for example, the FDA may impose restrictions on marketing
the specific products until such deficiencies are corrected.

     The Company has received CE approval on several of the Company's products
that allows the Company to sell the products in the countries comprising the
European community. In addition to the CE mark, however, some foreign countries
may require separate individual foreign regulatory clearances. The


                                       11

<PAGE>

Company may not be able to obtain regulatory clearances for other products in
the United States or foreign markets.

     The process for obtaining regulatory clearances and approvals underlying
clinical studies for any new products or devices and for multiple indications
for existing products is lengthy and will require substantial commitments of
Company's financial resources and Company's management's time and effort. Any
delay in obtaining clearances or approvals or any changes in existing regulatory
requirements would materially adversely impact the Company's business.

     The Company's failure to comply with the applicable regulations would
subject the Company to fines, delays or suspensions of approvals or clearances,
seizures or recalls of products, operating restrictions, injunctions or civil or
criminal penalties, which would adversely impact the Company's business,
financial condition and results of operations.

     THE SUCCESS OF COMPETITIVE PRODUCTS COULD HAVE AN ADVERSE IMPACT ON THE
     COMPANY'S BUSINESS.

     The Company faces intense competition in the medical device and
pharmaceutical markets, which are characterized by rapidly changing technology,
short product life cycles, cyclical oversupply and rapid price erosion. Many of
the Company's competitors have substantially greater financial, technical,
marketing, distribution and other resources. The Company's strategy is to
compete primarily on the basis of technological innovation, reliability, quality
and price of the Company's products. Without timely introductions of new
products and enhancements, the Company's products will become technologically
obsolete over time, in which case the Company's revenues and operating results
would suffer. The success of the Company's new product offerings will depend on
several factors, including the Company's ability to:

     -    Properly identify customer needs;

     -    Innovate and develop new technologies, services and applications;

     -    Establish adequate product distribution coverage;

     -    Obtain and maintain required regulatory approvals from the FDA and
          other regulatory agencies;

     -    Protect the Company's intellectual property;

     -    Successfully commercialize new technologies in a timely manner;

     -    Manufacture and deliver the Company's products in sufficient volumes
          on time;

     -    Differentiate the Company's offerings from the offerings of the
          Company's competitors;

     -    Price the Company's products competitively;

     -    Anticipate competitors' announcements of new products, services or
          technological innovations; and

     -    Anticipate general market and economic conditions.

     The Company cannot ensure that the Company will be able to compete
effectively in the competitive environments in which the Company operates.

     THE COMPANY'S PRODUCTS EMPLOY PROPRIETARY TECHNOLOGY, AND THIS TECHNOLOGY
     MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES.

     The Company holds several United States and foreign patents for the
Company's products. Other parties, however, hold patents relating to similar
products and technologies. If patents held by others were adjudged valid and
interpreted broadly in an adversarial proceeding, the court or agency could deem
them to cover one or more aspects of the Company's products or procedures. Any
claims for patent infringements or claims by the Company for patent enforcement
would consume time, result in costly litigation, divert technical and management
personnel or require the Company to develop non-infringing technology or enter
into royalty or licensing agreements. The Company cannot be certain that the
Company will not be subject to one or more claims for patent infringement, that
the Company would prevail in any such action or that the Company's patents will
afford protection against competitors with similar technology.

     If a court determines that any of the Company's products infringes,
directly or indirectly, on a patent in a particular market, the court may enjoin
the Company from making, using or selling the product.


                                       12

<PAGE>

Furthermore, the Company may be required to pay damages or obtain a
royalty-bearing license, if available, on acceptable terms.

     LACK OF AVAILABILITY OF KEY SYSTEM COMPONENTS COULD RESULT IN DELAYS,
     INCREASED COSTS OR COSTLY REDESIGN OF THE COMPANY'S PRODUCTS.

     Although some of the parts and components used to manufacture the Company's
products are available from multiple sources, the Company currently purchases
most of the Company's components from single sources in an effort to obtain
volume discounts. Lack of availability of any of these parts and components
could result in production delays, increased costs or costly redesign of the
Company's products. Any loss of availability of an essential component could
result in a material adverse change to the Company's business, financial
condition and results of operations. Some of the Company's suppliers are subject
to the FDA's Good Manufacturing Practice regulations. Failure of these suppliers
to comply with these regulations could result in the delay or limitation of the
supply of parts or components to the Company, which would adversely impact the
Company's financial condition and results of operations.

     THE COMPANY'S ABILITY TO MARKET OR SELL THE COMPANY'S PRODUCTS MAY BE
     ADVERSELY IMPACTED BY LIMITATIONS ON REIMBURSEMENTS BY GOVERNMENT PROGRAMS,
     PRIVATE INSURANCE PLANS AND OTHER THIRD PARTY PAYORS.

     The Company's customers bill various third party payors, including
government programs and private insurance plans, for the health care services
provided to their patients. Third party payors may reimburse the customer,
usually at a fixed rate based on the procedure performed, or may deny
reimbursement if they determine that the use of the Company's products was
elective, unnecessary, inappropriate, not cost-effective, experimental or used
for a non-approved indication. Third party payors may deny reimbursement
notwithstanding FDA approval or clearance of a product and may challenge the
prices charged for the medical products and services. The Company's ability to
sell the Company's products on a profitable basis may be adversely impacted by
denials of reimbursement or limitations on reimbursement, compared with
reimbursement available for competitive products and procedures. New legislation
that further reduces reimbursements under the capital cost pass-through system
utilized in connection with the Medicare program could also adversely impact the
marketing of the Company's products.

     FUTURE LEGISLATION OR CHANGES IN GOVERNMENT PROGRAMS MAY ADVERSELY IMPACT
     THE MARKET FOR THE COMPANY'S PRODUCTS.

     In the past several years, the federal government and Congress have made
proposals to change aspects of the delivery and financing of health care
services. The Company cannot predict what form any future legislation may take
or its impact on the Company's business. Legislation that sets price limits and
utilization controls adversely impact the rate of growth of the markets in which
the Company participates. If any future health care legislation were to
adversely impact those markets, the Company's product marketing could also
suffer, which would adversely impact the Company's business.

     THE COMPANY MAY BECOME INVOLVED IN PRODUCT LIABILITY LITIGATION, WHICH MAY
     SUBJECT THE COMPANY TO LIABILITY AND DIVERT MANAGEMENT ATTENTION.

     The testing and marketing of the Company's products entails an inherent
risk of product liability, resulting in claims based upon injuries or alleged
injuries or a failure to diagnose associated with a product defect. Some of
these injuries may not become evident for a number of years. Although the
Company is not currently involved in any product liability litigation, the
Company may be party to litigation in the future as a result of an alleged
claim. Litigation, regardless of the merits of the claim or outcome, could
consume a great deal of the Company's time and attention away from the Company's
core businesses. The Company maintains limited product liability insurance
coverage of $1,000,000 per occurrence and $2,000,000 in the aggregate, with
umbrella policy coverage of $5,000,000 in excess of such amounts. A successful
product liability claim in excess of any insurance coverage may adversely impact
the Company's financial condition and results of operations. The Company's
product liability insurance coverage may not continue to be available to the
Company in the future on reasonable terms or at all.


                                       13

<PAGE>

     THE COMPANY'S INTERNATIONAL OPERATIONS COULD BE ADVERSELY IMPACTED BY
     CHANGES IN LAWS OR POLICIES OF FOREIGN GOVERNMENTAL AGENCIES AND SOCIAL AND
     ECONOMIC CONDITIONS IN THE COUNTRIES IN WHICH THE COMPANY OPERATES.

     The Company derives a portion of its revenue from sales outside the United
States. Changes in the laws or policies of governmental agencies, as well as
social and economic conditions, in the countries in which the Company operates
could impact the Company's business in these countries and the Company's results
of operations. Also, economic factors, including inflation and fluctuations in
interest rates and foreign currency exchange rates, and competitive factors such
as price competition, business combinations of competitors or a decline in
industry sales from continued economic weakness, both in the United States and
other countries in which the Company conducts business, could adversely impact
the Company's results of operations.

     THE COMPANY IS DEPENDENT ON ITS MANAGEMENT AND KEY PERSONNEL TO SUCCEED.

     The Company's principal executive officers and technical personnel have
extensive experience with the Company's products, the Company's research and
development efforts, the development of marketing and sales programs and the
necessary support services to be provided to the Company's customers. Also, the
Company competes with other companies, universities, research entities and other
organizations to attract and retain qualified personnel. The loss of the
services of any of the Company's executive officers or other technical
personnel, or the Company's failure to attract and retain other skilled and
experienced personnel, could have a material adverse impact on the Company's
ability to maintain or expand businesses.

     THE MARKET PRICE OF THE COMPANY'S STOCK HAS HISTORICALLY BEEN VOLATILE, AND
     THE COMPANY HAS NOT PAID CASH DIVIDENDS.

     The volatility of the Company's common stock imposes a greater risk of
capital losses on shareholders as compared to less volatile stocks. In addition,
such volatility makes it difficult to ascribe a stable valuation to a
shareholder's holdings of the Company's common stock. The following factors have
and may continue to have a significant impact on the market price of the
Company's common stock:

     -    Any acquisitions, strategic alliances, joint ventures and divestitures
          that the Company effects, if any;

     -    Announcements of technological innovations;

     -    Changes in marketing, product pricing and sales strategies or new
          products by the Company's competitors;

     -    Changes in domestic or foreign governmental regulations or regulatory
          requirements; and

     -    Developments or disputes relating to patent or proprietary rights and
          public concern as to the safety and efficacy of the procedures for
          which the Company's products are used.

     Moreover, the possibility exists that the stock market, and in particular
the securities of technology companies such as Escalon, could experience extreme
price and volume fluctuations unrelated to operating performance.

     The Company has not paid cash dividends on its common stock and does not
anticipate paying cash dividends in the foreseeable future.

     THE IMPACT OF TERRORISM OR ACTS OF WAR COULD HAVE A MATERIAL ADVERSE IMPACT
     ON THE COMPANY'S BUSINESS.

     Terrorist acts or acts of war, whether in the United States or abroad,
could cause damage or disruption to the Company's operations, its suppliers,
channels to market or customers, or could cause costs to increase, or create
political or economic instability, any of which could have a material adverse
impact on the Company's business.

     THE COMPANY'S CHARTER DOCUMENTS AND PENNSYLVANIA LAW MAY INHIBIT A
     TAKEOVER.


                                       14

<PAGE>

     Certain provisions of Pennsylvania law and the Company's Bylaws could delay
or impede the removal of incumbent directors and could make it more difficult
for a third party to acquire, or discourage a third party from attempting to
acquire, control of the Company. These provisions could limit the share price
that certain investors might be willing to pay in the future for shares of the
Company's common stock. The Company's Board of Directors is divided into three
classes, with directors in each class elected for three-year terms. The Bylaws
impose various procedural and other requirements that could make it more
difficult for shareholders to effect certain corporate actions. The Company's
Board of Directors may issue shares of preferred stock without shareholder
approval on such terms and conditions, and having such rights, privileges and
preferences, as the Board may determine. The rights of the holders of common
stock will be subject to, and may be adversely impacted by, the rights of the
holders of any preferred stock that may be issued in the future. The Company has
no current plans to issue any shares of preferred stock.

ITEM 2. DESCRIPTION OF PROPERTY

     The Company currently leases an aggregate of approximately 93,700 square
feet of space for its (i) corporate offices in Wayne, Pennsylvania, (ii)
administrative office and manufacturing facility in Barrow-in-Furness, United
Kingdom, (ii) administrative office and manufacturing facility in Dallas, Texas,
(iii) manufacturing facility in Lake Success, New York, (iv) manufacturing
facility in New Berlin, Wisconsin, and (v) manufacturing facility in Oxford,
Connecticut. The corporate offices in Pennsylvania cover approximately 7,100
square feet and expire in April 2008. The facility in the United Kingdom covers
approximately and 16,000 square feet and consists of three buildings whose
leases expire in September 2006 and August 2007 and September 2009. The lease
expiring in September 2006 will not be renewed and Drew will lease a smaller
6,000 square foot facility in its place, reducing overall square footage in
Barrow by 7,000 square feet. The facility in Texas covers approximately 34,400
square feet and consists of three buildings whose leases expire in March 2007.
Drew is renegotiating the lease on two of its Dallas facilities, one of the
buildings will be closed and the remaining larger building will house the
majority of Drew US operations (see footnote 1 of financial statements). The New
York facility leases, covering approximately 12,200 square feet, and they expire
in October 2011. The Wisconsin lease, covering approximately 13,500 square feet
of space expires in April 2007. The Connecticut facility lease consists of two
separate areas within the same building. The leases cover approximately 12,000
square feet and expire in January 2007 and 2008. Annual rent under all of the
Company's lease arrangements was approximately $772,000.

ITEM 3. LEGAL PROCEEDINGS

     INTRALASE CORP. LEGAL PROCEEDINGS

     In October 1997, the Company and IntraLase entered into a License Agreement
wherein the Company granted IntraLase the exclusive right to use the Company's
laser properties, including patented and non-patented technology, in exchange
for shares of IntraLase common stock as well as royalties based on a percentage
of net sales of future products. The shares of common stock were restricted for
sale until April 6, 2005 and, according to a Fourth Amended Registration Right
Agreement between the Company and IntraLase, are now able to be sold. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Notes to Condensed Consolidated Financial Statements for
discussions on the Company's sales of IntraLase common stock.

     On June 10, 2004, the Company gave IntraLase notice of its intention to
terminate the License Agreement due to IntraLase's failure to pay certain
royalties that the Company believed were due under the License Agreement. On
June 21, 2004, IntraLase sought a preliminary injunction and temporary
restraining order with the United States District Court for the Central District
of California, Southern District against the Company to prevent termination of
the License Agreement. Contemporaneously, IntraLase filed an action for
declaratory relief asking the court to validate its interpretation of certain
terms of the License Agreement relating to the amount of royalties owed to the
Company ("First Action"). The parties mutually agreed to the entry of a
temporary restraining order which was entered by the court shortly thereafter.
At the close of discovery, IntraLase and the Company filed cross-motions for
summary judgment. On May 5, 2005, the District Court, having ruled on such
motions, entered judgment in the First Action.


                                       15
<PAGE>
     The court, in ruling on the parties' cross-motions for summary judgment,
did not agree with IntraLase's interpretation of certain terms and declared
that, under the terms of the License Agreement, IntraLase must pay the Company
royalties on revenue from maintenance contracts and one-year warranties.
Further, the court rejected IntraLase's argument that it is entitled to deduct
the value of non-patented components of its ophthalmic products, which it sells
as an integrated unit, from the royalties due the Company. Non-patented
components of the products include computer monitors, joysticks, keyboards,
universal power supplies, microscope assemblies, installation kits and syringes.
In addition, the court rejected IntraLase's assertion that accounts receivable
are not "consideration received" under the License Agreement and expressly ruled
that IntraLase must pay the Company royalties on IntraLase's accounts
receivable. The court also held that IntraLase must give the Company an
accounting of third-party royalties. The court agreed with IntraLase that it is
not required to pay royalties on research grants.

     The court also agreed with the Company in finding that royalties are
"monies" and the default in the payment of royalties must be remedied within 15
days of written notice of the default. The court rejected IntraLase's position
concerning the effective date of the Amended and Restated License Agreement
holding that the effective date of such Agreement was dated October 17, 2000.
IntraLase has appealed the judgment to the United States Court of Appeals for
the Ninth Circuit. The parties have submitted briefs to the court. The Company
believes that a decision by the court is unlikely in 2006.

     IntraLase, after entry of the court's ruling, attempted to cure its default
under the License Agreement, but underpaid based upon a purported interpretation
of "accounts receivable" that discounts the receivables recorded on the sales
substantially, and in a manner that appears to directly contradict IntraLase's
own published financial statements.

     In May, 2005, IntraLase filed a second suit against the Company in the
Central District of California, case number SAVC 05-440-AHS ("Second Action"),
again for declaratory relief as well as for reformation of the License
Agreement. In this action, IntraLase has asked the court to, among other things,
validate its interpretation of certain other terms of the License Agreement
relating to the amount of royalties owed to the Company and a declaration
concerning the Company's audit rights under the License Agreement. On June 3,
2005, after having been served with Escalon's Complaint filed in the Delaware
Court of Chancery ("Delaware Action," described below), IntraLase filed an
Amended Complaint in the Second Action. The Company, not having been served with
the Amended Complaint, filed a motion to dismiss the Complaint in the Second
Action on jurisdictional and substantive grounds. On June 6, 2005, the Company
filed a Motion to Dismiss the Amended Complaint on grounds virtually identical
to its first motion to dismiss. The court dismissed without prejudice the Second
Action on the grounds that much of IntraLase's lawsuit sought a ruling on issues
already raised by the Company in the Company's Delaware Action. Accepting the
Company's arguments for dismissal, the California Court held that retaining
jurisdiction would likely result in duplicative litigation and an unnecessary
entanglement between the federal and state court actions.

     As referenced above, on May 15, 2005, the Company, not having been served
with IntraLase's Second Action, initiated the Delaware Action by filing a
Complaint against IntraLase for, among other things, breach of contract, breach
of fiduciary duty arising out of IntraLase's bad faith conduct under, and
multiple breaches of, the License Agreement. In the Delaware Action, the Company
seeks declaratory relief, specified damages, and specific performance of its
rights under the License Agreement, including its express right under the
Agreement to have independent certified accountants audit the books and records
of IntraLase to verify and compute payments due the Company.

     On February 21, 2006, the Company again gave IntraLase notice of its
intention to terminate the License Agreement due to IntraLase's failure to pay
certain royalties that the Company believed were due under the License Agreement
as well as IntraLase's refusal to permit the Company to inspect IntraLase's
records and books of account in accordance with paragraph 5.3 of the License
Agreement. IntraLase had steadfastly refused to permit inspections reasonably
requested by the Company to audit IntraLase's records and books of account and,
instead, conditioned any inspection by the Company's auditors on unreasonable
and unnecessary confidentiality restrictions and unilateral limitations on the
scope of records and books of account that would be made available for
inspection to the Company. On the same day, the Company filed its First Amended
Complaint in the Delaware Action adding to its pending claims a claim for
declaratory relief wherein the Company seeks a judgment declaring that the
License Agreement terminated fifteen days after IntraLase received the Company's
notice of defaults and intent to terminate and failed to cure said defaults.


                                       16

<PAGE>
     On February 28, 2006, the Company agreed to suspend the cure periods
applicable to the alleged breaches set out in its February 21, 2006 letter while
the Company and IntraLase engaged in mediation efforts. Mediation before Vice
Chancellor Donald F. Parsons, Jr. of the Delaware Court of Chancery, pursuant to
Chancery Court Rule 174, took place on May 5, 2006 and was unsuccessful.
However, in August, 2006, the Parties entered into a Stipulation under which
IntraLase agreed to allow an independent auditor, retained by the Company, to
inspect certain of IntraLase's books and records as needed, in the opinion of
the independent auditor, to verify that the Company received the full value of
royalty payments to which it is entitled pursuant to the License Agreement. The
Company sent its independent auditor to IntraLase's headquarters in early
September, 2006 to commence the audit review, which is continuing. The Company
is desirous of concluding this audit in October, 2006.

     Separately, on April 22, 2005, the Company, as beneficial record holder of
common stock of IntraLase, made a formal written demand to inspect certain of
IntraLase's books and records pursuant to Section 220 of the Delaware General
Corporation Law. Shortly thereafter, Escalon Holdings, record holder of common
stock of IntraLase, made the same written demand. IntraLase rejected both
demands. Thereafter, the Company and Escalon Holdings filed an action in the
Delaware Court of Chancery against IntraLase seeking to enforce their
shareholder rights to inspect IntraLase's books and records ("220 Action"). The
220 Case remains in the discovery stage and the Court has set a trial date of
November 8, 2006.

     The Company is cognizant of the legal expenses and costs associated with
the IntraLase matter. The Company, however, is taking all necessary and
appropriate actions to protect its rights and interests under the License
Agreement. The Company expects expenses associated with this litigation to
adversely impact earnings in the near term. The Company believes that IntraLase
has sufficient funds to support such payments based on its filings with the SEC
and filings in connection with the First Action.

     DREW LEGAL PROCEEDINGS

          CARVER LITIGATION-CONNECTICUT ACTION

     On December 17, 2002, Edward Carver, David DeCava and Diane Carver, former
principal shareholders of CDC Technologies, Inc., filed a complaint in the State
of Connecticut, Superior Court, Judicial District of Waterbury at Waterbury
against CDC Acquisition, IV Diagnostics and certain other principal shareholders
of CDC Technologies seeking a total of approximately $420,000 for, among other
things, repayment of loans made to CDC Technologies, payment of past wages and
reimbursement of business expenses ("Connecticut Action"). The plaintiffs'
claims arose out of a certain asset purchase for stock transaction in which CDC
Acquisition, a wholly owned subsidiary of Drew, acquired the assets of CDC
Technologies and IV Diagnostics. CDC Acquisition and IV Diagnostics, also a
subsidiary of Drew, asserted counterclaims against the plaintiffs for, among
other things, breach of fiduciary duty, unfair trade and conversion. In
addition, CDC Acquisition and IV Diagnostics asserted cross-claims against its
co-defendants for indemnification pursuant to the transaction agreements. A
bench trial was held in June, 2005. In August, 2005 the court rendered a
decision resulting in the court's award of only $76,000 to plaintiffs. CDC
Acquisition and IV Diagnostics filed a motion for reconsideration of certain
issues ruled upon by the court. The motion was denied. Plaintiffs' counsel filed
a motion for attorneys' fees seeking over $181,000. The court granted such
motion but awarded only $3,000 to plaintiffs' counsel. On November 1, 2005, CDC
Acquisition and IV Diagnostics timely appealed the court's ruling that CDC
Acquisitions and IV Diagnostics are liable to the plaintiffs.

CDC Acquisitions and IV Diagnostics and the plaintiffs in the Connecticut Action
recently resolved their disputes as Acquisition Corp. paid the plaintiffs the
outstanding judgment amount, eighty-three thousand dollars ($83,000.00). The
Company's cross-claims against certain of the former principal shareholders of
CDC Technologies, Inc. ("Technology Defendants") remain pending. The Technology
Defendants also have a cross-claim pending against CDC Acquisition Corp.
However, even in the event that Technology Defendants would prevail, their
damages are limited to the amount of their settlement, $50,000. Technology
Defendants recently filed a Motion to Enforce Settlement Agreement with the
trial court, asserting that there was an understanding that Technology
Defendants would be included in a three-way agreement to resolve all claims
associated with this litigation. The Company is opposing the Motion of the
Technology Defendants and intends to preserve and proceed to enforce its rights
against the Technology Defendants.




                                       17

<PAGE>
          INSTITUTE OF CHILD HEALTH

     Drew entered into a license agreement with the Institute of Child Health
("ICH") on May 10, 1993 to use ICH's intellectual property to manufacture,
lease, sell, use and sublicense certain products and all related consumables
used therein in the testing of blood and fluids. Under the license agreement
Drew was to pay royalties to ICH on the products and consumables. On January 23,
2006, the Company received a letter from ICH alleging that Drew has failed to
remit certain moneys due under the license agreement and has sought an
accounting to determine such amount due. Drew is reviewing this matter with
legal counsel and disputes the allegations for nonpayment.

     Other Legal Proceedings

     The Company, from time to time is involved in various legal proceedings and
disputes that arise in the normal course of business. These matters have
included intellectual property disputes, contract disputes, employment disputes
and other matters. The Company does not believe that the resolution of any of
these matters has had or is likely to have a material adverse impact on the
Company's business, financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

                                    PART II.

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND SMALL
     BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

     Escalon's Common Stock trades on the Nasdaq SmallCap Market under the
symbol "ESMC." The table below sets forth, for the periods indicated, the high
and low sales prices as quoted on the Nasdaq SmallCap Market.

<TABLE>
<CAPTION>
                                    HIGH     LOW
                                   ------   -----
<S>                                <C>      <C>
FISCAL YEAR ENDED JUNE 30, 2006
Quarter ended September 30, 2005   $ 9.08   $5.71
Quarter ended December 31, 2005    $ 5.85   $4.54
Quarter ended March 31, 2006       $ 5.99   $4.59
Quarter ended June 30, 2006        $ 5.34   $4.40

FISCAL YEAR ENDED JUNE 30, 2005
Quarter ended September 30, 2004   $15.43   $5.92
Quarter ended December 31, 2004    $13.99   $7.70
Quarter ended March 31, 2005       $ 9.08   $4.62
Quarter ended June 30, 2005        $ 8.49   $3.70
</TABLE>

     As of September 20, 2006, there were 1,361 holders of record of the
Company's Common Stock. On September 20, 2006 the closing price of Escalon's
Common Stock as reported by the Nasdaq SmallCap Market was $4.40 per share.

     Escalon has never declared or paid a cash dividend on its common stock and
presently intends to retain any future earnings to finance future growth and
working capital needs.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

     SELECTED FINANCIAL DATA


                                       18

<PAGE>

     The following selected financial data are derived from the consolidated
financial statements of the Company. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein in Item 6 and the financial statements and related
notes to consolidated financial statements thereto included herein in Item 7.

<TABLE>
<CAPTION>
                                                             FOR THE YEARS ENDED JUNE 30,
                                                   ------------------------------------------------
                                                      2006      2005      2004      2003      2002
                                                    -------   -------   -------   -------   -------
                                                   (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                <C>        <C>       <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
NET REVENUES:
Product revenue                                     $27,544   $23,864   $12,348   $11,191   $10,293
Other revenue                                         2,247     3,060     2,373     2,175     1,781
                                                    -------   -------   -------   -------   -------
REVENUES, NET                                        29,791    26,925    14,721    13,366    12,074
                                                    -------   -------   -------   -------   -------
COSTS AND EXPENSES:
   Cost of goods sold                                16,004    13,158     5,476     4,896     4,640
   Marketing, general and administrative             13,995    12,556     5,206       780       555
   Research and development                           2,828     1,893       776     5,034     5,097
   Writedown of license and distribution rights           0         0         0       196         0
                                                    -------   -------   -------   -------   -------
      TOTAL COSTS AND EXPENSES                       32,827    27,607    11,458    10,906    10,292
                                                    -------   -------   -------   -------   -------
(LOSS) INCOME FROM OPERATIONS                        (3,036)     (683)    3,263     2,460     1,782
                                                    -------   -------   -------   -------   -------
OTHER (EXPENSE) AND INCOME:
   Gain on sale of available for sale securities      1,157     3,412         0         0         0
   Loss from termination of joint venture                 0         0         0         0       (23)
   Equity in Ocular Telehealth Management, LLC         (174)      (64)        0         0         8
   Interest income                                      162        69        59         3         2
   Interest expense                                     (64)      (55)     (407)     (638)     (791)
                                                    -------   -------   -------   -------   -------
      TOTAL OTHER (EXPENSE) AND INCOME                1,081     3,362      (347)     (635)     (804)
                                                    -------   -------   -------   -------   -------
NET (LOSS) INCOME BEFORE TAXES                       (1,956)    2,680     2,915     1,825       978
                                                    -------   -------   -------   -------   -------
   Provision for income taxes                            31       232       173       112         0
                                                    -------   -------   -------   -------   -------
NET (LOSS) INCOME                                   $(1,987)  $ 2,448   $ 2,742   $ 1,713   $   978
                                                    =======   =======   =======   =======   =======
BASIC NET (LOSS) INCOME PER SHARE                   $ (0.32)  $  0.42   $  0.70   $  0.51   $  0.29
                                                    =======   =======   =======   =======   =======
DILUTED NET (LOSS) INCOME PER SHARE                 $ (0.32)  $  0.39   $  0.64   $  0.48   $  0.29
                                                    =======   =======   =======   =======   =======
WEIGHTED AVERAGE SHARES - BASIC USED IN PER
   SHARE CALCULATION                                  6,152     5,832     3,897     3,365     3,346
                                                    =======   =======   =======   =======   =======
WEIGHTED AVERAGE SHARES - DILUTED USED IN PER
   SHARE CALCULATION                                  6,152     6,231     4,304     3,573     3,360
                                                    =======   =======   =======   =======   =======
</TABLE>

<TABLE>
<CAPTION>
                                                              AT JUNE 30,
                                         ----------------------------------------------------
                                           2006       2005       2004       2003       2002
                                         --------   --------   --------   --------   --------
                                                        (AMOUNTS IN THOUSANDS)
<S>                                      <C>        <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
Cash and cash equivalents                $  3,380   $  5,116   $ 12,602   $    298   $    221
Working capital (deficit)                  10,616     13,613     13,966        889       (240)
Total assets                               38,645     40,049     29,457     16,890     16,912
Long-term debt, net of current portion        163        392      2,396      4,080      5,191
Total liabilities                           5,545      5,530      5,996      7,951      9,719
Accumulated deficit                       (34,122)   (32,136)   (34,585)   (37,326)   (39,039)
Total shareholders' equity                 33,100     34,519     23,461      8,939      7,193
</TABLE>

     No cash dividends were paid in any of the periods presented.


                                       19

<PAGE>

     The following discussion and analysis should be read together with the
consolidated financial statements and notes thereto and other financial
information contained elsewhere in this Form 10-KSB and the discussion under
"Cautionary Factors that May Affect Future Results" included in Part I of this
Form 10-KSB.

     Escalon operates primarily in four reportable business segments: Drew,
Sonomed, Vascular and Medical/Trek/EMI. Drew is a diagnostics company
specializing in the design, manufacture and distribution of instruments for
blood cell counting and blood analysis. Drew is focused on providing
instrumentation and consumables for the physician office and veterinary office
laboratories. Drew also supplies the reagent and other consumable materials
needed to operate the instruments. Sonomed develops, manufactures and markets
ultrasound systems used for diagnosis or biometric applications in
ophthalmology. Vascular develops, manufactures and markets vascular access
products. Medical/Trek/EMI develops, manufactures and distributes ophthalmic
surgical products under the Escalon Medical Corp. and/or Trek Medical Products
names and manufactures and markets digital camera system for ophthalmic fundus
photography. For a more complete description of these businesses and their
products, see Item 1 - Description of Business.

     EXECUTIVE OVERVIEW - FISCAL YEARS ENDED JUNE 30, 2006 AND 2005

     The following highlights are discussed in further detail within this Form
10-KSB. The reader is encouraged to read this Form 10-KSB in its entirety to
gain a more complete understanding of factors impacting Company performance and
financial condition.

     -    On July 23, 2004, the Company acquired 67% of the outstanding ordinary
          shares of Drew pursuant to the Company's exchange offer for all of the
          outstanding ordinary shares of Drew, and since that date has acquired
          all of the Drew shares. The Company has been operating Drew as a
          separate business unit since its acquisition, and Drew's results of
          its operations are included in the "Management's Discussion and
          Analysis or Plan of Operation" for all periods since the acquisition
          in July 2004. Prior to the acquisition, Drew's ability to obtain raw
          materials and components was severely restricted due to prolonged
          liquidity constraints. These constraints were pervasive throughout all
          of Drew's locations and affected all aspects of Drew's operations. The
          Company's operational priorities with respect to Drew have been to
          stabilize and increase Drew's revenue base and to infuse Drew with
          working capital in the areas of manufacturing, sales and marketing and
          product development in an effort to remove the pre-acquisition
          liquidity constraints (see "Business Conditions" in Liquidity and
          Capital Resource section).

     -    In connection with the acquisition of Drew, the Company issued 900,000
          shares of its common stock during the fiscal year ended June 30, 2005,
          of which 841,686 shares were issued in the six-month period ended
          December 31, 2004. The balance of the shares were issued in the
          six-month period ended June 30, 2005.

     -    Product revenue increased approximately 15.4% during fiscal year ended
          June 30, 2006 as compared to the prior fiscal year. The increase is
          primarily related to strong sales in the Company's Drew, Sonomed,
          Vascular and Medical/Trek/EMI business units. Sales at these business
          units increased approximately 26.2%, 1.0%, 14.5% and 10.8%,
          respectively, during the fiscal year ended June 30, 2006 when compared
          to the prior fiscal year.

     -    During July 2005, the Company sold 58,555 shares of IntraLase common
          stock that had originally been received by the Company in connection
          with the license of its laser properties to IntraLase in 1997. (See
          note 16 to the notes to consolidated financial statements.) The stock
          was sold at $19.8226 per share and yielded net proceeds of $1,157,336
          after the payment of brokers' commissions and other fees. The net
          proceeds were recorded as other income.

     -    Other revenue decreased approximately $813,287 or 26.4% during the
          fiscal year ended June 30, 2006 as compared to the prior fiscal year.
          The decrease primarily relates to a decrease in royalty payments
          received from Bauch & Lomb in connection with the Silicone Oil product
          line. During the fiscal years ended June 30, 2006 and 2005,
          approximately .6% and 5.5%, respectively, of the Company's net revenue
          was received from the Bauch & Lomb contract, which expired in August


                                       20

<PAGE>

          2005. Accordingly, the Company will receive no additional revenue
          related to this contract. The decrease in royalties from Bauch & Lomb
          was partially offset by increases in royalties from IntraLase and Bio
          Rad.

     -    Cost of goods sold as a percentage of product revenue increased to
          approximately 58.1% of revenues during the fiscal year ended June 30,
          2006, as compared to approximately 55.1% of product revenue for the
          prior fiscal year. Gross margins in the Drew business unit have
          historically been lower than those in the Company's other business
          units. The aggregate cost of goods sold as a percentage of product
          revenue of the Sonomed, Vascular and Medical/Trek/EMI business units
          during fiscal year ended June 30, 2006 increased to approximately
          51.0% of product revenue from approximately 44.6% in the prior fiscal
          year.

     -    Operating expenses increased approximately 16.4% during the fiscal
          year ended June 30, 2006 as compared to the prior fiscal year. During
          the fiscal year ended June 30, 2006, the Company incurred higher
          personnel costs to support the growth in the Company's business
          operations, higher advertising, sales and marketing salaries, travel
          and trade show costs related to the higher sales volumes and higher
          expenses associated with the integration of the MRP and existing EMI
          product lines. (The MRP acquisition closed on January 30, 2006. See
          note 12 of the notes to consolidated financial statements.) Research
          and development costs also increased to support introductions and
          planned introductions of new and or enhanced products, especially in
          the Drew and Sonomed business units. In addition, the Company
          continues to experience a high amount of legal and accounting fees
          primarily related to IntraLase litigation costs, increased auditors
          fees in proportion to the increase in the Company's size due to the
          acquisition of Drew and costs related to compliance with the
          Sarbanes-Oxley Act of 2002, which fees and costs exceeded $500,000.
          While the Company expects these legal, accounting and compliance
          expenses to impact earnings in the near term, it does not believe that
          all of these expenses will continue in the future at such high levels.

     RESULTS OF OPERATIONS

     FISCAL YEARS ENDED JUNE 30, 2006 AND 2005

     The following table shows consolidated product revenue by business unit as
well as identifying trends in business unit product revenues for the fiscal
years ended June 30, 2006 and 2005. Table amounts are in thousands:

<TABLE>
<CAPTION>
                    FISCAL YEARS ENDED JUNE 30,
                   ----------------------------
                     2006      2005    % CHANGE
                   -------   -------   --------
<S>                <C>       <C>       <C>
PRODUCT REVENUE:
Drew               $14,253   $11,294     26.2%
Sonomed              7,737     7,663      1.0%
Vascular             3,640     3,180     14.5%
Medical/Trek/EMI     1,914     1,727     10.8%
                   -------   -------     ----
TOTAL              $27,544   $23,864     15.4%
                   =======   =======     ====
</TABLE>

     Product revenue increased approximately $3,680,000, or 15.4%, to
$27,544,000 during the year ended June 30, 2006 as compared to the last fiscal
year. In the Drew business unit, product revenue increased $2,959,000, or 26.2%
as compared to last fiscal year. The increase is primarily due to additional
sales in the domestic and international markets of diabetics and hematology
instruments. Sales of spare parts and reagents and controls, which are used to
operate the instruments, also increased during the period to support the
increase in the installed base of the related instruments.

     Product revenue increased $74,000, or 1%, to $7,737,000 in the Sonomed
business unit as compared to the last fiscal year. The increase in product
revenue was primarily caused by an increase in sales of the Company's EZ AB scan
ultrasound systems and an increase in export sales, which were partially offset
by a decrease in domestic sales and in demand for the Company's pachymeter
product. The domestic market for pachymeters had previously expanded due to
enhanced techniques in glaucoma


                                       21
<PAGE>

screening performed by optometrists, who had historically not been users of the
pachymeter. Domestic demand for the pachymeter returned to historic levels
during the fourth quarter of fiscal 2004 due to market saturation and increased
price competition within the marketplace.

     Product revenue increased $460,000, or 14.5%, to $3,640,000, at the
Vascular business unit during the year ended June 30, 2006 as compared to last
fiscal year. The increase in product revenue in the Vascular business unit was
primarily caused by an increase in direct sales to end users by the Company's
domestic sales team. These increases were partially offset by decreases in
revenue from the Company's distributor network. The Company terminated its
relationship with several of its distributors during fiscal year 2005. In the
Medical/Trek/EMI business unit, product revenue increased $187,000 or 10.8% to
$1,914,000 during the year ended June 30, 2006 as compared to the last fiscal
year. The increase in Medical/Trek/EMI product revenue is primarily attributed
to an increase in the Trek business unit revenue from Bausch & Lomb. Also
contributing to the increase was an increase in EMI sales of digital imaging
systems from the MRP acquisition. (See note 12 of the notes to consolidated
financial statements.)

     Other revenue decreased by approximately $813,000, or 26.5%, to $2,246,000
during the fiscal year ended June 30, 2006 as compared to the prior fiscal year.
The decrease is primarily due to an approximately $1,283,000 decrease in
royalties received from Bausch & Lomb in connection with their sales of Silicone
Oil. The Company's contract with Bausch & Lomb called for annual step-downs in
the calculation of Silicone Oil revenue to be received by the Company from 64%
from August 13, 2003 to August 12, 2004 to 45% from August 13, 2004 to August
12, 2005. The Company's contract with Bausch & Lomb ended in August 2005, and
accordingly, the Company received no royalties after the termination date and
will receive no future royalties under this agreement. (See note 11 of the notes
to consolidated financial statements for a description of the step-down
provisions under the contract with Bausch & Lomb.) Royalties from Bio-Rad
related to an OEM agreement between Bio-Rad and Drew increased by approximately
$51,000 to $282,508 due to higher sales of Drew's products in covered areas.
While this agreement terminated as of May 15, 2005, the parties have continued
to operate under the terms of the expired agreement pending negotiation of a
potential extension and/or revision.

     The following table presents consolidated cost of goods sold by reportable
business unit and as a percentage of related unit product revenues for the
fiscal years ended June 30, 2006 and 2005. Table amounts are in thousands:

<TABLE>
<CAPTION>
                         FISCAL YEARS ENDED JUNE 30,
                      ---------------------------------
                        2006      %       2005      %
                      -------   -----   -------   -----
<S>                   <C>       <C>     <C>       <C>
COST OF GOODS SOLD:
Drew                  $ 9,225   64.7%   $ 7,554   66.9%
Sonomed                 3,962   51.2%     3,115   40.7%
Vascular                1,535   42.2%     1,432   45.0%
Medical/Trek/EMI        1,282   67.0%     1,058   61.3%
                      -------   ----    -------   ----
TOTAL                 $16,004   58.1%   $13,159   55.1%
                      =======   ====    =======   ====
</TABLE>

     Cost of goods sold totaled approximately $16,004,000, or 58.1% of product
revenue, for the fiscal year ended June 30, 2006 as compared to $13,159,000 or
55.1% of product revenue, for the prior fiscal year. Cost of goods sold in the
Drew business unit totaled $9,225,000, or 64.7% of product revenue, for the
fiscal year ended June 30, 2006 as compared to $7,554,000, or 66.9% of product
revenue, for the prior fiscal year. The decrease in the cost of goods sold as a
percentage of revenue was due to a shift in the mix of products sold and a
decrease in manufacturing gains experienced in the prior fiscal year. Instrument
and OEM sales historically have lower margins than the sales of reagents and
controls, which are used to operate the instruments.

     Cost of goods sold in the Sonomed business unit totaled $3,962,000, or
51.2% of product revenue, for the fiscal year ended June 30, 2006 as compared to
$3,115,000, or 40.7% of product revenue, for prior fiscal year. The primary
reason for the increase was an increase in the percentage of international sales
during the period. The Company historically experiences a lower selling price
per unit on its international product sales. In addition, the Company
experienced a significantly higher margin in the prior year on pachymeters sales
due to significant market demand. The demand returned to normal commencing


                                       22

<PAGE>

in the fourth quarter of fiscal 2004. Cost of goods sold in the Vascular
business unit totaled $1,535,000, or 42.2% of product revenue, for fiscal year
ended June 30, 2006 as compared to $1,432,000, or 45.0% of product revenue, for
the last fiscal year. The Company experienced lower overtime and higher
production efficiencies in the current period as compared to the prior year.
Cost of goods sold in the Medical/Trek/EMI business unit totaled $1,282,000, or
67% of product revenue, for fiscal year ended June 30, 2006 as compared to
$1,058,000, or 61.3% of product revenue, during the same period last fiscal
year. Fluctuations in Medical/Trek/EMI cost of goods sold primarily emanates
from product mix, which was primarily controlled by market demand. Further
contributing to the increase was the integration of MRP into the existing EMI
product lines.

     The following table presents consolidated marketing, general and
administrative expenses as well as identifying trends in business unit
marketing, general and administrative expenses for the fiscal years ended June
30, 2006 and 2005. Table amounts are in thousands:

<TABLE>
<CAPTION>
                                          FISCAL YEARS ENDED JUNE 30,
                                         -----------------------------
                                           2006      2005    % CHANGE
                                         -------   -------   ---------
<S>                                      <C>       <C>       <C>
MARKETING, GENERAL AND ADMINISTRATIVE:
Drew                                     $ 6,006   $ 4,104      46.4%
Sonomed                                    2,098     1,608      30.5%
Vascular                                   1,682     1,424      18.2%
Medical/Trek/EMI                           4,209     5,420     -22.4%
                                         -------   -------     -----
TOTAL                                    $13,995   $12,556      11.5%
                                         =======   =======     =====
</TABLE>

     Marketing, general and administrative expenses increased $1,439,000, or
11.5%, to 13,995,000 during the fiscal year ended June 30, 2006 as compared to
the prior fiscal year. Marketing, general and administrative expenses in the
Drew business unit increased $1,902,000, or 46.4%, to $6,006,000 as compared to
the same period last fiscal year. The increase is primarily due to higher
personnel and advertising costs related to improving the image of the Drew brand
with both customers and distributors, improving the product distributor network
and expanding the management team, which ultimately helped contribute to the
11.5% increase in product revenue when compared to the corresponding prior year
period.

     Marketing, general and administrative expenses in the Sonomed business unit
increased by $490,000, or 30.5%, to $2,098,000 as compared to the prior fiscal
year. The increase is due primarily to increased personnel, travel and
advertising and trade show expenses related to the expansion into international
markets and the roll out of Sonomed's new UBM Instrument.

     Marketing, general and administrative expenses in the Vascular business
unit increased $258,000, or 18.2%, to $1,682,000 as compared to the same period
last fiscal year. Sales salaries and other personnel-related expenses increased
approximately $157,000, travel related expenses for sales personnel increased by
approximately $90,000, advertising increased by approximately $9,000 and the
expense for customer samples increased by approximately $19,000 when compared to
the prior fiscal year. All of the increases were related to supporting a higher
volume of business during the current period as compared to the same period in
the prior fiscal year. Legal expenses increased $49,000 over the prior period
due to additional patent applications, planning and review.

     Marketing, general and administrative expenses in the Medical/Trek/EMI
business unit decreased $1,211,000 or 22.4% to $4,209,000 as compared to last
fiscal year. Of the decrease, $1,087,000 is due to a one-time supplemental
retirement benefit awarded in June 2005 to the Company's Chairman and CEO (see
note 10 to the consolidated financial statements). EMI marketing, general and
administrative expenses increased to $560,000 from $222,000 experienced last
year due mainly to the integration of MRP with the EMI lines, and the joint
marketing and integration of the Company's product line with Anka Systems. Legal
expenses were $754,000, a 22,000 increase over last year. The Company expects
litigation costs due to Interlase and other matters to continue to impact
earnings in the near term.

     Research and development expenses increased $935,000, or 49.4%, to
$2,828,000 during the fiscal year ended June 30, 2006 as compared to the prior
fiscal year. Drew accounted for $1,734,000 of the $2,828,000 incurred for the
year. These funds relate to the continued research on Drew's two new


                                       23

<PAGE>

instruments the Drew 360 and the XL22. Approximately $510,000 was incurred
during the period by Sonomed as it finalized the development of its new UBM
Instrument. The remainder was incurred on various projects by legacy Escalon
Companies to continue to enhance and improve their product lines.

     Gain on sale of available for sale securities was approximately $1,157,000
and $3,412,000 for the fiscal years ended June 30, 2006 and 2005, respectively.
The decrease was due to the sale of fewer shares of IntraLase common stock in
July 2005. (See note 16 of the notes to consolidated financial statements.)

     The Company recognized a loss of approximately $174,000 and $64,000 related
to its investment in Ocular Telehealth Management ("OTM") during the fiscal
years ended June 30, 2006 and 2005, respectively. Commencing July 1, 2005, the
Company began recognizing all of the losses of OTM in its consolidated financial
statements. OTM is an early stage privately held company. Prior to July 1, 2005,
the share of OTM's loss recognized by the Company was in direct proportion to
the Company's ownership equity in OTM. OTM began operations during the
three-month period ended September 30, 2004. (See note 14 of the notes to
consolidated financial statements.)

     Interest income was $162,000 and $69,000 for the fiscal years ended June
30, 2006 and 2005, respectively. The increase was due to higher cash balances
and effective yields on investments.

     Interest expense was $64,000 and $55,000 for the fiscal years ended June
30, 2006 and 2005 respectively. The Company paid off several of its debt
facilities to several entities in advance of their maturities during the fiscal
year ended June 30, 2005. Additionally, the Company reversed accrued loan
commitment fees as a result of the satisfaction of the debt and the release by
the lender of those fees. The fees were originally accrued based on contract
terms.

LIQUIDITY AND CAPITAL RESOURCES

     The following table presents overall liquidity and capital resources from
continuing operations during the fiscal years ended June 30, 2006 and 2005.
Table amounts are in thousands:

<TABLE>
<CAPTION>
                                              JUNE 30,
                                       ---------------------
                                          2006        2005
                                       ---------   ---------
<S>                                    <C>         <C>
CURRENT RATIO:
Current assets                         $  14,911   $  17,665
Less: Current liabilities                  4,295       4,052
                                       ---------   ---------
WORKING CAPITAL                        $  10,616   $  13,613
                                       =========   =========
CURRENT RATIO                           3.5 TO 1    4.4 TO 1
                                       =========   =========
DEBT TO TOTAL CAPITAL RATIO:
Notes payable and current maturities   $     233   $     230
Long-term debt                               163         392
                                       ---------   ---------
Total debt                             $     396   $     622
                                       ---------   ---------
Total equity                              33,100      34,519
                                       ---------   ---------
TOTAL CAPITAL                          $  33,496   $  35,141
                                       =========   =========
TOTAL DEBT TO TOTAL CAPITAL                  1.2%        1.8%
                                       =========   =========
</TABLE>

     WORKING CAPITAL POSITION

     Working capital decreased $2,997,000 as of June 30, 2006 and the current
ratio decreased to 3.5 to 1 from 4.4 to 1 when compared to June 30, 2005. The
decrease in working capital was caused primarily by a decrease in cash of
$1,736,000 from $5,116,000 to $3,380,000 in 2005 and 2006, respectively.
Available for sale securities dropped $1,157,000 from $1,207,000 in 2005 to
$50,000 in 2006. Accounts receivable declined $756,000 from $4,752,000 in 2005
to $3,996,000 in 2006. Overall total current assets decreased


                                       24

<PAGE>

$2,754,000 from $17,645,000 in 2005 to $14,911,000 in 2006. Total current
liabilities which consist of current portion of long term debt, accounts payable
and accrued expenses increased $243,000, from $4,052,000 in 2005 to $4,295,000
in 2006.

     CASH USED IN OPERATING ACTIVITIES

     During fiscal 2006, the Company used approximately $2,605,000 of cash for
operating activities. In fiscal 2005, the Company used approximately $3,350,000
in operating activities. The net increase in cash generated from operating
activities of approximately $745,000 in fiscal 2006 as compared to fiscal 2005
is due primarily to the following factors:

     -    Income/loss from operations decreased approximately $4,434,000 in
          fiscal 2006 as compared to fiscal 2005, from net income in 2005 of
          $2,448,000 to a net loss in 2006 of $1,986,000. The net loss in 2006
          was driven by net losses at our Drew division of approximately
          $2,500,000 offset by net income in legacy Escalon companies of
          approximately $600,000. The loss at Drew was primarily driven by
          increased marketing and advertising expenses, research and development
          and the compression of gross margins on instrument sales. The swing
          from net income of $2,448,000 in 2005 to a net loss of $1,985,000 in
          2006 was offset by the following items:

     -    The Company, during fiscal 2005, utilized approximately $1,882,000 of
          cash to fund planned increases in inventory, primarily at its Drew and
          Sonomed business units. Prior to its acquisition by Escalon, Drew's
          ability to obtain raw materials and components was severely restricted
          due to prolonged liquidity constraints. Escalon's operating priorities
          included injecting working capital into Drew to remove the
          pre-acquisition liquidity constraints. Inventories increased at the
          Sonomed business unit to support planned introduction of new products.
          The cash spent in 2006 for increases in inventory were $1,189,000 or
          $693,000 lower than in the prior year. In addition, during 2005,
          Escalon had a gain on sale of marketable securities of $3,412,000
          compared to $1,157,000 in 2006.

     -    The Company also utilized approximately $2,169,000 of cash to fund
          increases primarily in Drew accounts receivable and reductions in
          Drew's accounts payable and accrued liabilities. The increase in
          receivables is due primarily to higher sales volume in the 4th quarter
          of fiscal 2005 and the reduction in payables and accruals is primarily
          due to the injection of working capital into Drew by Escalon to help
          remove Drew's pre-acquisition liquidity constraints. By contrast the
          changes in the accounts receivable and accounts payable accounts
          during 2006 resulted in a net increase in cash flow from operations of
          $992,000 and compared to a net decrease in 2005 of $2,169,000.

     CASH FLOWS USED IN INVESTING AND FINANCING ACTIVITIES

     Cash flows generated by investing activities for 2006 were approximately
$783,000. This amount is made up of sales of available for sales securities of
$1,157,000 (Interlase stock see note 16 of the consolidated financial
statements) offset by purchases of fixed assets of $327,000 and net cash used to
purchase MRP of $47,000.

     Cash flows generated by investing activities of approximately $2,187,000
during fiscal 2005 relate primarily to the net proceeds of approximately
$3,412,000 realized on the sale of a portion of the IntraLase securities held by
the Company as available for sale securities and cash acquired as part of the
Drew acquisition. The securities that were sold were originally acquired in
connection with the license of intellectual laser properties to IntraLase (see
note 16 to the consolidated financial statements). Partially offsetting the cash
realized on the securities sale were costs related to the Drew acquisition of
approximately $1,015,000, the Company's $256,000 investment in OTM and the
purchase of fixed assets during 2005. During the fiscal year ended June 30,
2004, in addition to the Drew acquisition costs discussed above, the Company had
approximately $231,000 of expenditures related to the Drew acquisition that were
classified as other current assets until the transaction was finalized in fiscal
2005. Otherwise, cash flows used in investing activities related solely to the
purchase of fixed assets for the fiscal year ended June 30, 2004. Any necessary
capital expenditures have generally been funded out of cash from operations, and
the Company is not aware of any factors that would cause historical capital
expenditure


                                       25

<PAGE>

levels to not be indicative of capital expenditures in the future and,
accordingly, does not believe that the Company will have to commit material
resources to capital investment for the foreseeable future.

     Cash flows provided by financing activities in the amount of $147,000
during 2006 relate to repayment of debt of $227,000, offset by the proceeds from
the issuance of common stock options of $374,000.

     Cash flows used in financing activities were approximately $6,318,000
during the fiscal year ended June 30, 2005. The Company paid off all of the
Company's pre-acquisition debt as well as substantially all of the debt acquired
from Drew. The Company paid off debt of approximately $6,348,000 during the
fiscal year ended June 30, 2005. See "Debt History" for more information
regarding repayment of the Company's debt facilities.

BUSINESS CONDITIONS:

     Due to Drew losing approximately $2.5 million in fiscal 2006, management
has re-evaluated the Drew business model and has devised a plan to enhance the
ability of Drew to operate profitably. The following actions are currently under
way and are expected to be completed by approximately November 7, 2006.

     The Company is moving Drew's Connecticut manufacturing facility to its
Dallas location. This move is expected to result in an annual savings of
approximately $391,000 in salaries and benefits, and facility savings of
approximately $149,000 for a total annual savings of approximately $540,000. The
implementation of this move to Texas began in August and is expected to be
finished by approximately November 7, 2006.

     The Drew Barrow, UK facility has been modified to reflect efficiencies we
plan to achieve in our Dallas location. The elimination of redundant positions
in Barrow is expected to result in salary reductions of approximately $416,000.
The lease on one of the Barrow properties has expired and will not be renewed,
because the building was under utilized and is no longer needed. Total annual
cash flow savings is expected to be approximately $100,000. Finally, other
savings related to the reduction of our footprint in the UK (IT, storage,
vehicles, etc.) is estimated to be approximately $51,000. Total annual cost
reductions for Barrow is expected to be approximately $567,000.

     Concurrent with the move of Connecticut to Dallas we are implementing cost
reductions in Dallas. The elimination of redundant positions is expected to
result in a reduction of salaries and benefits by approximately $294,000, these
reductions were made in September 2006. In addition, Drew is renegotiating two
of its leases in Dallas. The renegotiation allows Drew to close one of its
buildings and renew a lease on the larger facility. The Dallas facility will
house the majority of Drew US operations with a modest sales office located in
Connecticut. The facility changes are expected to result in a reduction of
approximately $146,000 per year. Total reductions in Dallas are expected to be
$440,000 per year once fully implemented.

<TABLE>
<S>                                       <C>
Summary of Drew anticipated reductions:
   A. Connecticut                         $  540,000
   B. Barrow                              $  567,000
   C. Dallas                              $  440,000
                                          ----------
Total Anticipated Annual Savings          $1,547,000
                                          ==========
</TABLE>

     Additionally, redundant or non-essential positions were identified at our
corporate headquarters. These positions were eliminated in August and September
of 2006 for anticipated savings in salaries and benefits of $372,000, bringing
total cost reductions when fully implemented to approximately $1.9 million. Due
to severance and other costs related to the plan approximately $700,000 of these
reductions are expected to be realized in fiscal 2007.

Management anticipates that these cuts combined with budgeted increased profits
in legacy Escalon entities and the continued growth of our Interlase royalty
revenue stream will return the Company to profitability.


                                       26
<PAGE>

     DEBT HISTORY

     Drew has long-term debt facilities through the Texas Mezzanine Fund and
through Symbiotics, Inc. The Texas Mezzanine Fund debt provided for interest at
fixed rate of 8% per annum until July 1, 2005. The interest rate was then
adjusted to the prime rate plus 4% per annum. Each June 1, the rate will be
adjusted to the prime rate plus 4% per annum. The debt has a minimum interest
rate of 8% per annum to a maximum interest rate of 18% per annum. The interest
rate on the Texas Mezzanine Fund was 10.25% per annum and 8% per annum as of
June 30, 2006 and 2005, respectively. Drew is required to pay the Texas
Mezzanine Fund 1% of fiscal year revenues over $11,500,000 as defined in a
revenue participation agreement. The note is due in June 2008 and is secured by
certain assets of Drew. The outstanding balance as of June 30, 2006 was
approximately $278,717. The Symbiotics, Inc. term debt, which originated from
the acquisition of a product line from Symbiotics, Inc., is payable in monthly
principal installments of $8,333 plus interest at a fixed rate of 5.00% per
annum. The outstanding balance as of June 30, 2006 was approximately $116,671.

     On December 23, 2002, a lender acquired the Company's bank debt, which
consisted of term debt of $5,850,000 and $1,475,000 outstanding on a $2,000,000
available line of credit. On February 13, 2003, the Company entered into an
amended agreement with the lender. The primary amendments of the amended loan
agreement were to reduce quarterly principal payments, extend the term of the
repayments and to alter the covenants of the original bank agreement. On
September 30, 2004, the Company paid off and terminated both the remaining term
debt and the outstanding balance on the line of credit. In November 2001, the
Company issued 60,000 warrants to purchase the Company's common stock at $3.66
per share in connection with this debt. The warrants were exercised in December
2004.

     On January 21, 1999, the Company's Vascular subsidiary and Endologix
entered into an Assets Sale and Purchase Agreement. Pursuant to this agreement,
the Company acquired for cash the assets of Endologix's vascular access business
in exchange and also agreed to pay royalties to Endologix based on future sales
of the vascular access business for a period of five years following the close
of the sale, with a guaranteed minimum of $300,000 per year. On February 1,
2001, the parties amended the agreement to eliminate any future royalty payments
to Endologix. Pursuant to this amendment, the Company paid $17,558 in cash to
Endologix, delivered a short-term note in the amount of $64,884 that was
satisfied in January 2002, delivered a note in the amount of $717,558 payable in
eleven quarterly installments that commenced on April 15, 2002, and issued
50,000 shares of its common stock to Endologix. On September 30, 2004, the
Company paid off the balance of the term debt.

     At the time of the acquisition of Drew by Escalon, Drew had two lines of
credit aggregating approximately $2,700,000, one of which was with a domestic
financial institution, one with a United Kingdom financial institution. At the
time of the acquisition, outstanding draws on the lines aggregated approximately
$1,643,000. The lines were paid off and terminated during the quarter ended
December 31, 2004.

     BALANCE SHEET

     The components of the balance sheet of the Company were increased as of
July 23, 2004 by the acquisition of Drew as follows:

<TABLE>
<S>                        <C>
Cash                       $  150,849
Accounts receivable         1,439,120
Inventory                   2,069,146
Other current assets          351,505
Furniture and equipment       868,839
Goodwill                    9,574,655
Patents                       297,246
Other long-term assets          7,406
Line of credit              1,617,208
Current liabilities         3,392,286
Long-term debt              1,072,457
Exchange of common stock    7,430,439
</TABLE>


                                       27

<PAGE>

     These amounts represents approximately a $952,000 net difference from the
amounts reported in the Company's Form 10-Q for the quarter ended September 30,
2004, which has been recorded as an increase in goodwill. The difference is the
result of additional facts obtained since the acquisition which impacted the
valuation of the assets acquired and liabilities assumed.

     OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

     The Company was not a party to any off-balance sheet arrangements as of and
for the fiscal years ended June 30, 2006 and 2005. The following table presents
the Company's contractual obligations as of June 30, 2006 (interest is not
included in the table as it is not material):

<TABLE>
<CAPTION>
                                2007           2008           2009       THEREAFTER     TOTAL
                            ------------   ------------   ------------   ----------   --------
<S>                         <C>            <C>            <C>            <C>          <C>
Texas Mezzanine Fund Note       $132,841       $145,876          $   0     $   0      $278,717
   Interest rate            Prime Plus 4%  Prime Plus 4%  Prime Plus 4%     0.00%
Symbiotics, Inc. Note           $ 99,996       $ 16,675          $   0     $   0      $116,671
   Interest rate                    5.00%          5.00%          5.00%     0.00%
                                --------       --------          -----     -----      --------
TOTAL                           $232,837       $162,551          $   0     $   0      $395,388
                                ========       ========          =====     =====      ========
</TABLE>

     FORWARD-LOOKING STATEMENT ABOUT SIGNIFICANT ITEMS LIKELY TO IMPACT
LIQUIDITY

     On July 23, 2004, the Company acquired approximately 67% of the outstanding
ordinary shares of Drew, pursuant to the Company's exchange offer for all of the
outstanding ordinary shares of Drew and subsequently acquired the remaining
shares during the fiscal year ended June 30, 2005. Drew does not have a history
of producing positive operating cash flows and, as a result, at the time of
acquisition, was operating under financial constraints and was
under-capitalized. As Drew is integrated into the Company, management will be
working to reverse the situation, while at the same time seeking to strengthen
Drew's market position. Escalon loaned approximately $11,276,000 to Drew. The
funds have been primarily used to procure components to build up inventory to
support the manufacturing process as well as to pay off accounts payable and
debt of Drew. Escalon anticipates that further working capital will likely be
required by Drew.

     Escalon realized .6%, 5.5% and 13.2% of its net revenue during the fiscal
years ended June 30, 2006, 2005 and 2004, respectively, from Bausch & Lomb's
sales of Silicone Oil. Silicone Oil revenue is based on the sale of the product
by Bausch & Lomb multiplied by a contractual factor that declines on an annual
basis due to a contractual step-down provision. The contract expired on August
12, 2005. (See note 11 of the notes to consolidated financial statements for
additional information regarding the contract with Bausch & Lomb.)

     ESCALON COMMON STOCK

     The Company's common stock is currently listed on the Nasdaq Capital
Market. In order to continue to be listed on the Nasdaq Capital Market, the
following requirements must be met:

     -    Stockholders' equity of $2,500,000 or market value of listed
          securities of $35,000,000 or net income from continuing operations (in
          the latest fiscal year or two of the last three fiscal years) of
          $500,000;

     -    500,000 publicly held shares;

     -    $1,000,000 market value of publicly held shares;

     -    A minimum bid price of $1;

     -    300 round lot shareholders;

     -    Two market makers; and

     -    Compliance with corporate governance standards.


                                       28

<PAGE>

     As of June 30, 2006, Escalon complied with these requirements.

CRITICAL ACCOUNTING POLICIES

     The preparation of financial statements requires management to make
estimates and assumptions that impact amounts reported therein. The most
significant of those involve the application of Statement of Accounting
Standards ("SFAS') No. 142 "Goodwill and Other Intangible Assets," discussed
further in the notes to consolidated financial statements included in this Form
10-KSB. The financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America, and, as such,
include amounts based on informed estimates and judgments of management. For
example, estimates are used in determining valuation allowances for deferred
income taxes, uncollectible receivables, obsolete inventory, sales returns and
rebates and purchased intangible assets. Actual results achieved in the future
could differ from current estimates. The Company used what it believes are
reasonable assumptions and, where applicable, established valuation techniques
in making its estimates.

     REVENUE RECOGNITION

     The Company recognizes revenue from the sale of its products at the time of
shipment, when title and risk of loss transfer. The Company provides products to
its distributors at agreed wholesale prices and to the balance of its customers
at set retail prices. Distributors can receive discounts for accepting high
volume shipments. The discounts are reflected immediately in the net invoice
price, which is the basis for revenue recognition. No further material discounts
are given.

     The Company's considerations for recognizing revenue upon shipment of
product to a distributor are based on the following:

     -    Persuasive evidence that an arrangement (purchase order and sales
          invoice) exists between a willing buyer (distributor) and the Company
          that outlines the terms of the sale (company information, quantity of
          goods, purchase price and payment terms). The buyer (distributor) does
          not have a right of return.

     -    Shipping terms are ex-factory shipping point. At this point the buyer
          (distributor) takes title to the goods and is responsible for all
          risks and rewards of ownership, including insuring the goods as
          necessary.

     -    The Company's price to the buyer (distributor) is fixed and
          determinable as specifically outlined on the sales invoice. The sales
          arrangement does not have customer cancellation or termination
          clauses.

     -    The buyer (distributor) places a purchase order with the Company; the
          terms of the sale are cash, COD or credit. Customer credit is
          determined based on the Company's policies and procedures related to
          the buyer's (distributor's) creditworthiness. Based on this
          determination, the Company believes that collectibility is reasonably
          assured.

     The Company assesses collectibility based on creditworthiness of the
customer and past transaction history. The Company performs ongoing credit
evaluations of its customers and does not require collateral from its customers.
For many of the Company's international customers, the Company requires an
irrevocable letter of credit to be issued by the customer before the purchase
order is accepted.

     VALUATION OF INTANGIBLE ASSETS

     Escalon annually evaluates for impairment its intangible assets and
goodwill in accordance with SFAS 142, "Goodwill and Other Intangible Assets," or
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. These intangible assets include goodwill, trademarks and
trade names. Factors the Company considers important that could trigger an
impairment review include significant under-performance relative to historical
or projected future operating results or significant negative industry or
economic trends. If these criteria indicate that the value of the intangible
asset may be impaired, an evaluation of the recoverability of the net carrying
value of the asset is made. If this evaluation indicates that the intangible
asset is not recoverable, the net carrying value of the related intangible asset
will be reduced to fair value. Any such impairment charge could be significant
and could have a material adverse impact on the Company's financial statements
if and when an impairment charge is recorded. No impairment losses were recorded
for goodwill, trademarks and trade names during any of the periods presented
based on these evaluations.


                                       29

<PAGE>

     INCOME/(LOSS) PER SHARE

     The Company computes net income/(loss) per share under the provisions of
SFAS No. 128, "Earnings Per Share," (SFAS 128) and Staff Accounting Bulletin,
No. 98 (SAB 98).

     Under the provisions of SFAS 128 and SAB 98, basic and diluted net
income/(loss) per share is computed by dividing the net income/(loss) for the
period by the weighted average number of shares of common stock outstanding
during the period. The calculation of diluted net income/(loss) per share
excludes potential common shares if the impact is anti-dilutive. Basic earnings
per share are computed by dividing net income/(loss) by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share are determined in the same manner as basic earnings per share, except
that the number of shares is increased by assuming exercise of dilutive stock
options and warrants using the treasury stock method.

     TAXES

     Estimates of taxable income of the various legal entities and jurisdictions
are used in the tax rate calculation. Management uses judgment in estimating
what the Company's income will be for the year. Since judgment is involved,
there is a risk that the tax rate may significantly increase or decrease in any
period.

     In determining income/(loss) for financial statement purposes, management
must make certain estimates and judgments. These estimates and judgments occur
in the calculation of certain tax liabilities and in the determination of the
recoverability of certain deferred tax assets, which arise from temporary
differences between the tax and financial statement recognition of revenue and
expense. SFAS 109 "Accounting for Income Taxes" also requires that the deferred
tax assets be reduced by a valuation allowance, if based on the available
evidence, it is more likely that not that all or some portion of the recorded
deferred tax assets will not be realized in future periods.

     In evaluating the Company's ability to recover the Company's deferred tax
assets, management considers all available positive and negative evidence
including the Company's past operating results, the existence of cumulative
losses and near-term forecasts of future taxable income that is consistent with
the plans and estimates management is using to manage the underlying businesses.

     Through June 30, 2006, the Company has recorded a full valuation allowance
against the Company's net operating losses due to uncertainty of their
realization as a result of the Company's earnings history, the number of years
the Company's net operating losses and tax credits can be carried forward, the
existence of taxable temporary differences and near-term earnings expectations.
The amount of the valuation allowance could decrease if facts and circumstances
change that materially increase taxable income prior to the expiration of the
loss carryforwards. Any reduction would reduce (increase) the income tax expense
(benefit) in the period such determination is made by the Company.

     QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     INTEREST RATE RISK

     The table below provides information about the Company's financial
instruments consisting of both variable and fixed interest rate debt
obligations. For debt obligations, the table represents principal cash flows and
related interest rates by expected maturity dates. Interest rates as of June 30,
2006 were variable at prime plus 4%, currently 10.25% per annum, on the Texas
Mezzanine Fund debt, and were fixed at 5.00% per annum, on the Symbiotics, Inc.
term debt. (See note 6 of the notes to consolidated financial statements for
further information regarding the Company's debt obligations.)


                                       30

<PAGE>

<TABLE>
<CAPTION>
                                2007           2008           2009       THEREAFTER     TOTAL
                            ------------   ------------   ------------   ----------   --------
<S>                         <C>            <C>            <C>            <C>          <C>
Texas Mezzanine Fund Note       $132,841       $145,876          $   0     $   0      $278,717
   Interest rate            Prime Plus 4%  Prime Plus 4%  Prime Plus 4%     0.00%
Symbiotics, Inc. Note           $ 99,996       $ 16,675          $   0     $   0      $116,671
   Interest rate                    5.00%          5.00%          5.00%     0.00%
                                --------       --------          -----     -----      --------
TOTAL                           $232,837       $162,551          $   0     $   0      $395,388
                                ========       ========          =====     =====      ========
</TABLE>

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements of the Company are filed under this Item 7,
beginning on page F-2 of this report.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
     FINANCIAL DISCLOSURE

     None

ITEM 8A. CONTROLS AND PROCEDURES

(A)  EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

     The Company's management, with the participation of the Company's Chief
Executive Officer and Principal Financial and Accounting Officer, have
established disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated subsidiaries, is
made known to the officers who certify the Company's financial reports and to
other members of senior management and the Board of Directors.

     Based on their evaluation of the effectiveness of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act,) as of June 30, 2006, the Chief Executive Officer and Principal
Financial and Accounting Officer of the Company have concluded that such
disclosure controls and procedures are effective to ensure that the information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms, and that information required
to be disclosed in the reports that the Company files or submits under the
Exchange Act is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Principal Financial and Accounting
Officer, to allow timely decisions regarding required disclosure.

(B)  INTERNAL CONTROL OVER FINANCIAL REPORTING

     There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rule 13a-15(f) under the
Exchange Act, during the quarter ended June 30, 2006 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.

     A control system, no matter how well designed and operated, cannot provide
absolute assurance that the objectives of the control systems are met, and no
evaluation of internal controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been detected. The
Company's disclosure controls and procedures are designed to provide reasonable
assurance of achieving their objectives and the chief executive officer and the
principal financial and accounting


                                       31

<PAGE>

officer concluded that the Company's disclosure controls and procedures are
effective at that reasonable assurance level.

ITEM 8B. OTHER INFORMATION

     None.

                                    PART III.

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
     WITH SECTION 16(A) OF THE EXCHANGE ACT AND EXECUTIVE OFFICERS OF THE
     REGISTRANT.

     The information required by this Item 9 is incorporated by reference to the
Company's proxy statement for the Company's 2006 Annual Meeting of Shareholders
to be filed with the SEC.

ITEM 10. EXECUTIVE COMPENSATION

     The information required by this Item 10 is incorporated by reference to
the Company's proxy statement for the Company's 2006 Annual Meeting of
Shareholders to be filed with the SEC.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
     RELATED SHAREHOLDER MATTERS

     The information required by this Item 11 is incorporated by reference to
the Company's proxy statement for the Company's 2006 Annual Meeting of
Shareholders to be filed with the SEC.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     See note 14 of the notes to the consolidated financial statements.

ITEM 13. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     CONSOLIDATED FINANCIAL STATEMENTS

     See index to Consolidated Financial Statements on Page F-1.

     CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

     All schedules have been omitted because they are not applicable, or not
required, or the information is shown in the financial statements or notes to
consolidated financial statements therein.


                                       32

<PAGE>

EXHIBITS

     The following is a list of exhibits filed as part of this Annual Report on
Form 10-KSB, where so indicated by footnote, exhibits, which were previously
filed, are incorporated by reference. For exhibits incorporated by reference,
the location of the exhibit in the previous filing is indicated parenthetically,
followed by the footnote reference to the previous filing.

<TABLE>
<S>     <C>   <C>
3.1     (a)   Restated Articles of Incorporation of Registrant. (8)

        (b)   Agreement and Plan of Merger dated as of September 28, 2001
              between Escalon Pennsylvania, Inc. and Escalon Medical Corp. (8)

3.2           Bylaws of Registrant. (8)

4.5     (a)   Warrant Agreement between Registrant and U.S. Stock Transfer
              Corporation. (1)

        (b)   Amendment to Warrant Agreement between the Registrant and U.S.
              Stock Transfer Corporation. (2)

        (c)   Amendment to Warrant Agreement between the Registrant and American
              Stock Transfer Corporation. (3)

4.6           Securities Purchase Agreement, dated as of December 31, 1997 by
              and among the Registrant and Combination. (4)

4.7           Registration Rights Agreement, dated as of December 31, 1997 by
              and among the Registrant and Combination. (4)

4.8           Warrant to Purchase Common Stock issued December 31, 1997 to David
              Stefansky. (4)

4.9           Warrant to Purchase Common Stock issued December 31, 1997 to
              Combination. (4)

4.10          Warrant to Purchase Common Stock issued December 31, 1997 to
              Richard Rosenblum. (4)

4.11          Warrant to Purchase Common Stock issued December 31, 1997 to
              Trautman, Kramer & Company. (4)

10.6          Employment Agreement between the Registrant and Richard J. DePiano
              dated May 12, 1998. (6)**

10.7          Non-Exclusive Distributorship Agreement between Registrant and
              Scott Medical Products dated October 12, 2000. (9)

10.9          Assets Sale and Purchase Agreement between the Registrant and
              Endologix, Inc. dated January 21, 1999. (5)

10.13         Supply Agreement between the Registrant and Bausch & Lomb
              Surgical, Inc. dated August 13, 1999. (5)

10.15         Registrant's Amendment and Supplement Agreement and Release
              between the Registrant and Endologix, Inc. dated February 28,
              2001. (10)

10.29         Registrant's amended and restated 1999 Equity Incentive Plan. (13)
              **

10.30         Securities Purchase Agreement dated as of March 16, 2004 (the
              "Securities Purchase Agreement") between the Company and the
              Purchasers signatory thereto. (14)

10.31         Registration Rights Agreement dated as of March 16, 2004 between
              the Company and the Purchasers signatory thereto. (14)

10.32         Form of Warrant to Purchase Common Stock issued to each Purchaser
              under the Securities Purchase Agreement. (14)

10.33         Manufacturing Supply and Distribution Agreement between Sonomed,
              Inc. and Ophthalmic Technologies, Inc. dated as of March 11, 2004.
              (15)

10.34         Supplemental Executive Retirement Benefit Agreement for Richard
              DePiano dated June 23, 2005. (16)**

10.35         2004 Equity Incentive Plan. (17)**

21            Subsidiaries. (*)

23.1          Consent of Independent Registered Public Accounting Firm. (*)

</TABLE>


                                       33

<PAGE>

<TABLE>
<S>     <C>   <C>
31.1          Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
              2002 - Richard J. DePiano (*)

31.2          Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
              2002 - Robert M. O'Connor(*)

32.1          Certification pursuant to Section 1350 of Title 18 of the United
              States Code - Richard J. DePiano. (*)

32.2          Certification pursuant to Section 1350 of Title 18 of the United
              States Code - Robert M. O'Connor. (*)
</TABLE>

----------
*    Filed herewith.

**   Management contract of compensatory plan.

(1)  Filed as an exhibit to Pre-Effective Amendment No. 2 to the Company's
     Registration Statement on Form S-1 dated November 9, 1993 (Registration No.
     33-69360).

(2)  Filed as an exhibit to the Company's Form 10-KSB for the year ended June
     30, 1994.

(3)  Filed as an exhibit to the Company's Form 10-KSB for the year ended June
     30, 1995.

(4)  Filed as an exhibit to the Company's Registration Statement on Form S-3
     dated January 20, 1998 (Registration No. 333-44513).

(5)  Filed as an exhibit to the Company's Form 10-KSB for the year ended June
     30, 1999.

(6)  Filed as an exhibit to the Company's Form 8-K/A, dated March 31, 2000.

(7)  Intentionally omitted.

(8)  Filed as an exhibit to the Company's Proxy Statement on Schedule 14A, as
     filed by the Company with the SEC on September 21, 2001.

(9)  Filed as an exhibit to the Company's Form 10-KSB for the year ended June
     30, 2001.

(10) Intentionally omitted.

(11) Intentionally omitted.

(12) Intentionally omitted.

(13) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
     December 31, 2003.

(14) Filed as an exhibit to the Company's Registration Statement on Form s_3
     dated April 8, 2004 (Registration No. 333-114332).

(15) Filed as an exhibit to the Company's Form 10-Q for the quarter ended March
     31, 2004.

(16) Filed as an exhibit to the Company's Form 8-K, dated June 23, 2005.

(17) Filed with the Definitive Proxy Statement on October 27, 2004.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The information required by this Item 14 is incorporated by reference to
the Company's proxy statement for the Company's 2006 Annual Meeting of
Shareholders to be filed with the SEC.


                                       34

<PAGE>

                                   SIGNATURES

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

                                        Escalon Medical Corp.
                                        (Registrant)


                                        By: /s/ Richard J. DePiano
                                            ------------------------------------
                                            Richard J. DePiano
                                            Chairman and Chief Executive Officer

Dated: September 28, 2006

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

<TABLE>
<S>                              <C>                             <C>


By: /s/ Richard J. DePiano       Chairman and Chief Executive    September 28, 2006
    --------------------------   Officer (Principal Executive
    Richard J. DePiano           Officer) and Director


By: /s/ Robert M. O'Connor       Chief Financial Officer         September 28, 2006
    --------------------------   (Principal Financial Officer)
    Robert M. O'Connor


By: /s/ Anthony Coppola          Director                        September 28, 2006
    --------------------------
    Anthony Coppola


By: /s/ Jay L. Federman          Director                        September 28, 2006
    --------------------------
    Jay L. Federman


By: /s/ William L.G. Kwan        Director                        September 28, 2006
    --------------------------
    William L.G. Kwan


By: /s/ Lisa Napolitano          Director                        September 28, 2006
    --------------------------
    Lisa Napolitano


By: /s/ Fred Choate              Director                        September 28, 2006
    --------------------------
    Fred Choate
</TABLE>


                                       35

<PAGE>

                              ESCALON MEDICAL CORP.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Report of Independent Registered Public Accounting Firm                      F-2
Report of Independent Registered Public Accounting Firm                      F-3
Consolidated Balance Sheets at June 30, 2006 and 2005                        F-4
Consolidated Statements of Income for the Years Ended June 30, 2006 and
   2005                                                                      F-5
Consolidated Statements of Shareholders' Equity for the Years Ended June
   30, 2006 and 2005                                                         F-6
Consolidated Statements of Cash Flows for the Years Ended June 30, 2006
   and 2005                                                                  F-7
Notes to Consolidated Financial Statements                                   F-8
</TABLE>

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Escalon Medical Corp.
Wayne, Pennsylvania

     We have audited the accompanying consolidated balance sheets of Escalon
Medical Corp. and subsidiaries (the "Company") as of June 30, 2006, and the
related consolidated statement of income, shareholders' equity and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Escalon
Medical Corp. and subsidiaries as of June 30, 2006, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.

                                        Mayer Hoffman McCann P.C.

Plymouth Meeting, Pennsylvania
September 20, 2006

                                       F-2

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Escalon Medical Corp.
Wayne, Pennsylvania

     We have audited the accompanying consolidated balance sheet of Escalon
Medical Corp. and subsidiaries (the "Company") as of June 30, 2005, and the
related consolidated statements of income, shareholders' equity and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Escalon
Medical Corp. and subsidiaries as of June 30, 2005, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.

                                        BDO Seidman, LLP

Philadelphia, Pennsylvania
September 22, 2005


                                       F-3
<PAGE>

                     ESCALON MEDICAL CORP. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                       JUNE 30,       JUNE 30,
                                                         2006           2005
                                                     ------------   ------------
<S>                                                  <C>            <C>
ASSETS
Current assets:
   Cash and cash equivalents                         $  3,379,710   $  5,115,772
   Available for sale securities                           50,220      1,207,317
   Accounts receivable, net                             3,996,243      4,752,310
   Inventory, net                                       7,122,916      5,856,285
   Notes receivable                                             0        100,000
   Other current assets                                   362,160        633,214
                                                     ------------   ------------
      TOTAL CURRENT ASSETS                             14,911,249     17,664,898
                                                     ------------   ------------
Furniture and equipment, net                              969,956        911,700
Goodwill                                               21,072,260     20,166,450
Trademarks and trade names                                620,106        616,906
Patents, net                                              313,702        402,814
Covenant not to compete and customer list, net            420,073              0
Other assets                                              337,421        286,568
                                                     ------------   ------------
   TOTAL ASSETS                                      $ 38,644,767   $ 40,049,336
                                                     ============   ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Current portion of long-term debt                 $    232,837   $    230,344
   Accounts payable                                     1,558,501      1,135,680
   Accrued expenses                                     2,503,771      2,685,670
                                                     ------------   ------------
      TOTAL CURRENT LIABILITIES                         4,295,109      4,051,694
                                                     ------------   ------------
Long-term debt, net of current portion                    162,551        391,793
Accrued post-retirement benefits                        1,087,000      1,087,000
                                                     ------------   ------------
   TOTAL LIABILITIES                                    5,544,660      5,530,487
                                                     ------------   ------------
Shareholders equity:
Preferred stock, $0.001 par value; 2,000,000
   shares authorized; no shares issued
Common stock, $0.001 par value; 35,000,000 share
   authorized; 6,344,657 and 5,963,477 issued and
   outstanding at June 30, 2006 and June 30, 2005,
   respectively                                             6,345          5,964
Common stock warrants                                   1,601,346      1,601,346
Additional paid-in capital                             65,699,370     63,898,190
Accumulated (deficit)                                 (34,122,427)   (32,136,487)
Accumulated other comprehensive (loss) income             (84,527)     1,149,836
                                                     ------------   ------------
   TOTAL SHAREHOLDERS' EQUITY                          33,100,107     34,518,849
                                                     ------------   ------------
   TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY        $ 38,644,767   $ 40,049,336
                                                     ============   ============
</TABLE>

                 See notes to consolidated financial statements


                                       F-4

<PAGE>

                     ESCALON MEDICAL CORP. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                   FOR THE YEARS ENDED JUNE 30
                                                   ---------------------------
                                                       2006          2005
                                                   ------------   ------------
<S>                                                <C>            <C>
NET REVENUES:
Product revenue                                    $27,543,785    $23,864,322
Other revenue                                        2,246,913      3,060,300
                                                   -----------    -----------
REVENUES, NET                                       29,790,698     26,924,622
                                                   -----------    -----------
COSTS AND EXPENSES:
   Cost of goods sold                               16,003,904     13,158,061
   Marketing, general and administrative            13,994,788     12,556,374
   Research and development                          2,828,196      1,892,706
                                                   -----------    -----------
      TOTAL COSTS AND EXPENSES                      32,826,888     27,607,141
                                                   -----------    -----------
(LOSS) INCOME FROM OPERATIONS                       (3,036,190)      (682,519)
                                                   -----------    -----------
OTHER (EXPENSE) AND INCOME:
   Gain on sale of available for sale securities     1,157,336      3,411,761
   Equity in Ocular Telehealth Management, LLC        (173,844)       (63,613)
   Interest income                                     161,588         69,262
   Interest expense                                    (63,521)       (55,116)
                                                   -----------    -----------
      TOTAL OTHER (EXPENSE) AND INCOME               1,081,559      3,362,294
                                                   -----------    -----------
NET (LOSS) INCOME BEFORE TAXES                      (1,954,631)     2,679,775
                                                   -----------    -----------
Provision for income taxes                              31,309        231,664
                                                   -----------    -----------
NET (LOSS) INCOME                                  $(1,985,940)   $ 2,448,111
                                                   ===========    ===========
BASIC NET (LOSS) INCOME PER SHARE                  $    (0.323)   $     0.420
                                                   ===========    ===========
DILUTED NET (LOSS) INCOME PER SHARE                $    (0.323)   $     0.393
                                                   ===========    ===========
WEIGHTED AVERAGE SHARES - BASIC                      6,152,455      5,831,564
                                                   ===========    ===========
WEIGHTED AVERAGE SHARES - DILUTED                    6,152,455      6,231,024
                                                   ===========    ===========
</TABLE>

                 See notes to consolidated financial statements


                                       F-5

<PAGE>

                     ESCALON MEDICAL CORP. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                   FOR THE YEARS ENDED JUNE 30, 2006 AND 2005

<TABLE>
<CAPTION>
                                                                                                    ACCUMULATED
                                      COMMON STOCK         COMMON      ADDITIONAL                      OTHER           TOTAL
                                   -------------------      STOCK       PAID-IN      ACCUMULATED   COMPREHENSIVE   SHAREHOLDERS'
                                     SHARES     AMOUNT    WARRANTS      CAPITAL        DEFICIT     INCOME (LOSS)       EQUITY
                                   ---------   -------   ----------   -----------   ------------   -------------   -------------
<S>                                <C>         <C>       <C>          <C>           <C>            <C>             <C>
BALANCE AT JUNE 30, 2004           5,017,122    $5,018   $1,601,346   $56,438,903   $(34,584,598)   $         0     $23,460,669
Comprehensive Income:
   Net income                              0         0            0             0      2,448,111              0       2,448,111
   Change in unrealized gains on
      available for sale securities        0         0            0             0              0      1,207,317       1,207,317
   Foreign currency translation            0         0            0             0              0        (57,481)        (57,481)
                                   ---------    ------   ----------   -----------   ------------    -----------     -----------
TOTAL COMPREHENSIVE INCOME                 0         0            0             0      2,448,111      1,149,836       3,597,947
Acquisition of Drew                  900,000       900            0     7,429,538              0              0       7,430,438
Exercise of common stock
   purchase warrants                  32,855        33            0           (33)             0              0               0
Exercise of stock options             13,500        13            0        29,782              0              0          29,795
                                   ---------    ------   ----------   -----------   ------------    -----------     -----------
BALANCE AT JUNE 30, 2005           5,963,477    $5,964   $1,601,346   $63,898,190   $(32,136,487)   $ 1,149,836     $34,518,849
Comprehensive Income:
   Net (loss)                              0         0            0             0     (1,985,940)             0      (1,985,940)
   Change in unrealized gains on
      available for sale securities        0         0            0             0              0     (1,157,097)     (1,157,097)
   Foreign currency translation            0         0            0             0              0        (77,266)        (77,266)
                                   ---------    ------   ----------   -----------   ------------    -----------     -----------
TOTAL COMPREHENSIVE INCOME                 0         0            0             0     (1,985,940)    (1,234,363)     (3,220,303)
Exercise of stock options            131,180       131            0       296,123              0              0         296,254
Income tax benefit from exercise
   of stock options                                                        77,807                                        77,807
Purchase of assets of MRP            250,000       250            0     1,427,250              0              0       1,427,500
                                   ---------    ------   ----------   -----------   ------------    -----------     -----------
BALANCE AT JUNE 30, 2006           6,344,657    $6,345   $1,601,346   $65,699,370   $(34,122,427)   $   (84,527)    $33,100,107
                                   ---------    ------   ----------   -----------   ------------    -----------     -----------
</TABLE>


                                       F-6
<PAGE>

                     ESCALON MEDICAL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                        YEARS ENDED JUNE 30,
                                                                     -------------------------
                                                                         2006          2005
                                                                     -----------   -----------
<S>                                                                  <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income                                                    $(1,985,940)  $ 2,448,111
Adjustments to reconcile net (loss) income to net cash (used in)
   operating activities:
   Depreciation and amortization                                         440,952       387,651
   Post retirement benefits                                                    0     1,087,000
   Gain on sale of available for sale securities                      (1,157,336)   (3,411,761)
   Reserve on notes receivable                                           100,000        50,000
   Loss on Ocular Telehealth Management, LLC                             173,844        63,613
   Abandonment of leashold improvement                                         0        12,458
   Change in operating assets and liabilities:
      Accounts receivable, net                                           761,834      (838,624)
      Inventory, net                                                  (1,189,207)   (1,882,149)
      Other current and long-term assets                                  19,880        63,750
      Accounts payable, accrued and other liabilities                    230,643    (1,330,009)
                                                                     -----------   -----------
         NET CASH (USED IN) OPERATING ACTIVITIES                      (2,605,330)   (3,349,960)
                                                                     -----------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of Drew, net of cash acquired                                      0       151,459
   Acquisition costs related to Drew                                                (1,015,362)
   Purchase of MRP, net of cash acquired                                 (47,060)            0
   Proceeds from the sale of available for sale securities             1,157,336     3,411,761
   Investment in Ocular Telehealth Management, LLC                             0      (256,000)
   Purchase of fixed assets                                             (327,340)     (104,396)
                                                                     -----------   -----------
         NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES             782,936     2,187,462
                                                                     -----------   -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit borrowing                                                       0             0
Line of credit repayment                                                       0    (1,905,822)
Principal payments on term loans                                        (226,749)   (4,441,761)
Issuance of common stock - private placement                                   0             0
Issuance of common stock - stock options                                 374,061        29,795
                                                                     -----------   -----------
         NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES             147,312    (6,317,788)
                                                                     -----------   -----------
         Effect of exchange rate changes on cash and cash
            equivalents                                                  (60,980)       (5,913)
                                                                     -----------   -----------
         NET (DECREASE) IN CASH AND CASH EQUIVALENTS                  (1,736,061)   (7,486,199)
                                                                     -----------   -----------
Cash and cash equivalents, beginning of period                         5,115,772    12,601,971
                                                                     -----------   -----------
Cash and cash equivalents, end of period                             $ 3,379,711   $ 5,115,772
                                                                     ===========   ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid                                                        $    37,586   $   198,647
                                                                     ===========   ===========
Income taxes refund (paid)                                           $    (1,133)  $   327,176
                                                                     ===========   ===========
Issuance of common stock for Drew acquisition                        $         0   $ 7,430,438
                                                                     ===========   ===========
Issuance of common stock for MRP acquisition                         $ 1,427,500   $         0
                                                                     ===========   ===========
(Decrease)/increase in unrealized appreciation on available for
   sale securities                                                   $(1,157,097)  $ 1,207,317
                                                                     ===========   ===========
</TABLE>

                 See notes to consolidated financial statements


                                       F-7

<PAGE>

                     ESCALON MEDICAL CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   ORGANIZATION AND DESCRIPTION OF BUSINESS AND BUSINESS CONDITIONS

     Escalon Medical Corp. ("Escalon") is a Pennsylvania corporation initially
incorporated in California in 1987, and reincorporated in Pennsylvania in
November 2001. Within this document, the "Company" collectively shall mean
Escalon and its wholly owned subsidiaries: Sonomed, Inc. ("Sonomed"), Escalon
Vascular Access, Inc. ("Vascular"), Escalon Medical Europe GmbH ("EME"), Escalon
Digital Vision, Inc. ("EMI"), Escalon Pharmaceutical, Inc. ("Pharmaceutical"),
Escalon Holdings, Inc. (EHI) and Drew Scientific Group, Plc ("Drew"), including
its subsidiaries. All intercompany accounts and transactions have been
eliminated. Additionally, the Company's investment in Ocular Telehealth
Management, LLC ("OTM") is accounted for under the equity method.

     The Company operates in the healthcare market specializing in the
development, manufacture, marketing and distribution of medical devices and
pharmaceuticals in the areas of ophthalmology, diabetes, hematology and vascular
access. The Company and its products are subject to regulation and inspection by
the United States Food and Drug Administration (the "FDA"). The FDA requires
extensive testing of new products prior to sale and has jurisdiction over the
safety, efficacy and manufacture of products, as well as product labeling and
marketing. The Company's Internet address is www.escalonmed.com.

     In connection with the presentation of the current period consolidated
financial statements, certain prior period balance have been reclassified to
conform with current period presentation.

     The Drew business unit has experienced significant losses and negative cash
flow from operations in the last two years. Management has begun to implement
cost reductions in each of Drew's three locations in order to bring Drew's cost
structure in line with anticipated revenues. Management anticipates that these
cuts combined with budgeted profits in legacy Escalon entities and the continued
IntraLase royalty revenue stream will provide sufficient liquidity in the
coming fiscal year.

2.   SIGNIFICANT ACCOUNTING POLICIES

     PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Sonomed, Vascular, EME, EMI, Pharmaceutical,
EHI and Drew. All intercompany accounts and transactions have been eliminated.

     USE OF ESTIMATES

     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 impact the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.

     CASH AND CASH EQUIVALENTS

     For the purposes of reporting cash flows, the Company considers all cash
accounts, which are not subject to withdrawal restrictions or penalties, and
highly liquid investments with original maturities of 90 days or less to be cash
and cash equivalents.

     FAIR VALUE OF FINANCIAL INSTRUMENTS


                                      F-8

<PAGE>

     The Company follows Statement of Financial Accounting Standards No. 107
("SFAS" 107"), "Disclosure about Fair Value of Financial Instruments". The
carrying amounts for cash and cash equivalents, accounts receivable, line of
credit, accounts payable and accrued liabilities approximate their fair value
because of their short-term maturity. The carrying value of available for sale
securities approximates market based-upon market arms-length transactions in the
underlying security. The carrying amounts of long-term debt approximate fair
value since the Company's interest rates approximate current interest rates.
While we believe the carrying value of the assets and liabilities is reasonable,
considerable judgment is used to develop estimates of fair value; thus the
estimates are not necessarily indicative of the amounts that could be realized
in a current market exchange.

     MARKETABLE SECURITIES

     The Company reports debt and marketable securities in accordance with
Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting
for Certain Investments in Debt and Equity Securities." All of the equity
securities held by the Company at June 30, 2006 and 2005 are classified as
available for sale securities. Accordingly, amounts are reported at fair value,
with unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity.

     REVENUE RECOGNITION

     The Company recognizes revenue from the sale of its products at the time of
shipment, when title and risk of loss transfer. The Company provides products to
its distributors at agreed wholesale prices and to the balance of its customers
at set retail prices. Distributors can receive discounts for accepting high
volume shipments. The discounts are reflected immediately in the net invoice
price, which is the basis for revenue recognition. No further material discounts
or sales incentives are given.

     The Company's considerations for recognizing revenue upon shipment of
product to a distributor are based on the following:

     -    Persuasive evidence that an arrangement (purchase order and sales
          invoice) exists between a willing buyer (distributor) and the Company
          that outlines the terms of the sale (company information, quantity of
          goods, purchase price and payment terms). The buyer (distributor) does
          not have a right of return.

     -    Shipping terms are ex-factory shipping point. At this point the buyer
          (distributor) takes title to the goods and is responsible for all
          risks and rewards of ownership, including insuring the goods as
          necessary.

     -    The Company's price to the buyer (distributor) is fixed and
          determinable as specifically outlined on the sales invoice. The sales
          arrangement does not have customer cancellation or termination
          clauses.

     -    The buyer (distributor) places a purchase order with the Company; the
          terms of the sale are cash, COD or credit. Customer credit is
          determined based on the Company's policy and procedures related to the
          buyer's (distributor's) creditworthiness. Based on this determination,
          the Company believes that collectibility is reasonably assured.

     With respect to additional consideration related to the sale of Silicone
Oil by Bausch & Lomb and the licensing of the Company's intellectual laser
technology, revenue is recognized upon notification from the other parties of
amount earned or upon receipt of royalty payments.

     Provision has been made for estimated sales returns based on historical
experience.

     SHIPPING AND HANDLING REVENUES AND COSTS

     Shipping and handling revenues are included in product revenue and the
related costs are included in cost of goods sold.

     INVENTORIES


                                      F-9

<PAGE>

     Raw materials, work in process and finished goods are recorded at lower of
cost (first-in, first-out) or market. The composition of inventories is as
follows:

<TABLE>
<CAPTION>
                              JUNE 30,
                      -----------------------
                         2006         2005
                      ----------   ----------
<S>                   <C>          <C>
Raw materials         $4,219,836   $3,476,493
Work in process          809,807      473,252
Finished goods         2,345,985    2,073,208
                      ----------   ----------
                       7,375,628    6,022,953
                      ----------   ----------
Valuation allowance     (252,712)    (166,668)
                      ----------   ----------
TOTAL INVENTORY       $7,122,916   $5,856,285
                      ==========   ==========
</TABLE>

     Valuation allowance activity for the years ended June 30 was as follows:

<TABLE>
<CAPTION>
                                          JUNE 30,
                                    -------------------
                                      2006       2005
                                    --------   --------
<S>                                 <C>        <C>
BALANCE, JULY 1                     $166,668   $  5,125
Provision for valuation allowance     87,475    161,543
Write-off's                           (1,431)         0
                                    --------   --------
BALANCE, JUNE 30                    $252,712   $166,668
                                    ========   ========
</TABLE>

     ACCOUNTS RECEIVABLE

     Accounts receivable are recorded at net realizable value. The Company
performs ongoing credit evaluations of customers' financial condition and does
not require collateral for accounts receivable arising in the normal course of
business. The Company maintains allowances for potential credit losses based on
the Company's historical trends, specific customer issues and current economic
trends. Accounts are written off when they are determined to be uncollectible
based on management's assessment of individual accounts. Credit losses, when
realized, have been within the range of management's expectations. Allowance for
doubtful accounts activity for the years ended June 30 was as follows:

<TABLE>
<CAPTION>
                                JUNE 30,
                          --------------------
                             2006       2005
                          ---------   --------
<S>                       <C>         <C>
BALANCE, JULY 1           $ 490,465   $121,212
Provision for bad debts     347,968    202,446
Write-off's                (188,856)   (41,208)
Other (a)                         0    208,015
                          ---------   --------
BALANCE, JUNE 30          $ 649,577   $490,465
                          =========   ========
</TABLE>

     (a) Acquired as part of the Drew acquisition in July 2004

     PROPERTY AND EQUIPMENT

     Property and equipment is recorded at cost. Leasehold improvements are
amortized on a straight-line basis over the lesser of the estimated useful life
of the asset or lease term. Depreciation on property and equipment is recorded
using the straight-line method over the estimated economic useful life of the
related assets. Estimated useful lives are generally 3 to 5 years for computer
equipment and software, 5 to 7


                                      F-10

<PAGE>

years for furniture and fixtures and 5 to 10 years for production and test
equipment. Depreciation expense for the years ended June 30, 2006 and 2005 was
$324,458 and $321,142, respectively.

     Property and equipment consist of the following at:

<TABLE>
<CAPTION>
                                                           JUNE 30,
                                                  -------------------------
                                                      2006          2005
                                                  -----------   -----------
<S>                                               <C>           <C>
Equipment                                         $ 2,289,994   $ 1,921,731
Furniture and Fixtures                                 65,891       120,460
Leasehold Improvements                                128,866       121,193
                                                  -----------   -----------
                                                    2,484,751     2,163,384
                                                  -----------   -----------
Less: Accumulated depreciation and amortization    (1,514,795)   (1,251,684)
                                                  -----------   -----------
                                                  $   969,956   $   911,700
                                                  ===========   ===========
</TABLE>

     LONG-LIVED ASSETS

     Long-lived assets and certain identifiable intangibles to be held and used
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. An asset's value is impaired if
management's estimate of the aggregate future cash flows, undiscounted and
without interest charges, to be generated by the asset are less than the
carrying value of the asset. Such cash flows consider factors such as expected
future operating income and historical trends, as well as the effects of demand
and competition. To the extent impairment has occurred, the loss will be
measured as the excess of the carrying amount of the asset over the fair value
of the asset. Such estimates require the use of judgment and numerous subjective
assumptions, which if actual experience varies, could result in material
differences in the requirements for impairment charges.

     INTANGIBLE ASSETS

     The Company follows Statement of Financial Accounting Standards No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets," which discontinues the
amortization of goodwill and identifiable intangible assets that have indefinite
lives. In accordance with SFAS 142, these assets are tested for impairment on an
annual basis.

     ACCRUED WARRANTIES

     The Company provides a limited one year warranty against manufacturer's
defects on its products sold to customers. The Company's standard warranties
require the Company to repair or replace, at the Company's discretion, defective
parts during such warranty period. The Company accrues for its product warranty
liabilities based on estimates of costs to be incurred during the warranty
period, based on historical repair information for warranty costs.

     BUSINESS COMBINATIONS

     The Company allocates the purchase price of acquired companies to the
tangible and intangible assets acquired and liabilities assumed based on their
estimated fair values. When acquisitions are deemed material by management, the
Company engages independent third-party appraisal firms to assist in determining
the fair values of assets acquired and liabilities assumed. Such a valuation
requires management to make significant estimates and assumption, especially
with respect to intangible assets.

     STOCK-BASED COMPENSATION

     The Company reports stock-based compensation through the disclosure-only
requirements of the Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation," as amended by Statement of
Financial Accounting Standards No. 148 ("SFAS 148"),


                                      F-11
<PAGE>

"Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment to FASB No. 123." Compensation expense for options is measured using
the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB
25, because the exercise price of the Company's employee stock options is
generally equal to the market price of the Company's underlying stock on the
date of grant, no compensation expense is recognized.

     SFAS 123 establishes an alternative method of expense recognition for
stock-based compensation awards based on fair values. The following table
illustrates the impact on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS 123.

<TABLE>
<CAPTION>
                                                          2006         2005
                                                      -----------   ----------
<S>                                                   <C>           <C>
Net (loss) income, as reported                        $(1,985,940)  $2,448,111
Deduct: Total stock-based employee compensation
   expense determined under fair value based method
   for all awards, net of related tax effects            (288,848)    (539,026)
                                                      -----------   ----------
PRO FORMA NET (LOSS) INCOME                           $(2,274,788)  $1,909,085
                                                      ===========   ==========
(LOSS) EARNINGS PER SHARE:
BASIC - AS REPORTED                                   $    (0.323)  $    0.420
                                                      ===========   ==========
BASIC - PRO FORMA                                     $    (0.370)  $    0.327
                                                      ===========   ==========
DILUTED - AS REPORTED                                 $    (0.323)  $    0.393
                                                      ===========   ==========
DILUTED - PRO FORMA                                   $    (0.370)  $    0.306
                                                      ===========   ==========
</TABLE>

     The Company has followed the guidelines of SFAS 123 to establish the
valuation of its stock options. The fair value of these equity awards was
estimated at the date of grant using these Black-Scholes option pricing method.
For the purposes of pro forma disclosures, the estimated fair value of the
equity awards is amortized to expense over the options' vesting period. For the
purposes of applying SFAS 123, the estimated per share value of the options
granted during the fiscal years ended June 30, 2006, 2005 and 2004 was $5.52,
$4.93, and $6.94, respectively. The fair value was estimated using the following
assumptions: dividend yield of 0.0%; volatility ranging between 0.60 and 2.51;
risk free interest ranging between 3.30% and 4.5%; and expected life of 10
years. The volatility assumption is based on volatility seen in the Company's
stock over the last five years. This assumption was made according to the
guidance of SFAS 123. There is no reason to believe that future volatility will
compare to historic volatility.

     RESEARCH AND DEVELOPMENT

     All research and development costs are charged to operations as incurred.

     ADVERTISING COSTS

     Advertising costs are charged to operations as incurred. Advertising
expense for the two years ended June 30, 2006 and 2005 was $279,670 and
$190,963, respectively.

     NET INCOME PER SHARE

     The Company follows Financial Accounting Standard Board Statement No. 128,
"Earnings Per Share," in presenting basic and diluted earnings per share. The
following table sets forth the computation of basic and diluted earnings per
share:


                                      F-12

<PAGE>

<TABLE>
<CAPTION>
                                              2006         2005
                                          -----------   ----------
<S>                                       <C>           <C>
NUMERATOR:
   Numerator for basic and diluted
      earnings per share
   NET (LOSS) INCOME                      $(1,985,940)  $2,448,111
                                          -----------   ----------
DENOMINATOR:
   Denominator for basic earnings per
      share - weighted average shares       6,152,455    5,831,564
   Effect of dilutive securities:
      Stock options and warrants                    0      399,460
                                          -----------   ----------
   DENOMINATOR FOR DILUTED EARNINGS PER
      SHARE - WEIGHTED AVERAGE AND
      ASSUMED CONVERSION                    6,152,455    6,231,024
                                          -----------   ----------
BASIC (LOSS) EARNINGS PER SHARE           $    (0.323)  $    0.420
                                          ===========   ==========
DILUTED (LOSS) EARNINGS PER SHARE         $    (0.323)  $    0.393
                                          ===========   ==========
</TABLE>

     As of June 30, 2006, the impact of all dilutive securities were omitted
from the diluted earnings per share calculation as they reduce the loss per
share (anti-dilutive). As of June 30, 2005, and 2004, 120,000 warrants, which
were issued in March 2004 (see note 7), to purchase shares of Escalon common
stock were outstanding. These warrants were excluded from the calculation of
diluted earnings per share as the exercise price of the warrants exceeded the
average share price of the Company's common stock for of the year ended June 30,
2005 making the warrants anti-dilutive.

     INCOME TAXES

     The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized based on
the difference between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted rates in effect in the years when those
temporary differences are expected to reverse. The impact on deferred taxes of a
change in tax rates, should a change occur, is recognized in income in the
period that include the enactment date.

     COMPREHENSIVE INCOME

     The Company reports comprehensive income in accordance with the provision
of SFAS No.130, "Reporting Comprehensive Income," which establishes standards
for reporting comprehensive income and its component in financial statements.
Comprehensive income, as defined, includes all changes in equity during a period
from non-owner sources.

     FOREIGN CURRENCY TRANSLATION

     The Company translates the assets and liabilities of international
subsidiaries into U.S. dollars at the current rates of exchange in effect as of
each balance sheet date. Revenues and expenses are translated using average
rates in effect during the period. Gains and losses from translation adjustments
are included in accumulated other comprehensive income on the consolidated
balance sheet. Foreign currency transaction gains or losses are recognized in
current operations and have not been significant to the Company's operating
results in any period. In addition, the effect of foreign currency rate changes
on cash and cash equivalents has not been significant in any period.

     NEW ACCOUNTING PRONOUNCEMENTS


                                      F-13

<PAGE>

     In December 2004, the FASB issued SFAS No.123R ("SFAS No.123R"), (revised
2004), "Share-Based Payments" SFAS No. 123R is a revision of SFAS No. 123 and
supersedes ABP Opinion No. 25 which requires the Company to expense share-based
payments, including employee stock options. With limited exceptions, the amount
of compensation costs will be measured based on the grant date fair value of the
equity or liability instrument issued. Compensation cost will be recognized over
the period that the employee provides service in exchange for the award. The
Company is required to adopt this standard in its fiscal year beginning July 1,
2005. The adoption of this standard for the expensing of stock options is
expected to reduce pretax earnings in future periods. The impact of adoption of
SFAS No. 123R can not be predicted at this time because it will depend upon the
level of share-based payments made in the future and the model the Company
elects to utilize.

3.   INTANGIBLE ASSETS

GOODWILL, TRADEMARKS AND TRADE NAMES

     Goodwill, trademarks and trade names represent intangible assets obtained
from EOI, Endologix, Sonomed and Drew acquisitions. Goodwill represents the
excess of purchase price over the fair value of net assets acquired.

     The Company adopted SFAS 142 effective July 1, 2001. Under SFAS 142,
goodwill and identified intangible assets that have indefinite lives are no
longer amortized but reviewed for impairment annually or more frequently if
certain indicators arise.

          In accordance with SFAS 142, effective July 1, 2001, the Company
discontinued the amortization of goodwill and identifiable intangible assets
that have indefinite lives. Intangible assets that have finite lives continue to
be amortized over their estimated useful lives. Management has evaluated the
carrying value of goodwill and its identifiable intangible assets that have
indefinite lives during each of the fiscal years subsequent to July 1, 2001,
utilizing discounted cash flows of the respective business units. After
evaluating the discounted cash flow of each of its respective business units,
management concluded that the carrying value of goodwill and identifiable
intangible assets did not exceed their fair values and therefore were not
impaired. In accordance with SFAS 142, these intangible assets will continue to
be assessed on an annual basis, and impairment, if any, would be recorded as a
charge against income from operations.

     The following table presents unamortized intangible assets by business unit
as of June 30,:


                                      F-14

<PAGE>

<TABLE>
<CAPTION>
                       2006          2005
                       NET           NET
                     CARRYING     CARRYING
                      AMOUNT        AMOUNT
                   -----------   -----------
<S>                <C>           <C>
GOODWILL
Sonomed            $ 9,525,550   $ 9,525,550
Drew                 9,574,655     9,574,655
Vascular               941,218       941,218
Medical/Trek/EMI     1,030,837       125,027
                   -----------   -----------
TOTAL              $21,072,260   $20,166,450
                   ===========   ===========
</TABLE>

<TABLE>
<CAPTION>
                              2006       2005
                               NET        NET
                            CARRYING   CARRYING
                             AMOUNT     AMOUNT
                            --------   --------
<S>                         <C>        <C>
TRADEMARKS AND TRADENAMES
Sonomed                     $616,906   $616,906
Medical/Trek/EMI               3,200          0
                            --------   --------
TOTAL                       $620,106   $616,906
                            ========   ========
</TABLE>

     PATENTS

     It is the Company's practice to seek patent protection on processes and
products in various countries. Patent application costs are capitalized and
amortized over their estimated useful lives, not exceeding 17 years, on a
straight-line basis from the date the related patents are issued. Costs
associated with patents no longer being pursued are expensed. Accumulated patent
amortization was $263,799 and $188,649 at June 30, 2006 and 2005, respectively.
Amortization expense for the years ended June 30, 2006 and 2005 was $75,150 and
$66,509, respectively.

     Amortization expense, relating entirely to patents, is estimated to be
approximately $70,000 per year for each of the next five fiscal years.

     COVENANT NOT TO COMPETE AND CUSTOMER LIST

     The Company recorded the value of a covenant not to compete and a customer
list as intangible assets as part of the acquisition of MRP (See note 12). The
valuation was based on the fair market value of these assets at the time of
acquisition. These assets are amortized over their estimate useful lives, not
exceeding 5 years, on a straight-line basis from the date of acquisition.
Accumulated amortization was $22,986 and $0 at June 30, 2006 and 2005,
respectively. Amortization expense for the years ended June 30, 2006 and 2005
was $22,896, and $0, respectively.

     The following table presents amortized intangible assets by business unit
as of June 30, 2006:


                                      F-15

<PAGE>

<TABLE>
<CAPTION>
                                                      ADJUSTED
                                GROSS                   GROSS
                              CARRYING                CARRYING    ACCUMULATED   NET CARRYING
                               AMOUNT    IMPAIRMENT    AMOUNT    AMORTIZATION       VALUE
                              --------   ----------   --------   ------------   ------------
<S>                           <C>        <C>          <C>        <C>            <C>
AMORTIZED INTANGIBLE ASSETS
PATENTS
Drew                          $275,284       $0       $275,284    $ (90,955)      $184,329
Vascular                        36,916        0         36,916      (18,458)        18,458
Medical/Trek/EMI               265,301        0        265,301     (154,386)       110,915
                              --------      ---       --------    ---------       --------
TOTAL                         $577,501       $0       $577,501    $(263,799)      $313,702
                              ========      ===       ========    =========       ========
COVENANT NOT TO COMPETE/
CUSTOMER LIST
Medical/Trek/EMI              $442,969       $0       $442,969    $ (22,896)      $420,073
                              --------      ---       --------    ---------       --------
TOTAL                         $442,969       $0       $442,969    $ (22,896)      $420,073
                              ========      ===       ========    =========       ========
</TABLE>

Amortization expense, relating entirely to covenant not to compete and the
customer list, is estimated to be approximately $93,350 per year for each of the
next five fiscal years.

The following table presents amortized intangible assets by business unit as of
June 30, 2005:

<TABLE>
<CAPTION>
                                                      ADJUSTED
                                GROSS                   GROSS
                              CARRYING                CARRYING    ACCUMULATED   NET CARRYING
                               AMOUNT    IMPAIRMENT    AMOUNT    AMORTIZATION       VALUE
                              --------   ----------   --------   ------------   ------------
<S>                           <C>        <C>          <C>        <C>            <C>
AMORTIZED INTANGIBLE ASSETS
PATENTS
Drew                          $297,246       $0       $297,246    $ (55,908)      $241,338
Vascular (pending issuance)     36,916        0         36,916            0         36,916
Medical/Trek/EMI               257,301        0        257,301     (132,741)       124,560
                              --------      ---       --------    ---------       --------
TOTAL                         $591,463       $0       $591,463    $(188,649)      $402,814
                              ========      ===       ========    =========       ========
</TABLE>

4.   NOTE RECEIVABLE

     Escalon entered into an agreement with an individual who was involved in
the development of the Company's Ocufit SR(R) drug delivery system. The Company
holds a note receivable from the individual in the amount of $150,000 that was
due in May 2005. The note was not paid when due and the individual is currently
in default. The Company intends to aggressively pursue collection, is currently
evaluating collection alternatives and has recorded a reserve of $150,000 and
$50,000 as of June 30, 2006 and 2005, respectively.

     In connection with a co-marketing agreement with Anka Systems, Inc.
("Anka"), in October 2005, the Company extended a $400,000 loan to Anka (See
note 17). Anka is an early stage privately held company. Under the terms of this
note, repayment was due within six months after written demand or immediately
upon an event of default. On February 16, 2006, the Company demanded repayment
in accordance with the terms of the note. The note was paid in full in April
2006.

5.   ACCRUED EXPENSES

     The following table presents accrued expenses:


                                      F-16

<PAGE>

<TABLE>
<CAPTION>
                         JUNE 30, 2006   JUNE 30, 2005
                         -------------   -------------
<S>                      <C>             <C>
Accrued compensation       $1,260,139      $1,276,639
Warranty accruals             255,740         201,413
Severance accruals                  0         195,263
Legal accruals                221,369         251,000
Other accruals                766,523         761,355
                           ----------      ----------
TOTAL ACCRUED EXPENSES     $2,503,771      $2,685,670
                           ==========      ==========
</TABLE>

     Severance accruals as of June 30, 2005 relate to certain former directors
and officers of Drew who management had the intent to terminate as of the
consummation date of the acquisition of Drew.

     In addition to normal accruals, other accruals as of June 30, 2006 and 2005
relate to the remaining lease payments on a facility that ceased manufacturing
operations prior to the Drew acquisition, accruals for litigation existing prior
to the Drew acquisition, franchise and ad valorem tax accruals and other sundry
operating expenses accruals.

     Accrued compensation as of June 30, 2006 and 2005 primarily relates to
payroll, bonus and vacation accruals, and payroll tax liabilities.

6.   LONG-TERM DEBT

     The Company has two long-term debt facilities through its Drew subsidiary:
the Texas Mezzanine Fund and Symbiotics, Inc. The Texas Mezzanine Fund debt
provided for interest at fixed rate of 8% per annum until July 1, 2005. The
interest rate was then adjusted to the prime rate plus 4% per annum. Each June
1, the rate will be adjusted to the prime rate plus 4% per annum. The debt has a
minimum interest rate of 8% per annum to a maximum interest rate of 18% per
annum. The interest rate on the Texas Mezzanine Fund was 10.25% per annum and 8%
per annum as of June 30, 2006 and 2005, respectively. Drew is required to pay an
additional interest payment to the Texas Mezzanine Fund of 1% of fiscal year
revenues over $11,500,000 as defined in a revenue participation agreement. The
note is due in June 2008 and is secured by certain assets of Drew. The
outstanding balance of the note was $278,717 and $405,471 as of June 30, 2006
and 2005, respectively. The Symbiotics, Inc. term debt, which originated from
the acquisition of a product line from Symbiotics, Inc., is payable in monthly
installments of $8,333 with interest at a fixed rate of 5% per annum. The
outstanding balance of this note was $116,671 and $216,666 as of June 30, 2006
and 2005, respectively.

     On December 23, 2002, a privately held fund (the "Lender") acquired the
Company's bank debt, which consisted of outstanding term debt of $5,850,000 and
$1,475,000 outstanding on a $2,000,000 line of credit (the "Term Loan and Line
of Credit"). On February 13, 2003, the Company entered into an Amended Loan
Agreement with the Lender. The primary amendments of the Amended Loan Agreement
were to reduce quarterly principal payments, extend the term of the repayments
and alter the covenants of the original loan agreement.

     As of June 30, 2004, the amount outstanding under the Term Loan and Line of
Credit were $3,896,019 and $250,000, respectively. At June 30, 2004, the
variable interest rates applicable to the term loan and line of credit were
5.75% and 5.50%, respectively. The lender's prime rate at June 30, 2004 was
4.00%. On September 30, 2004, the Company paid off Term Loan and Line of Credit.

     On January 21, 1999, the Company's Vascular subsidiary and Endologix
entered into an Assets Sale and Purchase Agreement. Pursuant to this agreement,
the Company acquired for cash the assets of Endologix's vascular access business
in exchange for cash and also agreed to pay royalties to Endologix based on
future sales of the vascular access business for a period of five years
following the closing of the sale, with a guaranteed minimum royalty of $300,000
per year. On February 1, 2001, the parties amended the agreement to eliminate
any future royalty payments to Endologix. Pursuant to the amendment, the


                                      F-17

<PAGE>

Company paid $17,558 in cash to Endologix, delivered a short-term note in the
amount of $64,884 that was satisfied in January 2002, a note in the amount of
$717,558, payable in 11 quarterly installments that commenced on April 15, 2002
and the Company issued 50,000 shares of its common stock to Endologix.

     As of June 30, 2004, the amount outstanding under the Endologix term loan
was $130,461 and the interest rate applicable to the loan was 5.00%. On
September 30, 2004, the Company paid off the balance of the term debt.

     The schedule below presents principal amortization for the next five years
under each of the Company's loan agreements as of June 30, 2006:

<TABLE>
<CAPTION>
TWELVE MONTHS
    ENDING
   JUNE 30,     TEXAS MEZZANINE   SYMBIOTICS     TOTAL
-------------   ---------------   ----------   --------
<S>             <C>               <C>          <C>
2007                $132,841       $ 99,996     232,837
2008                 145,876         16,675     162,551
                    --------       --------    --------
TOTAL               $278,717       $116,671     395,388
                    ========       ========

                Current portion of long-term
                debt                            232,837
                                               --------
                Long-term portion              $162,551
                                               ========
</TABLE>

7.   CAPITAL STOCK TRANSACTIONS

     STOCK OPTION PLANS

     As of June 30, 2006, Escalon had in effect seven employee stock option
plans which provide for incentive and non-qualified stock options. After
accounting for shares issued upon exercise of options, a total of 1,281,352
shares of the Company's common stock remain available for issuance as of June
30, 2006. Under the terms of the plans, options may not be granted for less than
the fair market value of the Common Stock at the date of grant. Vesting
generally occurs ratably over five years and the option is exercisable over a
period no longer than 10 years after the grant date. As of June 30, 2006,
options to purchase 920,685 shares of the Company's common stock were
outstanding and exercisable, and 360,667 shares were reserved for future grants.

     On June 30, 2006, the Compensation Committee of the Company approved the
acceleration of vesting of all of the outstanding stock options to purchase
shares of the Company's common stock. The acceleration applies to all stock
options outstanding as of June 30, 2006 under the Company's 1991 Stock Option
Plan, 1992 Stock Option Plan, 1993 Stock Option Plan, 1999 Stock Option Plan and
2004 Equity Incentive Plan.

     The Company is taking this action in order to reduce the future
compensation expense associated with unvested stock options following the
adoption of Statement of Financial Accounting Standards No. 123, Share Based
Payment (revised 2004) ("SFAS 123R"). The Company will be required to apply the
expense recognition provisions of SFAS 123R beginning in the first quarter of
fiscal 2007. The Company currently estimates it will incur $154,000 in
stock-based compensation expense associated with the acceleration of the vesting
of all of the outstanding options to purchase shares of the Company's common
stock for the fiscal year ended 2006. As a result of the acceleration, the
Company expects to reduce the stock option expense it otherwise would be
required to record in connection with the accelerated options by approximately
$1.18 million over the original option vesting periods.


                                      F-18

<PAGE>
     The Company's Board of Directors took this action with the belief that it
is in the best interest of our shareholders, as it will reduce the Company's
reported compensation expense in future periods. In addition, because some of
these options have exercise prices in excess of the current market value, the
Board also believed that these options might not have been fully achieving the
Company's original objective of employee retention and incentive compensation.
The senior officers of the Company who are subject to reporting under Section
16(a) of the Securities Exchange Act of 1934 will be subject to the following
restriction with respect to the sale of shares purchased upon exercise of a
stock option whose vesting has been accelerated: Such sale shall be prohibited
until the earlier of: (i) the date on which the option would otherwise have
vested; (ii) twelve months from June 30, 2006; or (iii) termination of
employment.

     The following is a summary of Escalon's stock option activity and related
information for the fiscal years ended June 30, 2006 and 2005:

<TABLE>
<CAPTION>
                                                      2006                       2005
                                           -------------------------   ------------------------
                                            COMMON       WEIGHTED       COMMON      WEIGHTED
                                             STOCK        AVERAGE       STOCK        AVERAGE
                                            OPTIONS   EXERCISE PRICE   OPTIONS   EXERCISE PRICE
                                           --------   --------------   -------   --------------
<S>                                        <C>        <C>              <C>       <C>
Outstanding at the beginning of the year    847,210       $4.195       618,706       $3.395
   Granted                                  318,400       $6.632       242,004       $6.131
   Exercised                               (121,183)      $2.216       (13,500)      $2.244
   Forfeited                               (123,742)      $1.000             0       $0.000
                                           --------       ------       -------       ------
Outstanding at the end of the year          920,685       $5.310       847,210       $4.195
                                           ========                    =======
Exercisable at the end of the year          684,264                    581,556
                                           ========                    =======
Weighted average fair value of
   options granted during year                            $6.632                     $6.131
                                                          ------                     ------
</TABLE>

     The following table summarizes information about stock options outstanding
as of June 30, 2006:

<TABLE>
<CAPTION>
                               WEIGHTED
                               AVERAGE
                  NUMBER      REMAINING    WEIGHTED      NUMBER     WEIGHTED
  RANGE OF     OUTSTANDING   CONTRACTUAL    AVERAGE   EXERCISABLE    AVERAGE
  EXERCISE     AT JUNE 30,       LIFE      EXERCISE   AT JUNE 30,   EXERCISE
   PRICES          2006        (YEARS)       PRICE        2006        PRICE
------------   -----------   -----------   --------   -----------   --------
<S>            <C>           <C>           <C>        <C>           <C>
1.45 to 2.12     141,981         4.33        $1.82      141,981       $1.86
2.25 to 4.31     188,675         4.76        $2.83      188,675       $2.83
4.90 to 5.71     134,400         9.27        $5.17      134,400       $5.03
6.19 to 6.19     189,250         8.13        $6.19      189,250       $6.19
6.94 to 8.06     266,379         8.20        $7.48      266,379       $7.41
</TABLE>

     SALE OF COMMON STOCK AND WARRANTS

     On March 17, 2004, the Company completed a $10,400,000 private placement of
common stock and common stock purchase warrants to accredited and institutional
investors. The Company sold 800,000 shares of its common stock at $13.00 per
share. The investors also received warrants to purchase an additional 120,000
shares of common stock at an exercise price of $15.60 per share. If not
exercised, the warrants expire on September 13, 2009. The securities were sold
pursuant to the exemptions from registration of Rule 506 of Regulation D and
Section 4(2) under the Securities Act of 1933. The Company


                                      F-19
<PAGE>

has subsequently filed a registration statement with the Securities and Exchange
Commission, declared effective on April 20, 2004, to register for resale by the
holders all of the common stock issued in conjunction with this private
placement and common stock purchasable upon exercise of the warrants.

     The net proceeds to the Company from the offering, after costs associated
with the offering, of $9,787,918, have been allocated among common stock and
warrants based on their relative fair values. The Company used the Black-Sholes
pricing model to determine the fair value of the warrants to be $1,601,346.

     EXERCISE OF WARRANTS TO PURCHASE COMMON STOCK

     In connection with debt issued by a former lender to Escalon in November
2001, the Company issued the lender warrants to purchase 60,000 shares of the
Company's common stock at $3.66 per share. The lender exercised the warrants on
December 13, 2004, in a cashless exercise receiving 32,855 shares of the
Company's common stock in satisfaction of the warrants.

     EXCHANGE OFFER FOR DREW SCIENTIFIC GROUP, PLC

     On July 23, 2004, Escalon acquired approximately 67% of the outstanding
ordinary shares of Drew, a United Kingdom company, pursuant to the Company's
exchange offer for all of the outstanding ordinary shares of Drew, and since
that date has acquired all of the Drew shares.

     The issuances of shares of Escalon common stock in the exchange offer for
the acquisition of Drew were made in accordance with Rule 802 under the
Securities Act of 1933, as an exchange offer for a class of securities of a
foreign private issuer in which the conditions regarding the limitation on
United States ownership of Drew, the equal treatment of and United States
holders and Form CB filings were satisfied.

     The Company did not effect any repurchases of its common stock during the
fiscal years ended June 30, 2006 and 2005.

8.   INCOME TAXES

     The provision for income taxes for the years ended June 30, 2006, 2005 and
2004 consists of the following:

<TABLE>
<CAPTION>
                                       2006          2005
                                   -----------   -----------
<S>                                <C>           <C>
Current income tax provision
   Federal                         $        --   $   100,000
   State                                31,309       131,664
                                   -----------   -----------
                                        31,309       231,664
                                   -----------   -----------
Deferred income tax provision
   Federal                          (1,962,685)    1,572,610
   State                              (460,383)      370,026
   Change in valuation allowance    (2,423,068)   (1,942,636)
                                   -----------   -----------
                                            --            --
                                   -----------   -----------
Income tax expense                 $    31,309   $   231,664
                                   ===========   ===========
</TABLE>

     Income taxes as a percentage of income for the years ended June 30, 2006
and 2005 differ from statutory federal income tax rate due to the following:


                                      F-20

<PAGE>

<TABLE>
<CAPTION>
                                                        2006    2005
                                                       -----   -----
<S>                                                    <C>     <C>
Statutory federal income tax rate                      -34.0%   34.0%
State income taxes, net of federal income tax impact      --     4.9%
Change in valuation allowance                           34.0%  -34.0%
Other                                                     --     3.7%
                                                       -----   -----
Effective income tax rate                                 --     8.6%
                                                       =====   =====
</TABLE>

     As of June 30, 2006, the Company had deferred income tax assets of
$14,267,101. The deferred income tax assets have been reduced by a $14,930,826
valuation allowance. The valuation allowance is based on uncertainty with
respect to the ultimate realization of net operating loss carryforwards.

     The components of the net deferred tax income tax assets and liabilities as
of June 30, 2006 and 2005 are as follows:

<TABLE>
<CAPTION>
                                               2006           2005
                                           ------------   ------------
<S>                                        <C>            <C>
Deferred income tax assets:
   Net operating loss carryforward         $ 12,837,989   $ 15,468,279
   Accrued bonus                                273,966             --
   Executive post retirement costs              456,540        456,540
   General business credit                      450,199        450,199
   Allowance for doubtful accounts              146,876         76,256
   Accrued vacation                             202,722        156,040
   Inventory reserve                             84,601         51,654
   Accelerated depreciation                     382,450         46,354
   Warranty reserve                              95,574         84,805
                                           ------------   ------------
   Total deferred income tax assets          14,930,826     16,790,127
   Valuation allowance                      (12,711,806)   (15,139,874)
                                           ------------   ------------
                                              2,214,020      1,650,253
                                           ------------   ------------
Deferred income tax liabilities:
   Accelerated amortization                  (2,214,020)    (1,650,253)
                                           ------------   ------------
   Total deferred income tax liabilities     (2,214,020)    (1,650,253)
                                           ------------   ------------
                                           $         --   $         --
                                           ============   ============
</TABLE>

     As of June 30, 2006, the Company has a valuation allowance of $12,711,806,
which primarily relates to the federal net operating loss carryforwards. The
valuation allowance is a result of management evaluating its estimates of the
net operating losses available to the Company as they relate to the results of
operations of acquired businesses subsequent to their being acquired by the
Company. The Company evaluates a variety of factors in determining the amount of
the valuation allowance, including the Company's earnings history, the number of
years the Company's operating loss and tax credits can be carried forward, the
existence of taxable temporary differences, and near term earnings expectations.
Future reversal of the valuation allowance will be recognized either when the
benefit is realized or when it has been determined that it is more likely than
not that the benefit will be realized through future earnings. Any tax benefits
related to stock options that may be recognized in the future through reduction
of the associated valuation allowance will be recorded as additional paid-in
capital. The Company has available federal and state net operating loss
carryforwards of approximately $37,349,000 and $1,521,000, respectively, of
which $30,298,000 and $1,456,000, respectively, will expire over the next ten
years, and $7,051,000 and $65,000, respectively, will expire in years eleven
through twenty. Not included in the $37,349,000 federal net operating loss is
approximately $8.2 million federal NOL carryforward at June 30, 2006 which
represents amounts that were transferred to the Company as a result of the
acquisition of Drew. Use of this transferred NOL could be limited under Section
382 and can only be used against future Drew taxable income. Any tax benefit
realized from such use would first reduce acquired goodwill.


                                      F-21

<PAGE>

     The Company continues to monitor the realization of its deferred tax assets
based on changes in circumstances, for example, recurring periods of income for
tax purposes following historical periods of cumulative losses or changes in tax
laws or regulations. The Company's income tax provision and management's
assessment of the realizability of the Company's deferred tax assets involve
significant judgments and estimates. If taxable income expectations change, in
the near term the Company may be required to reduce the valuation allowance
which would result in a material benefit to the Company's results of operations
in the period in which the benefit is determined by the Company.

9.   COMMITMENTS AND CONTINGENCIES

     COMMITMENTS

     The Company leases its manufacturing, research and corporate office
facilities and certain equipment under non-cancelable operating lease
arrangements. The future amounts to be paid under these arrangements as of June
30, 2006 are as follows:

<TABLE>
<CAPTION>
                          LEASE
TWELVE MONTHS ENDING   OBLIGATIONS
--------------------   -----------
<S>                    <C>
2007                    $  731,368
2008                       411,137
2009                       284,615
2010                       292,710
2011                       308,770
Thereafter                 116,354
                        ----------
TOTAL                   $2,144,954
                        ==========
</TABLE>

     Rent expense charged to operations during the years ended June 30, 2006,
2005 and 2004 was approximately $890,000, $772,000, and $386,000, respectively.

     CONTINGENCIES

     ROYALTY AGREEMENT: CLINICAL DIAGNOSTICS SOLUTIONS

     Drew and Clinical Diagnostics Solutions, Inc. ("CDS") entered into a
Private Label Manufacturing Agreement dated April 1, 2002 for the right to sell
formulations or products of CDS including reagents, controls and calibrators
("CDS products") on a private label basis. The agreement term is 15 years and
automatically renews year-to-year thereafter. Drew is obligated to pay CDS a
royalty of 7.5% on all sales of CDS products produced from Drew's United Kingdom
facility.

INTRALASE CORP. ("INTRALASE") LEGAL PROCEEDINGS

     In October 1997, the Company and IntraLase entered into a License Agreement
wherein the Company granted IntraLase the exclusive right to use the Company's
laser properties, including patented and non-patented technology, in exchange
for shares of IntraLase common stock as well as royalties based on a percentage
ofnet sales of future products. The shares of common stock were restricted for
sale until April 6, 2005 and, according to a Fourth Amended Registration Right
Agreement between the Company and IntraLase, are now able to be sold. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Notes to Condensed Consolidated Financial Statements for
discussions on the Company's sales of IntraLase common stock.

     On June 10, 2004, the Company gave IntraLase notice of its intention to
terminate the License Agreement due to IntraLase's failure to pay certain
royalties that the Company believed were due under the License Agreement. On
June 21, 2004, IntraLase sought a preliminary injunction and temporary
restraining order with the


                                      F-22

<PAGE>
United States District Court for the Central District of California, Southern
District against the Company to prevent termination of the License Agreement.
Contemporaneously, IntraLase filed an action for declaratory relief asking the
court to validate its interpretation of certain terms of the License Agreement
relating to the amount of royalties owed to the Company ("First Action"). The
parties mutually agreed to the entry of a temporary restraining order which was
entered by the court shortly thereafter. At the close of discovery, IntraLase
and the Company filed cross-motions for summary judgment. On May 5, 2005, the
District Court, having ruled on such motions, entered judgment in the First
Action.

     The court, in ruling on the parties' cross-motions for summary judgment,
did not agree with IntraLase's interpretation of certain terms and declared
that, under the terms of the License Agreement, IntraLase must pay the Company
royalties on revenue from maintenance contracts and one-year warranties.
Further, the court rejected IntraLase's argument that it is entitled to deduct
the value of non-patented components of its ophthalmic products, which it sells
as an integrated unit, from the royalties due the Company. Non-patented
components of the products include computer monitors, joysticks, keyboards,
universal power supplies, microscope assemblies, installation kits and syringes.
In addition, the court rejected IntraLase's assertion that accounts receivable
are not "consideration received" under the License Agreement and expressly ruled
that IntraLase must pay the Company royalties on IntraLase's accounts
receivable. The court also held that IntraLase must give the Company an
accounting of third-party royalties. The court agreed with IntraLase that it is
not required to pay royalties on research grants.

     The court also agreed with the Company in finding that royalties are
"monies" and the default in the payment of royalties must be remedied within 15
days of written notice of the default. The court rejected IntraLase's position
concerning the effective date of the Amended and Restated License Agreement
holding that the effective date of such Agreement was dated October 17, 2000.
IntraLase has appealed the judgment to the United States Court of Appeals for
the Ninth Circuit. The parties have submitted briefs to the court. The Company
believes that a decision by the court is unlikely in 2006.

     IntraLase, after entry of the court's ruling, attempted to cure its default
under the License Agreement, but underpaid based upon a purported interpretation
of "accounts receivable" that discounts the receivables recorded on the sales
substantially, and in a manner that appears to directly contradict IntraLase's
own published financial statements.

     In May, 2005, IntraLase filed a second suit against the Company in the
Central District of California, case number SAVC 05-440-AHS ("Second Action"),
again for declaratory relief as well as for reformation of the License
Agreement. In this action, IntraLase has asked the court to, among other things,
validate its interpretation of certain other terms of the License Agreement
relating to the amount of royalties owed to the Company and a declaration
concerning the Company's audit rights under the License Agreement. On June 3,
2005, after having been served with the Company's Complaint filed in the
Delaware Court of Chancery ("Delaware Action," described below), IntraLase filed
an Amended Complaint in the Second Action. The Company, not having been served
with the Amended Complaint, filed a motion to dismiss the Complaint in the
Second Action on jurisdictional and substantive grounds. On June 6, 2005, the
Company filed a Motion to Dismiss the Amended Complaint on grounds virtually
identical to its first motion to dismiss. The court dismissed without prejudice
the Second Action on the grounds that much of IntraLase's lawsuit sought a
ruling on issues already raised by the Company in the Company's Delaware Action.
Accepting the Company's arguments for dismissal, the California Court held that
retaining jurisdiction would likely result in duplicative litigation and an
unnecessary entanglement between the federal and state court actions.

     As referenced above, on May 15, 2005, the Company, not having been served
with IntraLase's Second Action, initiated the Delaware Action by filing a
Complaint against IntraLase for, among other things, breach of contract, breach
of fiduciary duty arising out of IntraLase's bad faith conduct under, and
multiple breaches of, the License Agreement. In the Delaware Action, the Company
seeks declaratory relief, specified damages, and specific performance of its
rights under the License Agreement, including its express right under the
Agreement to have independent certified accountants audit the books and records
of IntraLase to verify and compute payments due the Company.


                                      F-23

<PAGE>
     On February 21, 2006, the Company again gave IntraLase notice of its
intention to terminate the License Agreement due to IntraLase's failure to pay
certain royalties that the Company believed were due under the License Agreement
as well as IntraLase's refusal to permit the Company to inspect IntraLase's
records and books of account in accordance with paragraph 5.3 of the License
Agreement. IntraLase had steadfastly refused to permit inspections reasonably
requested by the Company to audit IntraLase's records and books of account and,
instead, conditioned any inspection by the Company's auditors on unreasonable
and unnecessary confidentiality restrictions and unilateral limitations on the
scope of records and books of account that would be made available for
inspection to the Company. On the same day, the Company filed its First Amended
Complaint in the Delaware Action adding to its pending claims a claim for
declaratory relief wherein the Company seeks a judgment declaring that the
License Agreement terminated fifteen days after IntraLase received the Company's
notice of defaults and intent to terminate and failed to cure said defaults.

     On February 28, 2006, the Company agreed to suspend the cure periods
applicable to the alleged breaches set out in its February 21, 2006 letter while
the Company and IntraLase engaged in mediation efforts. Mediation before Vice
Chancellor Donald F. Parsons, Jr. of the Delaware Court of Chancery, pursuant to
Chancery Court Rule 174, took place on May 5, 2006 and was unsuccessful.
However, in August, 2006, the Parties entered into a Stipulation under which
IntraLase agreed to allow an independent auditor, retained by the Company, to
inspect certain of IntraLase's books and records as needed, in the opinion of
the independent auditor, to verify that the Company received the full value of
royalty payments to which it is entitled pursuant to the License Agreement. The
Company did send its independent auditor to IntraLase's headquarters in early
September, 2006 to commence the audit review, which is continuing. The Company
is desirous of concluding this audit in October, 2006.

     Separately, on April 22, 2005, the Company, as beneficial record holder of
common stock of IntraLase, made a formal written demand to inspect certain of
IntraLase's books and records pursuant to Section 220 of the Delaware General
Corporation Law. Shortly thereafter, Escalon Holdings, record holder of common
stock of IntraLase, made the same written demand. IntraLase rejected both
demands. Thereafter, the Company and Escalon Holdings filed an action in the
Delaware Court of Chancery against IntraLase seeking to enforce their
shareholder rights to inspect IntraLase's books and records ("220 Action"). The
220 Case remains in the discovery stage and the Court has set a trial date of
November 8, 2006.

     The Company is cognizant of the legal expenses and costs associated with
the IntraLase matter. The Company, however, is taking all necessary and
appropriate actions to protect its rights and interests under the License
Agreement. The Company expects expenses associated with this litigation to
adversely impact earnings in the near term. The Company believes that IntraLase
has sufficient funds to support such payments based on its filings with the SEC
and filings in connection with the First Action.

     DREW LEGAL PROCEEDINGS

          CARVER LITIGATION-CONNECTICUT ACTION

     On December 17, 2002, Edward Carver, David DeCava and Diane Carver, former
principal shareholders of CDC Technologies, Inc., filed a complaint in the State
of Connecticut, Superior Court, Judicial District of Waterbury at Waterbury
against CDC Acquisition, IV Diagnostics and certain other principal shareholders
of CDC Technologies seeking a total of approximately $420,000 for, among other
things, repayment of loans made to CDC Technologies, payment of past wages and
reimbursement of business expenses ("Connecticut Action"). The plaintiffs'
claims arose out of a certain asset purchase for stock transaction in which CDC
Acquisition, a wholly owned subsidiary of Drew, acquired the assets of CDC
Technologies and IV Diagnostics. CDC Acquisition and IV Diagnostics, also a
subsidiary of Drew, asserted counterclaims against the plaintiffs for, among
other things, breach of fiduciary duty, unfair trade and conversion. In
addition, CDC Acquisition and IV Diagnostics asserted cross-claims against its
co-defendants for indemnification pursuant to the transaction agreements. A
bench trial was held in June, 2005. In August, 2005 the court rendered a
decision resulting in the court's award of only $76,000 to plaintiffs. CDC
Acquisition and IV Diagnostics filed a motion for reconsideration of certain
issues ruled upon by the court. The motion was denied. Plaintiffs' counsel filed
a motion for attorneys' fees seeking over $181,000. The court granted such
motion but awarded only $3,000 to plaintiffs' counsel. On November 1,


                                      F-24

<PAGE>

2005, CDC Acquisition and IV Diagnostics timely appealed the court's ruling that
CDC Acquisitions and IV Diagnostics are liable to the plaintiffs.

CDC Acquisitions and IV Diagnostics and the plaintiffs in the Connecticut Action
recently resolved their disputes as Acquisition Corp. paid the plaintiffs the
outstanding judgment amount, eighty-three thousand dollars ($83,000.00). The
Company's cross-claims against certain of the former principal shareholders of
CDC Technologies, Inc. ("Technology Defendants") remain pending. The Technology
Defendants also have a cross-claim pending against CDC Acquisition Corp.
However, even in the event that Technology Defendants would prevail, their
damages are limited to the amount of their settlement, $50,000. Technology
Defendants recently filed a Motion to Enforce Settlement Agreement with the
trial court, asserting that there was an understanding that Technology
Defendants would be included in a three-way agreement to resolve all claims
associated with this litigation. The Company is opposing the Motion of the
Technology Defendants and intends to preserve and proceed to enforce its rights
against the Technology Defendants.

          INSTITUTE OF CHILD HEALTH

     Drew entered into a license agreement with the Institute of Child Health
("ICH") on May 10, 1993 to use ICH's intellectual property to manufacture,
lease, sell, use and sublicense certain products and all related consumables
used therein in the testing of blood and fluids. Under the license agreement
Drew was to pay royalties to ICH on the products and consumables. On January 23,
2006, the Company received a letter from ICH alleging that Drew has failed to
remit certain moneys due under the license agreement and has sought an
accounting to determine such amount due. Drew is reviewing this matter with
legal counsel and disputes the allegations for nonpayment.

     Other Legal Proceedings

     The Company, from time to time is involved in various legal proceedings and
disputes that arise in the normal course of business. These matters have
included intellectual property disputes, contract disputes, employment disputes
and other matters. The Company does not believe that the resolution of any of
these matters has had or is likely to have a material adverse impact on the
Company's business, financial condition or results of operations.

10.  RETIREMENT AND POST-RETIREMENT PLANS

     The Company adopted a 401(k) retirement plan effective January 1, 1994.
Escalon employees become eligible for the plan commencing on the date of
employment. Company contributions are discretionary, and no Company
contributions have been made since the plan's inception.

     On January 14, 2000, Escalon acquired Sonomed. Sonomed adopted a 401(k)
retirement plan effective on January 1, 1993. This plan has continued subsequent
to the acquisition and is available only to Sonomed employees. The Company's
contribution for the fiscal years ended June 30, 2006 and 2005 was $35,034 and
$24,928, respectively.

     On July 23, 2004, the Company acquired Drew. Drew adopted a 401(k)
retirement plan effective on July 1, 1995. This plan has continued subsequent to
the acquisition and is available only to Drew's United States employees. Company
contributions are discretionary, and no contributions have been made since Drew
was acquired by the Company. Drew also has two defined contribution retirement
plans which were effective November 24, 2002 and February 1, 1992. These plans
have continued subsequent to the acquisition and are available only to Drew's
United Kingdom Employees. Drew contributions for the fiscal years ended June 30,
2006 and 2005 was $10,000 and $30,817, respectively.

     On June 23, 2005, the Company entered into a Supplemental Executive
Retirement Benefit Agreement with its Chairman and Chief Executive Officer. The
agreement provides for the payment of


                                      F-25

<PAGE>

supplemental retirement benefits to the covered executive in the event of his
termination of services with the Company under the following circumstances.

     -    If the covered executive retires at age 65 or older, the Company would
          be obligated to pay the executive $8,000 per month for life, with
          payments commencing the month after retirement. If the covered
          executive were to die within a period of three years after such
          retirement, the Company would be obligated to continue making such
          payments until a minimum of 36 monthly payments have been made to the
          covered executive and his beneficiaries in the aggregate.

     -    If the covered executive dies before his retirement while employed by
          the Company, the Company would be obligated to make 36 monthly
          payments to his beneficiaries of $8,000 per month commencing in the
          month after his death.

     -    If the covered executive were to become disabled while employed by the
          Company, the Company would be obligated to pay the executive $8,000
          per month for life, with payments commencing the month after he
          suffers such disability. If the covered executive were to die within
          three years after suffering such disability, the Company would be
          obligated to continue making such payments until a minimum of 36
          monthly payments have been made to the covered executive and his
          beneficiaries in the aggregate.

     -    If the covered executive's employment with the Company is terminated
          by the Company, or if the executive terminates his employment with the
          Company for good reason, as defined in the agreement, the Company
          would be obligated to pay the executive $8,000 per month for life. If
          the covered executive were to die within a period of three years after
          such termination, the Company would be obligated to continue making
          such payments until a minimum of 36 monthly payments have been made to
          the covered executive and his beneficiaries in the aggregate.

     In fiscal 2005 the Company accrued $1,087,000, which represents the present
value of the supplemental retirement benefits awarded. This amount is accrued at
June 30, 2006 and 2005.

11.  SALE OF SILICONE OIL PRODUCT LINE, LICENSING OF LASER TECHNOLOGY AND OTHER
     REVENUE

     SALE OF SILICONE OIL PRODUCT LINE

     In the first quarter of fiscal 2000, Escalon received $2,117,000 from the
sale to Bausch & Lomb of its license and distribution rights for the Silicone
Oil product line. This sale resulted in a $1,864,000 gain after writing off the
remaining net book value of license and distribution rights associated with that
product line. The Company's contract to receive additional consideration based
on sales of Silicone Oil by Bausch & Lomb expired on August 12, 2005.

     The agreement with Bausch & Lomb, which commenced on August 13, 2000, was
structured so that the Company received consideration from Bausch & Lomb based
on its adjusted gross profit from its sales of Silicone Oil on a quarterly
basis. The consideration was subject to a factor, which stepped down according
to the following schedule:

<TABLE>
<S>                       <C>
From 8/13/00 to 8/12/01   100%
From 8/13/01 to 8/12/02    82%
From 8/13/02 to 8/12/03    72%
From 8/13/03 to 8/12/04    64%
From 8/13/04 to 8/12/05    45%
</TABLE>

Royalties received from Silicone Oil during 2006 and 2005 were $203,000 and
$1,486,000, respectively.

     INTRALASE: LICENSING OF LASER TECHNOLOGY


                                      F-26

<PAGE>

     The material terms of the license of the Company's laser patents to
IntraLase, which expires in 2013, provide that the Company will receive a 2.5%
royalty on product sales that are based on the licensed laser patents, subject
to deductions for third party royalties otherwise due and payable to the
Company, and a 1.5% royalty on product sales that are not based on the licensed
laser patents. The Company receives a minimum annual license fee of $15,000 per
year during the remaining term of the license. The minimum annual license fee is
offset against the royalty payments.

     The material termination provisions of the license of the laser technology
are as follows:

     1.   Termination by the Company if IntraLase defaults in the payment of any
          royalty to the Company;

     2.   Termination by the Company if IntraLase makes any false report to the
          Company;

     3.   Termination by the Company in IntraLase defaults in the making of any
          required report to the Company;

     4.   Termination by either party due to the commission of any material
          breach of any covenant or promise by the other party under the license
          agreement; or

     5.   Termination of the license by IntraLase after 90 days notice (if
          IntraLase were to terminate the license, it would not be permitted to
          utilize the licensed technology necessary to manufacture its current
          products).

     Also contributed to the venture were the Company's laser inventory,
equipment and related furniture having a net book value of $-0-. In December
1999, IntraLase received its first 510(K) approval from the FDA. IntraLase began
selling its products in calendar 2002 (see note 9 for a description of the
Company's legal proceedings with IntraLase).

     BIO-RAD LABORATORIES, INC. ROYALTY

     The royalty received from Bio-Rad Laboratories, Inc. ("Bio-Rad") relates to
a certain non-exclusive Eighth Amendment to an OEM Agreement ("OEM Agreement")
between the Company's Drew subsidiary and Bio-Rad, dated July 19, 1994. Bio-Rad
pays a royalty based on sales of certain of Drew's products in certain
geographic regions.

     The material terms of the OEM Agreement, provided:

     -    Drew receives an agreed royalty per test;

     -    Royalty payments will be made depending on the volume of tests
          provided by Bio-Rad. If less than 3,750 tests per month are provided
          by Bio-Rad, Bio-Rad will calculate the number of tests used on a
          quarterly basis in arrears and pay Drew within 45 days of the end of
          the quarter. If more than 3,750 tests per month are provided by
          Bio-Rad, Bio-Rad will pay an estimated monthly royalty and within 45
          days of the end of the quarter will make final settlement upon the
          actual number of tests.

While the agreement, as amended by the Eighth Amendment, expired on May 15,
2005, the parties have continued to operate under the terms of the expired
agreement pending negotiation of a potential extension and/or revision.

     OTHER REVENUE

     Other revenue includes quarterly payments received from:

     (1)  Bausch & Lomb in connection with the sale of the Silicone Oil product
          line. This agreement expired August 12, 2005;

     (2)  Royalty payments received from IntraLase relating to the licensing of
          the Company's intellectual laser technology; and

     (3)  Royalty payments received from Bio-Rad.


                                      F-27

<PAGE>

     The following table presents other revenue received by the Company for the
years ended June 30, 2006 and 2005:

<TABLE>
<CAPTION>
                       2006         2005
                    ----------   ----------
<S>                 <C>          <C>
ROYALTY INCOME:
Bio-Rad royalty     $  283,000   $  240,000
Baush and Lomb         203,000    1,486,000
IntraLase royalty    1,761,000    1,334,000
                    ----------   ----------
TOTAL               $2,247,000   $3,060,000
                    ==========   ==========
</TABLE>

12.  ACQUISITION OF DREW AND MRP, AND PRO FORMA RESULTS OF OPERATIONS

     On July 23, 2004, the Company acquired approximately 67% of the outstanding
ordinary shares of Drew, a United Kingdom company, pursuant to the Company's
exchange offer for all of the outstanding ordinary shares of Drew, and acquired
all of the remaining Drew shares during fiscal year ended June 30, 2005. The
results of Drew's operations have been included in the consolidated financial
statements, and the Company has been operating Drew as an additional business
unit since July 23, 2004.

     The aggregate purchase price of Drew was $8,525,966, net of acquired cash
of $151,996, consisting of direct acquisition costs of $1,246,376, primarily for
investment banking, legal and accounting fees that were directly related to the
acquisition of Drew, and 900,000 shares of Escalon common stock valued at
$7,430,439. The value of the 900,000 shares issued was based on a five-day
average of the market price of the stock (two days before through two days after
the shares were exchanged).

     The Company accounted for the purchase under FAS 141. Under FAS 141, the
Company paid a premium (i.e., goodwill) over the fair value of the net tangible
and identified intangible assets. The Company acquired Drew as part of its
strategy to diversify its business into the diagnostic medical devices market.
Drew afforded the Company a combined capital equipment product with a continuing
revenue stream product in the form of disposables. The application of purchase
accounting under FAS 141 requires that the total purchase price be allocated to
the fair value of assets acquired and liabilities assumed based on their fair
values at the acquisition date, with amounts exceeding the fair values being
recorded as goodwill. The allocation process requires an analysis of acquired
fixed assets, contracts, customer lists and relationships, trademarks, patented
technology, service markets, contractual commitments, legal contingencies and
brand value to identify and record the fair value of all assets acquired and
liabilities assumed. The Company engaged a third-party to value the assets
acquired and liabilities assumed. In valuing acquired assets and assumed
liabilities, fair values were based on expected discounted cash flows, current
replacement cost or other techniques as deemed appropriate.

     The following table summarizes the purchase price allocation of estimated
fair values of assets acquired and liabilities assumed as of the date of
acquisition of Drew of July 23, 2004.

<TABLE>
<S>                         <C>
Current assets              $ 3,859,771
Furniture and equipment         868,839
Patents                         297,246
Other long-term assets            7,406
Goodwill                      9,574,655
                            -----------
Total assets acquired       $14,607,917
                            -----------
Line of credit              $ 1,617,208
</TABLE>


                                      F-28

<PAGE>

<TABLE>
<S>                         <C>
Current liabilities           3,392,286
Long-term debt                1,072,457
                            -----------
Total liabilities assumed   $ 6,081,951
                            -----------
Net assets acquired         $ 8,525,966
                            ===========
</TABLE>

     The following pro forma results of operations information has been prepared
to give effect to the purchase of Drew as if such transaction had occurred at
the beginning of the period being presented. The information presented is not
necessarily indicative of results of future operations of the combined
companies.

<TABLE>
<CAPTION>
                                          FISCAL YEAR ENDED
                                      -------------------------
                                          2006          2005
                                      -----------   -----------
<S>                                   <C>           <C>
Revenues, net                         $29,790,698   $26,924,622
Cost of goods sold                     16,003,904    13,158,061
                                      -----------   -----------
GROSS PROFIT                           13,786,794    13,766,561
                                      -----------   -----------
Operating expenses                     16,822,984    14,449,080
Other income and (expense)              1,081,559     3,362,294
                                      -----------   -----------
NET (LOSS) INCOME BEFORE TAXES         (1,954,631)    2,679,775
                                      -----------   -----------
Provision for income taxes                 31,309       231,664
                                      -----------   -----------
NET (LOSS) INCOME                     $(1,985,940)  $ 2,448,111
                                      ===========   ===========
BASIC NET (LOSS) INCOME PER SHARE     $    (0.323)  $     0.420
                                      ===========   ===========
DILUTED NET (LOSS) INCOME PER SHARE   $    (0.323)  $     0.393
                                      ===========   ===========
WEIGHTED AVERAGE SHARES - BASIC         6,152,455     5,831,564
                                      ===========   ===========
WEIGHTED AVERAGE SHARES - DILUTED       6,152,455     6,231,024
                                      ===========   ===========
</TABLE>

     MRP ACQUISITION

     On January 30, 2006 EMI acquired substantially all of the assets of MRP
Group, Inc. ("MRP") in exchange for 250,000 shares of the Company's common stock
and approximately $47,000 in cash. The MRP business consists of ophthalmic
technology solutions offering two retinal imaging systems. Approximately 200 of
these systems have been installed at leading medical and retinal care centers.
The operating results of MRP are included as part of the Medical/Trek/EMI
business unit as of January 30, 2006.

     The Company accounted for the purchase under FAS 141. Under FAS 141, the
Company paid a premium (i.e., goodwill) over the fair value of the net tangible
and identified intangible assets acquired to obtain a leading edge technology
platform in the digital imaging marketplace. The application of purchase
accounting under FAS 141 requires that the total purchase price be allocated to
the fair value of assets acquired and liabilities assumed based on their fair
values at the acquisition date, with amounts exceeding the fair values being
recorded as goodwill in the amount of $905,807. The allocation process requires
an analysis of acquired fixed assets, contracts, customer lists and
relationships, trademarks, patented technology, service markets, contractual
commitments, legal contingencies and brand value to identify and record the fair
value of all assets acquired and liabilities assumed. Business unit disclosures
and pro forma statement of operations data for 2006 and 2005 do not include MRP
operations and assets as they are not material in relation to the consolidated
financial statements.


                                      F-29
<PAGE>

     The following table summarizes the purchase price allocation of estimated
fair values of assets acquired and liabilities assumed as of the date of
acquisition of MRP of January 30, 2006.

<TABLE>
<S>                       <C>
Current assets            $  143,569
Furniture and equipment       50,000
Patents and Trademarks        11,200
Covenant not to compete      319,609
Customer list                123,360
                          ----------
Goodwill                     905,807
Total assets acquired     $1,553,545
                          ----------
Current liabilities           78,984
                          ----------
Net assets acquired       $1,474,561
                          ==========
</TABLE>

13.  SEGMENT REPORTING

     The Company's operations are classified into four principal reporting
     segments. Table amounts in thousands:

 SEGMENT STATEMENTS OF OPERATIONS (IN THOUSANDS) - TWELVE MONTHS ENDED JUNE 30,

<TABLE>
<CAPTION>
                                            DREW              SONOMED            VASCULAR
                                     -----------------   -----------------   ---------------
                                       2006      2005      2006      2005     2006     2005
                                     -------   -------   -------   -------   ------   ------
<S>                                  <C>       <C>       <C>       <C>       <C>      <C>
REVENUES, NET:
Product revenue                      $14,253   $11,294   $ 7,737   $ 7,663   $3,640   $3,180
Other revenue                            283       240         0         0        0        0
                                     -------   -------   -------   -------   ------   ------
TOTAL REVENUE, NET                    14,536    11,534     7,737     7,663    3,640    3,180
                                     -------   -------   -------   -------   ------   ------
COSTS AND EXPENSES:
Cost of goods sold                     9,225     7,554     3,962     3,115    1,535    1,432
Operating expenses                     7,741     5,211     3,671     3,593    2,112    1,747
                                     -------   -------   -------   -------   ------   ------
TOTAL COSTS AND EXPENSES              16,966    12,765     7,633     6,708    3,647    3,179
                                     -------   -------   -------   -------   ------   ------
(LOSS) INCOME FROM OPERATIONS         (2,430)   (1,231)      104       955       (7)       1
                                     -------   -------   -------   -------   ------   ------
OTHER (EXPENSE) AND INCOME:
Gain on sale of available for sale
   securities                              0         0         0         0        0        0
Equity in OTM                              0         0         0         0        0        0
Interest income                            0         4         0         0        0        0
Interest expense                         (63)      (83)        0         0        0       (1)
                                     -------   -------   -------   -------   ------   ------
TOTAL OTHER (EXPENSE) AND INCOME         (63)      (79)        0         0        0       (1)
                                     -------   -------   -------   -------   ------   ------
(LOSS) AND INCOME BEFORE TAXES        (2,493)   (1,310)      104       955       (7)       0
                                     -------   -------   -------   -------   ------   ------
Income taxes                               0         0        21        21        0        0
                                     -------   -------   -------   -------   ------   ------
NET (LOSS) INCOME                    $(2,493)  $(1,310)  $    83   $   934   $   (7)  $    0
                                     =======   =======   =======   =======   ======   ======
Depreciation and amortization        $   271   $   213   $    22   $    24   $   94   $   45
Assets                               $17,205   $ 7,977   $13,381   $13,472   $3,838   $2,174
Expenditures for long-lived assets   $   167   $    26   $    15   $    23   $   14   $   11
</TABLE>


                                      F-30

<PAGE>

 SEGMENT STATEMENTS OF OPERATIONS (IN THOUSANDS) - TWELVE MONTHS ENDED JUNE 30,

<TABLE>
<CAPTION>
                                     MEDICAL/TREK/EMI         TOTAL
                                     ----------------   -----------------
                                      2006      2005      2006      2005
                                     ------   -------   -------   -------
<S>                                  <C>      <C>       <C>       <C>
REVENUES, NET:
Product revenue                      $1,914   $ 1,727   $27,544   $23,864
Other revenue                         1,964     2,820     2,247     3,060
                                     ------   -------   -------   -------
TOTAL REVENUE, NET                    3,878     4,547    29,791    26,924
                                     ------   -------   -------   -------
COSTS AND EXPENSES:
Cost of goods sold                    1,282     1,058    16,004    13,159
Operating expenses                    3,301     3,897    16,825    14,448
                                     ------   -------   -------   -------
TOTAL COSTS AND EXPENSES              4,583     4,955    32,829    27,607
                                     ------   -------   -------   -------
(LOSS) INCOME FROM OPERATIONS          (705)     (408)   (3,038)     (683)
                                     ------   -------   -------   -------
OTHER (EXPENSE) AND INCOME:
Gain on sale of available for sale
   securities                         1,157     3,412     1,157     3,412
Equity in OTM                          (174)      (64)     (174)      (64)
Interest income                         162        66       162        70
Interest expense                          0        29       (63)      (55)
                                     ------   -------   -------   -------
TOTAL OTHER (EXPENSE) AND INCOME      1,145     3,443     1,082     3,363
                                     ------   -------   -------   -------
(LOSS) AND INCOME BEFORE TAXES          440     3,035    (1,956)    2,680
                                     ------   -------   -------   -------
Income taxes                             10       211        31       232
                                     ------   -------   -------   -------
NET (LOSS) INCOME                    $  430   $ 2,824   $(1,986)  $ 2,448
                                     ======   =======   =======   =======
Depreciation and amortization        $   96   $   106   $   483   $   388
Assets                               $4,221   $16,426   $38,645   $40,049
Expenditures for long-lived assets   $  138   $    44   $   334   $   104
</TABLE>

     The Company operates in the healthcare market, specializing in the
development manufacture and marketing of (1) ophthalmic medical devices and
pharmaceuticals; (2) in-vitro diagnostic ("IVD") instrumentation and consumables
for use in human and veterinary hematology; and (3) vascular access devices. The
business segments reported above are the segments for which separate financial
information is available and for which operating results are evaluated regularly
by executive management in deciding how to allocate resources and assessing
performance. The accounting policies of the business segments are the same as
those described in the summary of significant accounting policies. For the
purposes of this illustration, corporate expenses, which consist primarily of
executive management and administrative support functions, are allocated across
the business segments based upon a methodology that has been established by the
Company, which includes a number of factors and estimates and that has been
consistently applied across the business segments. These expenses are otherwise
included in the Medical/Trek/EMI business unit.

     During the fiscal year ended June 30, 2005, Drew derived its revenue from
the sale of instrumentation and consumables for blood cell counting and blood
analysis in the areas of diabetes, cardiovascular diseases and human and
veterinary hematology. Sonomed derived its revenue from the sale of A-Scans,
B-Scans and pachymeters. These products are used for diagnostic or biometric
applications in ophthalmology. Vascular derived its revenue from the sale of PD
Access(TM) and SmartNeedle(TM) monitors, needles and catheter products. These
products are used by medical personnel to assist in gaining access to arteries
and veins in difficult cases. Medical/Trek EMI derived its revenue from the sale
of ISPAN(TM) gas products, various disposable ophthalmic surgical products, CFA
digital imaging systems and related products, revenue derived from Bausch &
Lomb's sale of Silicone Oil (the contract for which expired on August 12, 2005)
and from royalty revenue related to IntraLase's licensing of the Company's
intellectual laser technology.

     During the fiscal year ended June 30, 2004, there was one entity, Bausch &
Lomb, from whom Escalon derived greater than 10% of consolidated net revenue.
Revenue from Bausch & Lomb was


                                      F-31

<PAGE>

approximately $2,622,000, or 17.8% of consolidated net revenue during the year
ended June 30, 2004. This revenue is recorded in the Medical/Trek/EMI business
unit. No customer represented more than 10% of consolidated revenue during the
years ended June 30, 2006 and 2005. Of the external revenue reported above, the
following amounts were derived internationally during the years ended June 30:

<TABLE>
<CAPTION>
                       2006         2005
                   -----------   ----------
<S>                <C>           <C>
Drew               $ 8,471,608   $5,616,000
Sonomed              4,316,856    3,818,000
Vascular               226,665      323,000
Medical/Trek/EMI        29,671       48,000
                   -----------   ----------
                   $13,044,800   $9,805,000
                   ===========   ==========
</TABLE>

14.  RELATED-PARTY TRANSACTIONS

     Escalon and a member of the Company's Board of Directors are founding and
equal members of Ocular Telehealth Management, LLC ("OTM"). OTM is a diagnostic
telemedicine company providing remote examination, diagnosis and management of
disorders affecting the human eye. OTM's initial solution focuses on the
diagnosis of diabetic retinopathy by creating access and providing annual
dilated retinal examinations for the diabetic population. OTM was founded to
harness the latest advances in telecommunications, software and digital imaging
in order to create greater access and a more successful disease management for
populations that are susceptible to ocular disease. Through June 30, 2006,
Escalon had invested $256,000 in OTM and owned 45% of OTM. The members of OTM
have agreed to review the operations of OTM after 24 months of operations which
began in April 2004, at which time the members each have the right to sell their
membership back to OTM at fair market value. Such sale would be subject to OTM's
ability to buy back the membership. The members met in May 2006 and decided to
continue the operations of OTM, emphasizing that all additional funding will be
provided pro-rata consistent with membership percentage ownership. The Company
will provide administrative support functions to OTM. For the years ended 2006
and 2005 the Company recorded losses of $173,844 and $63,613, respectively. This
investment is accounted for under the equity method of accounting and is
included in other assets.

     Two relatives of a senior executive officer have provided legal services as
either an employee or a consultant to the Company. Richard Depiano, Jr. (son of
the Chief Executive Officer ("CEO")) is General Counsel to the Company, Mr.
Depiano's salary plus bonus for the years 2006 and 2005 were $180,000 and
$165,000, respectively and in 2005 20,000 options to purchase common stock of
the Company at an exercise price of $8.06 per share. Caryn Lindsey (former
daughter-in-law of the CEO) acted as a consultant for the Company in 2005 and
as a consultant and employee during 2006. Ms. Lindsey in 2006 and 2005 received
consulting fees and salary of $110,939 and $118,000, respectively and in 2005
3,000 options to purchase common stock of the Company at an exercise price of
$4.97 per share.

15.  INTRALASE INITIAL PUBLIC OFFERING AND SALE OF INTRALASE COMMON STOCK

     In October 1997, Escalon licensed its intellectual laser properties to
IntraLase in exchange for an equity interest of 252,535 shares of Common Stock
(as adjusted for splits), as well as royalties on future product sales. The
Company has historically accounted for these shares a $0 basis because a readily
determinable market value was previously not available. On October 7, 2004,
IntraLase announced the initial public offering of shares of its common stock at
a price of $13.00 per share. The shares of common stock were restricted for a
period of less than one year and were permitted to be sold after April 6, 2005
pursuant to a certain Fourth Amended Registration Rights Agreement between the
Company and IntraLase. The Company sold 58,355 shares of IntraLase common stock
in July 2005 at $19.8226 per share resulting in gross proceeds of $1,160,316.
After paying broker commissions and other fees of $2,980, the Company received
net proceeds of $1,157,335. The Company sold 191,000 shares of IntraLase common
stock in May 2005 at $17.9134 per share resulting in gross proceeds of
$3,421,459. After paying broker commissions and other fees of $9,698, the
Company received net proceeds of $3,411,761. The net


                                      F-32

<PAGE>

proceeds from the sales were recorded in other income and expense. As of June
30, 2006 and 2005, the Company had 3000 and 61,535 shares, respectively of
IntraLase that were classified as available-for-sale securities and had a market
value of $50,220 and $1,207,317.

16.  ANKA CO-MARKETING AGREEMENT

     On October 11, 2005 the Company signed a non-exclusive co-marketing
agreement with privately held Anka, a provider of web-based connectivity
solutions for the ophthalmic physician. Anka's connectivity solutions are used
in major eye healthcare centers and provide seamless integration of data from
various clinical modalities commonly used in eye healthcare settings. The
co-marketing agreement will enable the Company to jointly market its existing
digital imaging hardware with Anka's connectivity solutions. By integrating the
sales and marketing efforts, the alliance should provide economies of operation
and a greater market reach. Anka is an early stage privately held company
located in the Washington, D.C. area.

     In connection with the co-marketing agreement, Company extended a $300,000
loan in October 2005 and an additional loan of $100,000 in January 2006,
pursuant to demand notes, to Anka. Under the terms of these notes, repayment was
due within six months after written demand or immediately upon an event of
default. On February 16, 2006, the Company demanded repayment in accordance with
the terms of the notes. The loan was paid in full in April 2006.


                                      F-33