<PAGE>
================================================================================

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

                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

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

                     FOR THE FISCAL YEAR ENDED JUNE 30, 2007
                         COMMISSION FILE NUMBER 0-20127

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

                              ESCALON MEDICAL CORP.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

          PENNSYLVANIA                            33-0272839
(STATE OR OTHER JURISDICTION OF                (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)              IDENTIFICATION NO.)

               565 E. SWEDESFORD ROAD, SUITE 200, WAYNE, PA 19087
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

                                 (610) 688-6830
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

COMMON STOCK, PAR VALUE $0.001               NASDAQ CAPITAL MARKET
       (TITLE OF CLASS)                      (NAME OF EACH EXCHANGE
                                              ON WHICH REGISTERED)

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

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

      Indicate by check mark if the registrant is a well-known seasoned issuer
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

      Indicate by check mark if the registrant is a not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act. Yes [ ] No [X]

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

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. Yes [ ] No [X]

      Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):

Large accelerated filer [ ]  Accelerated filer [ ]   Non-accelerated filer  [X]

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

      The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant on September 20, 2007, was approximately
$25,228,000, computed by reference to the price at which the common equity was
last sold on the NASDAQ Capital Market on such date.

      As of September 20, 2007, there were 6,386,857 shares of common stock
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

      Certain information required by Part III of this Annual Report on Form
10-K will be set forth in, and is incorporated by reference from the
registrant's Proxy Statement for the 2007 Annual Meeting of Shareholders.

================================================================================

<PAGE>

                              ESCALON MEDICAL CORP.
                           ANNUAL REPORT ON FORM 10-K
                     FOR THE FISCAL YEAR ENDED JUNE 30, 2007

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                    PAGE
                                                                                    ----
<S>                                                                                 <C>
                                          PART I

Item 1.   Business                                                                     1
Item 1A.  Risk Factors                                                                 7
Item 1B.  Unresolved Staff Comments                                                   15
Item 2.   Properties                                                                  15
Item 3.   Legal Proceedings                                                           15
Item 4.   Submission of Matters to a Vote of Security Holders                         16

                                          PART II
Item 5.   Market for Registrant's Common Equity, Related Stockholder Matters and
           Issuer Purchases of Equity Securities                                      16
Item 6.   Selected Financial Data                                                     17
Item 7.   Management's Discussion and Analysis of Financial Condition and
           Results of Operation                                                       19
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk                  34
Item 8.   Financial Statements and Supplementary Data                                 36
Item 9.   Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure                                                       67
Item 9A.  Controls and Procedures                                                     67
Item 9B.  Other Information                                                           68

                                          PART III
Item 10.  Directors, Executive Officers and Corporate Governance                      68
Item 11.  Executive Compensation                                                      68
Item 12.  Security Ownership of Certain Beneficial Owners and Management and
           Related Stockholder Matters                                                68
Item 13.  Certain Relationships and Related Transactions, and Director
           Independence                                                               68
Item 14.  Principal Accounting Fees and Services                                      68

                                          PART IV
Item 15.  Exhibits, Financial Statement Schedules                                     69
</TABLE>

                                       ii
<PAGE>

                                     PART 1

ITEM 1.  BUSINESS

COMPANY OVERVIEW

            Escalon Medical Corp. ("Escalon" or the "Company") 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"), Escalon IP Holdings, Inc.,
Escalon Vascular IP Holdings, Inc., Sonomed IP Holdings, Inc., Drew Scientific
Holdings, Inc., 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"). The FDA and other governmental
authorities require extensive testing of new products prior to sale and have
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.

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 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

            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

                                       1
<PAGE>

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 that 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.

            UBM

            The UBM is 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
within the anterior chamber 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.

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 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 vascular access.

EMI BUSINESS

            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 physician's 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 EMI business unit as of January 30, 2006.

                                       2
<PAGE>

            MEDICAL/TREK BUSINESS

            Medical/Trek manufactures and distributes the following ophthalmic
surgical products under the Company's and/or Trek Medical Product's names.
Vitreoretinal ophthalmic surgeons primarily utilize these products.

                  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"), the Company 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.
Silicon Oil refers to Adatosil(R) 5000 Silicone Oil, whose license of
distribution rights were sold to Bausch & Lomb Surgical, Inc. Pursuant to that
agreement, the Company has not received any revenue from Silicon Oil since
August 2005.

            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.

            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, 2007, 2006 and 2005 were approximately
$3,461,000, $2,828,000 and $1,893,000, respectively.

            MANUFACTURING AND DISTRIBUTION

            The Company leases an aggregate of approximately 39,600 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 Management's Discussion and Analysis of
Financial Condition of Results of Operations for additional information.

            The Company leases approximately 11,200 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 design and
development, manufacturing and product assembly. The Company also leases
approximately 2,500 square feet in Lawrence, Massachusetts used primarily for
product design and

                                       3
<PAGE>

development in the EMI business unit. 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. 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 approximately 12,200 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. The
Company has obtained European Community certification ("CE") 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.

            Drew received a warning letter from the FDA in April, 2007 that
certain deficiencies were noted during the FDA's audit of the Company's United
Kingdom facility. Drew has addressed the deficiencies and has brought the
facility into compliance with FDA regulations. As such, the FDA notified Drew in
June 2007 that the warning letter was removed.

            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.

                                       4
<PAGE>

                  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 and EMI business units sell their ophthalmic
devices and instruments directly to end users through internal sales and
marketing employees located at the Company's Wisconsin and Massachusetts
facilities. Sales are primarily made to teaching institutions, key hospitals and
eye surgery centers focusing 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.
The Company provides limited warranties 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
payors for health care services provided to their patients using these products.
These payors include Medicare, Medicaid and private insurers. Government
agencies generally reimburse health care providers at a fixed rate based on the
procedure performed. Third party payors 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. In 1997, Intralase and Escalon entered into an agreement under
which Intralase became the exclusive licensee of these patents, technology and
intellectual property owned by the Company. This agreement was amended and
restated in

                                       5
<PAGE>

October 2000. The original and amended license agreement is referred to as the
"License Agreement." Disputes arose between the parties culminating in
litigation between the parties. On February 27, 2007, the Company settled all
outstanding disputes and litigation with Intralase pursuant to which the Company
transferred to Intralase its ownership of all patents and intellectual property
formally licensed to Intralase and the license agreement was terminated. See
Item 3. Legal Proceedings for additional information.

            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 renewed on November 25, 2006.

      -     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.

                  COMPETITION

            There are numerous direct and indirect competitors of the Company in
the United States and abroad. These competitors 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.

            Sonomed's principal competitors are Alcon Laboratories, Inc,
Quantel, Inc. and Accutome, Inc. Management believes that Sonomed 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

                                       6
<PAGE>

helped Sonomed 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. Sonomed 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 and EMI businesses sell a broad range of ophthalmic
surgical and diagnostic products. The more significant products are ISPAN(R)
gases and delivery systems. Medical/Trek and EMI also manufacture 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 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 on the market that enable medical practitioners to gain access using
their normal procedures. The only similar product utilizes a separate ultrasound
monitor, but 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, 2007, the Company employed 167 full-time employees
and 12 part-time employees. 80 of the Company's employees are employed in
manufacturing, 37 are employed in general and administrative positions, 40 are
employed in sales and marketing and 22 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.

ITEM 1A. RISK FACTORS

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

                                       7
<PAGE>

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.

            FORM 10-K

            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
Securities and Exchange Commission (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:

            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. The Company
may not be able to effect any such acquisitions or alliances. 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 continues
to work to reverse the situation, while at the same time seeking to strengthen
Drew's market position. The Company loaned approximately $16 million 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 cannot rule out that further working capital will
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

                                       8
<PAGE>

goodwill in connection with such transactions. Finally, acquisitions or
alliances by the Company may not occur, which could impair the Company's growth.

            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.

      -     General economic conditions and other external factors such as
            energy costs.

            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 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.

                  THE COMPANY'S COST SAVING INITIATIVES MAY NOT BE EFFECTIVE.

                  The Company has implemented cost-saving initiatives that may
not be effective in returning the Company to profitability. 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 continued 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.

                                       9
<PAGE>

            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 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;

                                       10
<PAGE>

      -     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 may become subject to one or
more claims for patent infringement. The Company may not prevail in any such
action, and the Company's patents may not 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. 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

                                       11
<PAGE>

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.

            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.

                                       12
<PAGE>

            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 the Company, 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.

            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.

       THERE ARE INHERENT UNCERTAINTIES INVOLVED IN ESTIMATES, JUDGMENTS AND
       ASSUMPTIONS USED IN THE PREPARATION OF FINANCIAL STATEMENTS IN ACCORDANCE
       WITH UNITED STATES GAAP. ANY CHANGES IN ESTIMATES, JUDGMENTS AND
       ASSUMPTIONS USED COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S
       BUSINESS, FINANCIAL POSITION AND OPERATING RESULTS.

       The consolidated financial statements included in the periodic reports
the Company files with the SEC are prepared in accordance with accounting
principles generally accepted in the United States of America, or GAAP. The
preparation of financial statements in accordance with GAAP involves making
estimates, judgments and assumptions that affect reported amounts of assets
(including intangible assets),

                                       13
<PAGE>

liabilities and related reserves, revenues, expenses and income. This includes
estimates, judgments and assumptions for assessing the recoverability of the
Company's goodwill and other intangible assets, pursuant to Statement of
Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible
Assets, and SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. If any estimates, judgments or assumptions change in the
future, the Company may be required to record additional expenses or impairment
charges. Any resulting expense or impairment loss would be recorded as a charge
against our earnings and could have a material adverse impact on our financial
condition and operating results. Estimates, judgments and assumptions are
inherently subject to change in the future, and any such changes could result in
corresponding changes to the amounts of assets (including goodwill and other
intangible assets), liabilities, revenues, expenses and income. Any such changes
could have a material adverse effect on the Company's financial position and
operating results.

            On an on-going basis, the Company evaluate its estimates, including,
among others, those relating to:

      -     product returns,

      -     allowances for doubtful accounts,

      -     inventories and related reserves,

      -     intangible assets and Goodwill,

      -     income and other tax accruals,

      -     deferred tax asset valuation allowances,

      -     discounts and allowances,

      -     warranty obligations, and

      -     contingencies and litigation.

            The Company bases its estimates on historical experience and on
various other assumptions that the Company believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. The Company's assumptions and estimates may, however, prove to
have been incorrect and the Company's actual results may differ from these
estimates under different assumptions or conditions. While the Company believes
the assumptions and estimates it makes are reasonable, any changes to the
Company's assumptions or estimates, or any actual results which differ from the
Company's assumptions or estimates, could have a material adverse effect on the
Company's financial position and operating results.

            THE COMPANY WILL BE EXPOSED TO RISKS RELATING TO EVALUATIONS OF
            INTERNAL CONTROL OVER FINANCIAL REPORTING REQUIRED BY SECTION 404 OF
            THE SARBANES-OXLEY ACT OF 2002.

            The Company anticipates spending a substantial amount of management
time and resources to comply with changing laws, rules, regulations and
standards relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002 and regulations promulgated by the SEC.

            Under the current and proposed rules and regulations of the SEC, the
Company is currently not required to comply with the requirements of Section 404
of the Sarbanes-Oxley Act of 2002 until the Company files our Annual Report on
Form 10-K for the Company's fiscal year ending June 30, 2008, as long as the
Company continues to meet the definition of a non-accelerated filer. In the
Company's Annual Report on Form 10-K for the year ending June 30, 2008, the
Company's management will be required to provide an assessment as to the
effectiveness of the Company's internal control over financial reporting, which
assessment will be deemed furnished to rather than filed with the SEC. In the
Company's Annual Report on Form 10-K for the year ending June 30, 2008 and for
each fiscal year thereafter, the Company's management will be required to
provide an assessment as to the effectiveness of the Company's internal control
over financial reporting and the Company's independent registered public
accounting firm will be required to provide an attestation as to the Company's
management's assessment, which assessment and attestation will be filed with the
SEC. The assessment and attestation processes required by Section 404 are
relatively new to the Company. Accordingly, the Company may encounter problems
or delays in completing our obligations and receiving an unqualified report on
the Company's internal control over financial reporting by our independent
registered public accounting firm.

                                       14
<PAGE>

      While the Company believes that it will be able to timely meet the
Company's obligations under Section 404 and that the Company's management will
be able to certify as to the effectiveness of the Company's internal control
over financial reporting, there is no assurance that the Company will do so. If
the Company is unable to timely comply with Section 404, the Company's
management is unable to certify as to the effectiveness of the Company's
internal control over financial reporting or the Company's independent
registered public accounting firm is unable to attest to that certification, the
price of the Company's common stock may be adversely affected. Even if the
Company timely meets the certification and attestation requirements of Section
404, it is possible that the Company's independent registered public accounting
firm will advise the Company that they have identified significant deficiencies
and/or material weaknesses, which may also adversely affect the price of our
common stock.

SUBSTANTIALLY ALL OF OUR CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES ARE
HELD AT A SINGLE FINANCIAL INSTITUTION.

      Substantially all of the Company's cash and cash equivalents and
short-term marketable securities are presently held at one national financial
institution. Accordingly, the Company is subject to credit risk if this
financial institution is unable to repay the balance in the account or deliver
the Company's securities or if the financial institution should become bankrupt
or otherwise insolvent. Any of the above events could have a material and
adverse effect on the Company's business and financial condition.

ITEM 1B. UNRESOLVED STAFF COMMENTS:

            The Company does not believe there are any unresolved SEC staff
comments.

ITEM 2. PROPERTIES

            The Company currently leases an aggregate of approximately 61,800
square feet of space for its (i) corporate offices in Wayne, Pennsylvania, (ii)
Drew has an administrative office and manufacturing facility in
Barrow-in-Furness, United Kingdom, an administrative office and manufacturing
facility in Dallas, Texas, and a manufacturing facility in Oxford, Connecticut.
(iii) Sonomed has a manufacturing facility in Lake Success, New York, and (iv)
Vascular has a manufacturing facility in New Berlin, Wisconsin. The corporate
offices in Pennsylvania cover approximately 7,100 square feet and expire in
April 2008. The facility in the United Kingdom covers approximately 8,000 square
feet whose lease expires in September 2009. The facility in Texas covers
approximately 20,000 whose lease expires in March 2014. The Connecticut facility
lease covers approximately 3,300 square feet and expires in January 2008. The
New York facility leases covering approximately 12,200 square feet, expires in
October 2011. The Wisconsin lease, covering approximately 11,200 square feet of
space expires in July 2015. Annual rent under all of the Company's lease
arrangements was approximately $866,000.

ITEM 3. LEGAL PROCEEDINGS

                  INTRALASE CORP.

            In 1997, Intralase and the Company entered into an agreement under
which Intralase became the exclusive licensee of certain patents, technology and
intellectual property owned by the Company. This agreement was amended and
restated in October 2000. The original and amended license agreement is referred
to as the "License Agreement." Disputes arose between the parties culminating in
litigation between the parties.

            On February 27, 2007, the Company entered into an agreement with
Intralase to settle all outstanding disputes and litigation between the parties.
Under the settlement agreement, Intralase made a lump-sum payment to the Company
of $9,600,000 in exchange for which all pending litigation between the parties
was dismissed, the parties exchanged general releases, the Company transferred
to Intralase its ownership of all patents and intellectual property formerly
licensed to Intralase by the Company, and the license agreement was terminated.
In addition, the settlement payment from Intralase is deemed satisfaction

                                       15
<PAGE>

for all outstanding past, current and future royalties owed or alleged to be
owed by Intralase to the Company.

                  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 obligated to pay royalties to ICH on the products and
consumables. On January 23, 2006, the Company received a letter from ICH
alleging that Drew had failed to remit certain moneys due under the license
agreement and has sought an accounting to determine such amount due.

            Both parties continue to amicably negotiate a mutually agreeable
solution to this matter. Drew does not believe that the ultimate disposition of
this issue will have a material effect on the Company's financial statements.

                  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

                  No matters were submitted to a vote of security holders during
the quarter ended June 30, 2007.

                                    PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
                      ISSUER PURCHASES OF EQUITY SECURITIES

            The Company's common stock trades on the NASDAQ Capital 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 Capital Market.

                                       16
<PAGE>

<TABLE>
<CAPTION>
                                    HIGH     LOW
                                   ------   ------
<S>                                <C>      <C>
FISCAL YEAR ENDED JUNE 30, 2007

Quarter ended September 30, 2006   $ 5.19   $ 4.06
Quarter ended December 31, 2006    $ 4.19   $ 2.35
Quarter ended March 31, 2007       $ 4.38   $ 2.55
Quarter ended June 30, 2007        $ 4.53   $ 3.75

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
</TABLE>

            As of September 20, 2007, there were 4,333 holders of record of the
Company's common stock. On September 20, 2007 the closing price of the Company's
Common Stock as reported by the NASDAQ Capital Market was $6.40 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. SELECTED FINANCIAL DATA

            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 7 and the financial
statements and related notes to consolidated financial statements thereto
included herein in Item 8.

                                       17
<PAGE>

ESCALON MEDICAL CORP. AND SUBSIDIARIES
SELECTED FINANCIAL DATA-STATEMENT OF OPERATION

<TABLE>
<CAPTION>
                                                                FOR THE YEARS ENDED JUNE 30,
                                                     2007       2006        2005       2004       2003
                                                   --------   ---------   --------   --------   --------
                                                      (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                <C>        <C>         <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
NET REVENUES:
Product revenue                                    $ 27,893   $  27,544   $ 23,864   $ 12,348   $ 11,191
Other revenue                                        10,945       2,247      3,060      2,373      2,175
                                                   --------   ---------   --------   --------   --------
REVENUES, NET                                        38,838      29,791     26,924     14,721     13,366
                                                   --------   ---------   --------   --------   --------

COSTS AND EXPENSES:
   Cost of goods sold                                15,771      16,004     13,158      5,476      4,896
   Marketing, general and administrative             13,806      13,995     12,556      5,206        780
   Research and development                           3,461       2,828      1,893        776      5,034
   Write-down of license and distribution rights          0           0          0          0        196
                                                   --------   ---------   --------   --------   --------
     TOTAL COSTS AND EXPENSES                        33,039      32,827     27,607     11,458     10,906
                                                   --------   ---------   --------   --------   --------
(LOSS) INCOME FROM OPERATIONS                         5,799      (3,036)      (683)     3,263      2,460
                                                   --------   ---------   --------   --------   --------

OTHER (EXPENSE) AND INCOME:
   Gain on sale of available for sale securities         75       1,157      3,412          0          0
   Equity in Ocular Telehealth Management, LLC         (88)       (174)       (64)          0          0
   Interest income                                      208         162         69         59          3
   Interest expense                                     (29)        (64)       (55)      (407)      (638)
                                                   --------   ---------   --------   --------   --------
     TOTAL OTHER (EXPENSE) AND INCOME                   166       1,082      3,362       (348)      (635)
                                                   --------   ---------   --------   --------   --------
NET (LOSS) INCOME BEFORE TAXES                        5,965     (1,955)      2,679      2,915      1,825
                                                   --------   ---------   --------   --------   --------
Provision for income taxes                               51          31        232        173        112
                                                   --------   ---------   --------   --------   --------
NET (LOSS) INCOME                                  $  5,914   $ (1,986)   $  2,447   $  2,742   $  1,713
                                                   ========   ========    ========   ========   ========

BASIC NET (LOSS) INCOME PER SHARE                  $   0.96   $  (0.32)   $   0.42   $   0.70   $   0.51
                                                   ========   ========    ========   ========   ========

DILUTED NET (LOSS) INCOME PER SHARE                $   0.93   $  (0.32)   $   0.39   $   0.64   $   0.48
                                                   ========   ========    ========   ========   ========

WEIGHTED AVERAGE SHARES - BASIC USED IN
   PER SHARE CALCULATION                              6,152       6,152      5,832      3,897      3,365
                                                   ========   ========    ========   ========   ========

WEIGHTED AVERAGE SHARES - DILUTED USED IN
   PER SHARE CALCULATION                              6,361       6,152      6,231      4,304      3,573
                                                   ========   ========    ========   ========   ========
</TABLE>

                                       18
<PAGE>

ESCALON MEDICAL CORP. AND SUBIDIARIES
SELECTED FINANCIAL DATA-BALANCE SHEET

<TABLE>
<CAPTION>
                                                                    AT JUNE 30,
                                              2007         2006         2005        2004        2003
                                           ----------   ----------   ----------   ---------   ---------
                                                            (AMOUNTS IN THOUSANDS)
<S>                                        <C>          <C>          <C>          <C>        <C>
BALANCE SHEET DATA:
Cash and cash equivalents                  $    8,879   $    3,380   $    5,116   $  12,602   $     298
Working capital                                17,238       10,616       13,613      13,966         889
Total assets                                   45,017       38,645       40,049      29,457      16,890
Long-term debt, net of current portion              0          163          392       2,396       4,080
Total liabilities                               5,612        5,545        5,530       5,996       7,951
Accumulated deficit                           (28,208)     (34,122)     (32,136)    (34,585)    (37,326)
Total shareholders' equity                     39,406       33,100       34,519      23,461       8,939
</TABLE>

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

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

            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-K and the discussion under "Risk
Factors" included in Part IA of this Form 10-K.

            The Company operates primarily in five reportable business segments:
Drew, Sonomed, Vascular, Medical/Trek and 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 develops, manufactures and distributes ophthalmic
surgical products under the Escalon Medical Corp. and/or Trek Medical Products
names.

            EMI manufactures and markets digital camera systems 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, 2007 AND 2006

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

      -     Product revenue increased approximately 0.6% during fiscal year
            ended June 30, 2007 as compared to the prior fiscal year. The
            increase is primarily related to strong sales in the Company's
            Sonomed and EMI business units which increased approximately 27.0%
            and 241.9%, respectively, offset by sales decreases in the Drew and
            Vascular business units of 18.4% and

                                       19
<PAGE>

            4.8%, respectively. Sales in the Medical/Trek business units
            increased approximately 0.8% 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. The
            shares were sold at $19.8226 per share and yielded net proceeds of
            $1,157,336 after the payment of brokers' commissions and other fees.
            During 2007, Intralase accepted a $25 per share tender offer for all
            its outstanding shares. The Company received $75,000 for its
            remaining holdings in Intralase of 3,000 shares. The net proceeds
            for each of the transactions were recorded as other income.

      -     Other revenue increased approximately $8,698,000 or 387.1% during
            the fiscal year ended June 30, 2007 as compared to the prior fiscal
            year. The increase is due primarily to the $9,600,000 settlement
            reached with Intralase on February 27, 2007 as described in Item 3
            above.

      -     Cost of goods sold as a percentage of product revenue decreased to
            approximately 56.5% of revenues during the fiscal year ended June
            30, 2007, as compared to approximately 58.1% 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. Cost of goods sold in the Drew business unit was
            approximately 66.1% of product revenue during the fiscal year ended
            June 30, 2007 as compared to approximately 64.7% in the prior fiscal
            year. The aggregate cost of goods sold as a percentage of product
            revenue of the Sonomed, Vascular, EMI and Medical/Trek business
            units during fiscal year ended June 30, 2007 decreased to
            approximately 49.7% of product revenue from approximately 51.0% in
            the prior fiscal year.

      -     Operating expenses increased approximately 0.8% during the fiscal
            year ended June 30, 2007 as compared to the prior fiscal year. The
            modest increase was due to increased research and development costs
            of $606,000, primarily at Drew, offset by a decrease in selling,
            general and administrative costs of $467,000 primarily due to the
            realization of savings related to the cost reduction plan
            implemented in the first quarter of fiscal year 2007.

      RESULTS OF OPERATIONS

            FISCAL YEARS ENDED JUNE 30, 2007 AND 2006

            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, 2007 and 2006. Table amounts are in thousands:

<TABLE>
<CAPTION>
                      FISCAL YEARS ENDED JUNE 30,
                   ---------------------------------
                     2007        2006      % CHANGE
                   --------    --------    ---------
<S>                <C>         <C>         <C>
PRODUCT REVENUE:

Drew               $ 11,627    $ 14,253        -18.4%
Sonomed               9,823       7,737         27.0%
Vascular              3,467       3,640         -4.8%
EMI                   1,484         434        241.9%
Medical/Trek          1,492       1,480          0.8%
                   --------    --------    ---------
TOTAL              $ 27,893    $ 27,544          1.3%
                   --------    --------    ---------
</TABLE>

                                       20
<PAGE>

            Consolidated product revenue increased approximately $349,000, or
1.3%, to $27,893,000 during the year ended June 30, 2007 as compared to the last
fiscal year.

            In the Drew business unit, product revenue decreased $2,626,000, or
18.4% as compared to last fiscal year. The decrease is primarily due to the
non-renewal of two OEM agreements and the continued delay in the introduction of
Drew's new line of products in fiscal 2007. In July 2007, Drew received 510(k)
clearance from the FDA to market the new TRILOGY Analyzer. TRILOGY, a
multifunction analyzer used in determination of analytes in body fluids, is an
open system intended for clinical use in a professional setting for use with
various chemistry assays. Drew anticipates receiving approval on its new D3
Analyzer in the second quarter of fiscal 2008 which will provide two upgraded
instruments for sale in fiscal 2008. Additionally, Drew anticipates submitting
its new DS-360 Analyzer for FDA approval in the second half of fiscal 2008.

            Product revenue increased $2,086,000, or 27.0%, to $9,823,000 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 as well as increased sales of the new VuMax high
frequency systems and an overall increase in export sales.

            Product revenue decreased $173,000, or 4.8%, to $3,467,000, at the
Vascular business unit during the year ended June 30, 2007 as compared to last
fiscal year. The decrease was primarily caused by a decrease in revenues from
Company's distributor network due to the termination of its relationship with
several distributors during 2006 and 2005. This decrease was partially offset by
an increase in direct sales to end users by the Company's domestic sales team.
The Company continues to replace the territories of the terminated distributors
with direct sales efforts.

            Product revenue increased $1,050,000 or 241.9% in the EMI business
unit when compared to the last fiscal year. This increase is attributable to the
increase in sales of the digital imaging systems from the January 2006 MRP
acquisition. The EMI product offering continues to expand and has seen
significant market acceptance during the year ended June 30, 2007.

            In the Medical/Trek business unit, product revenue increased $12,000
or 0.8% to $1,492,000 during the year ended June 30, 2007 as compared to the
last fiscal year.

            The following table presents consolidated other revenue by
reportable business unit for the fiscal years ended June 30, 2007 and 2006.
Table amounts are in thousands:

<TABLE>
<CAPTION>
                       FISCAL YEARS ENDED JUNE 30,
                   ---------------------------------
                     2007        2006      % CHANGE
                   --------    --------    ---------
<S>                <C>         <C>         <C>
OTHER REVENUE:

Drew               $    243    $    283        -14.1%
Sonomed                   0           0          0.0%
Vascular                  0           0          0.0%
EMI                       0           0          0.0%
Medical/Trek         10,702       1,964        444.9%

                   --------    --------    ---------
TOTAL              $ 10,945    $  2,247        387.1%
                   --------    --------    ---------
</TABLE>

            Consolidated other revenue increased by approximately $8,698,000, or
387.1%, to $10,945,000 during the fiscal year ended June 30, 2007 as compared to
the prior fiscal year. The increase is primarily due to the $9,600,000
settlement reached with Intralase on February 27, 2007. Under the settlement
agreement, Intralase made a lump sum payment to Escalon of $9,600,000 in
exchange for which all pending litigation between the parties was dismissed, the
parties exchanged general releases, the Company transferred to Intralase its
ownership of patents and intellectual property formerly licensed to Intralase by

                                       21
<PAGE>

the Company, and the License Agreement was terminated. In addition, the payment
from Intralase satisfied all outstanding past, current and future royalties owed
or alleged to be owed by Intralase to the Company.

            Other revenue from the prior year of $1,964,000 and the amount in
the current year in excess of the $9,600,000 Intralase settlement of $1,102,000
are related to royalties received from Intralase license agreement received
prior to the settlement and royalties received by Drew related to the Bio-Rad
license agreement.

            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, 2007 and 2006. Table amounts are in
thousands:

<TABLE>
<CAPTION>
                           FISCAL YEARS ENDED JUNE 30,
                   ---------------------------------------------
                     2007          %         2006           %
                   --------    --------    ----------    -------
<S>                <C>         <C>         <C>           <C>
COST OF GOODS SOLD:

Drew               $  7,681        66.1%   $    9,225        64.7%
Sonomed               4,976        50.7%        3,962        51.2%
Vascular              1,393        40.2%        1,535        42.2%
EMI                     711        47.9%          290        66.8%
Medical/Trek          1,011        67.8%          992        67.0%
                   --------    --------    ----------    --------
TOTAL              $ 15,772        56.5%   $   16,004        58.1%
                   --------    --------    ----------    --------

</TABLE>

            Consolidated cost of goods sold totaled approximately $15,772,000,
or 56.5% of product revenue, for the fiscal year ended June 30, 2007 as compared
to $16,004,000 or 58.1 of product revenue, for the prior fiscal year.

            Cost of goods sold in the Drew business unit totaled $7,681,000, or
66.1% of product revenue, for the fiscal year ended June 30, 2007 as compared to
$9,225,000, or 64.7% of product revenue, for the prior fiscal year. The increase
in the cost of goods sold as a percentage of revenue is due to the margin
compression related to the continued aging of Drew's existing product offering.
The decrease in instrument gross margins was partially offset by an increase in
the sale of higher volume spare parts and continued sales of higher gross margin
reagents. This margin compression is expected to continue until Drew's updated
product offering comes on line for sale during fiscal 2008.

            Cost of goods sold in the Sonomed business unit totaled $4,976,000,
or 50.7% of product revenue, for the fiscal year ended June 30, 2007 as compared
to $3,962,000, or 51.2% of product revenue, for prior fiscal year. The primary
reason for the decrease as a percentage of product revenue was an increase in
the percentage of domestic sales during the period. The Company historically
experiences a higher selling price per unit on its domestic product sales.

            Cost of goods sold in the Vascular business unit totaled $1,393,000,
or 40.2% of product revenue, for fiscal year ended June 30, 2007 as compared to
$1,535,000, or 42.2% of product revenue, for the last fiscal year. The decrease
as a percentage of product revenue was due to lower overtime and higher
production efficiencies in the current period as compared to the prior year.

            Cost of goods sold in the EMI business unit totaled $711,000, or
47.9% of product revenue, for fiscal year ended June 30, 2007 as compared to
$290,000, or 66.8% of product revenue, for the last fiscal year. The significant
improvement in gross margins is related to improved production techniques
implemented during the year and EMI's ability to drive down the cost of
components due to increased purchases made during the year to keep pace with its
significant sales growth.

                                       22
<PAGE>

            Cost of goods sold in the Medical/Trek business unit totaled
$1,011,000, or 67.8% of product revenue, for the fiscal year ended June 30, 2007
as compared to $992,000, or 67.0% of product revenue, for the last fiscal year.

            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, 2007 and 2006. Table amounts are in thousands:

<TABLE>
<CAPTION>
                                FISCAL YEARS ENDED JUNE 30,
                           -----------------------------------
                             2007         2006       % CHANGE
                           ---------    ---------    ---------
<S>                        <C>          <C>          <C>
MARKETING, GENERAL AND ADMINISTRATIVE:

Drew                       $   5,475    $   6,006         -8.9%
Sonomed                        1,931        2,098         -8.0%
Vascular                       1,598        1,682         -5.0%
EMI                              480          550        -12.7%
Medical/Trek                   4,323        3,659         18.2%

                           ---------    ---------    ---------
TOTAL                      $  13,807    $  13,995         -1.4%
                           ---------    ---------    ---------
</TABLE>

            Consolidated marketing, general and administrative expenses
decreased $188,000, or 1.4%, to $13,807,000 during the fiscal year ended June
30, 2007 as compared to the prior fiscal year.

            Marketing, general and administrative expenses in the Drew business
unit decreased $531,000, or 8.9%, to $5,475,000 as compared to the same period
last fiscal year. The decrease is primarily due to the realization of previously
announced cost reductions initiated during the first quarter of the 2007 fiscal
year, offset by related charges incurred in consolidating our foot print in the
United Kingdom down to one site from three in the previous year, and from
increased legal and severance costs. The full effect of our previously announced
cost reduction plan is expected to be realized during fiscal 2008.

            Marketing, general and administrative expenses in the Sonomed
business unit decreased by $167,000, or 8.0%, to $1,931,000 as compared to the
prior fiscal year. The decrease is due primarily to the decreased need, as
compared to the prior fiscal year, for travel and advertising expenses related
to the introduction and expansion into international markets related to the roll
out of Sonomed's new UBM Instrument.

            Marketing, general and administrative expenses in the Vascular
business unit decreased $84,000, or 5.0%, to $1,598,000 as compared to the same
period last fiscal year. The decrease was due mainly to the discontinuance of
the relationship with an under performing European sales consultant and a more
efficient approach to domestic sales travel and other marketing related
expenses, including printed material and attendance at trade shows.

            Marketing, general and administrative expenses in the EMI business
unit decreased $70,000 or 12.7% to $480,000 as compared to last fiscal year. The
decrease is primarily related to additional costs incurred in the prior year on
printed and other advertising materials.

            The Medical/Trek business unit's marketing, general and
administrative expenses increased $664,000 or 18.2% to $4,323,000 as compared to
the last fiscal year. The increase was due primarily to $163,000 incurred during
this fiscal year under the new SFAS No. 123(R) rules, increased discretionary
bonuses of $175,000, increased corporate salaries of approximately $194,000 and
increased third party consultants in accounting, valuation services, and
information technology of $68,000 and increased insurance costs of $64,000.

                                       23
<PAGE>

            The following table presents consolidated research and development
expenses by reportable business unit and as a percentage of related unit product
revenues for the fiscal years ended June 30, 2007 and 2006. Table amounts are in
thousands:

<TABLE>
<CAPTION>
                               FISCAL YEARS ENDED JUNE 30,
                           -----------------------------------
                               2007          2006    % CHANGE
                           ---------    ---------    ---------
<S>                        <C>          <C>          <C>
RESEARCH AND DEVELOPMENT:

Drew                       $   2,355    $   1,734         35.8%
Sonomed                          495          511         -3.1%
Vascular                         172          164          4.9%
EMI                              350           85        311.8%
Medical/Trek                      89          334        -73.4%

                           ---------    ---------    ---------
TOTAL                      $   3,461    $   2,828         22.4%
                           =========    =========    =========
</TABLE>

            Consolidated research and development expenses increased $633,000,
or 22.4%, to $3,461,000 during the fiscal year ended June 30, 2007 as compared
to the prior fiscal year. Research and development expenses were primarily
expenses associated with the planned introduction of new or enhanced products in
the Drew and EMI business units.

            Research and development expenses in the Drew business unit
increased $621,000, or 35.8%, to $2,355,000. The increase is primarily due to
increased employee headcount, consulting and other related product development
expenses for Drew's continued research on two new instruments, the Drew DS-360
and the XL2280.

            Research and development expenses in the Sonomed business unit
decreased $16,000 to $495,000 as compared to the last fiscal year. The decrease
is primarily due to a completion of Sonomed's new UBM instrument in the prior
year offset by continued enhancements to Sonomed's existing products.

            Research and development in the EMI business unit increased $265,000
to $350,000 as compared to the last fiscal year. The increase is due to
additional employees related to continued development and enhancement of the
Company's digital ophthalmic product offerings.

            Research and development in the Medical/Trek business unit decreased
$245,000 to $89,000 as compared to the last fiscal year. This decrease is due
primarily to the elimination of the corporate research and development
department in the first quarter of fiscal 2007 related to the Company's
previously announced cost reduction plan.

            Gain on sale of available for sale securities was approximately
$75,000 and $1,157,000 during the fiscal years ended June 30, 2007 and 2006,
respectively due to the sale of 3,000 shares and 58,585 shares of Intralase
common stock during fiscal 2007 and 2006, respectively. The Company has no
remaining available for sale securities.

            The Company recognized a loss of approximately $88,000 and $174,000
related to its investment in Ocular Telehealth Management ("OTM") during the
fiscal years ended June 30, 2007 and 2006, 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.)

                                       24
<PAGE>

            Interest income was $208,000 and $162,000 for the fiscal years ended
June 30, 2007 and 2006, respectively. The increase was due to higher cash
balances and effective yields on investments.

            Interest expense was $29,000 and $64,000 for the fiscal years ended
June 30, 2007 and 2006, respectively.

      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>

            Consolidated product revenue increased approximately $3,680,000, or
15.4%, to $27,544,000 during the year ended June 30, 2006 as compared to fiscal
year 2005.

            In the Drew business unit, product revenue increased $2,959,000, or
26.2% as compared to fiscal year 2005. 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 fiscal year 2005. 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 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 fiscal
year 2005. 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 fiscal year 2005. The increase in Medical/Trek/EMI product revenue is
primarily attributed to an increase in the Trek business unit revenue

                                       25
<PAGE>

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 fiscal year
2005. The decrease is primarily due to an approximately $1,283,000 decrease in
royalties received from Bausch & Lomb in connection with its 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>

            Consolidated 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 fiscal year 2005.

            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 fiscal year 2005. 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 fiscal
year 2005. 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 fiscal year 2005. 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 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 fiscal year

                                       26
<PAGE>

2005. The Company experienced lower overtime and higher production efficiencies
in the current period as compared to fiscal year 2005.

            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 for fiscal year 2005.
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         46.3%
Sonomed                        2,098        1,608         30.4%
Vascular                       1,682        1,424         18.1%
Medical/Trek/EMI               4,209        5,420        -22.3%

                           ---------    ---------    ---------
TOTAL                      $  13,995    $  12,556         11.5%
                           ---------    ---------    ---------
</TABLE>

            Consolidated 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 fiscal year 2005.

            Marketing, general and administrative expenses in the Drew business
unit increased $1,902,000, or 46.4%, to $6,006,000 as compared to fiscal year
2005. 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 fiscal year 2005.

            Marketing, general and administrative expenses in the Sonomed
business unit increased by $490,000, or 30.5%, to $2,098,000 as compared to
fiscal year 2005. 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 fiscal
year 2005. 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
fiscal year 2005. All of the increases were related to supporting a higher
volume of business during the current period as compared to fiscal year 2005.
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 fiscal year 2005. 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 in fiscal year 2005 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 fiscal
year 2005. The Company expects litigation costs due to Intralase and other
matters to continue to impact earnings in the near term.

                                       27
<PAGE>

            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 fiscal year
2005. 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 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 15 of the notes to consolidated financial
statements.)

            The Company recognized a loss of approximately $174,000 and $64,000
related to its investment in 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 12 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.

                                       28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

            The following table presents overall liquidity and capital resources
from continuing operations during the fiscal years ended June 30, 2007 and 2006.
Table amounts are in thousands:

<TABLE>
<CAPTION>
                                                         JUNE 30,
                                                    2007         2006
                                                 ----------   -----------
<S>                                              <C>          <C>
CURRENT RATIO:

Current assets                                   $   21,763   $    14,911
Less: Current liabilities                             4,525         4,295
                                                 ----------   -----------
WORKING CAPITAL                                  $   17,238   $    10,616
                                                 ==========   ===========

CURRENT RATIO                                      4.8 TO 1      3.5 TO 1
                                                 ==========   ===========

DEBT TO TOTAL CAPITAL RATIO:

Notes payable and current maturities             $      150   $       233
Long-term debt                                            0           163
                                                 ----------   -----------
Total debt                                       $      150   $       396
                                                 ----------   -----------
Total equity                                         39,406        33,100
                                                 ----------   -----------
TOTAL CAPITAL                                    $   39,556   $    33,496
                                                 ==========   ===========

TOTAL DEBT TO TOTAL CAPITAL                             0.4%          1.2%
                                                 ==========   ===========
</TABLE>

             WORKING CAPITAL POSITION

            Working capital increased $6,622,000 as of June 30, 2007 and the
current ratio increased to 4.8 to 1 from 3.5 to 1 when compared to June 30,
2006. The increase in working capital was caused primarily by an increase in
cash of $5,499,000 from $3,380,000 to $8,879,000 in 2006 and 2007, respectively.
Accounts receivable increased $657,000 from $3,996,000 in 2006 to $4,653,000 in
2007. Overall total current assets increased $6,852,000 from $14,911,000 in 2006
to $21,763,000 in 2007. Total current liabilities which consist of current
portion of long term debt, accounts payable and accrued expenses increased
$230,000, from $4,295,000 in 2006 to $4,525,000 in 2007.

             CASH PROVIDED BY OR USED IN OPERATING ACTIVITIES

            During fiscal 2007, the Company generated approximately $5,783,000
of cash for operating activities. In fiscal 2006, the Company used approximately
$2,605,000 in operating activities. The net increase in cash generated from
operating activities of approximately $8,388,000 in fiscal 2007 as compared to
fiscal 2006 is due primarily to the following factors:

            Income/loss from operations increased approximately $7,901,000 in
fiscal 2007 as compared to fiscal 2006, from $(1,986,000) to $5,915,000 in 2007.
The net income in 2007 was driven by net income in the legacy Escalon companies
of approximately $9,585,000 offset by a net loss at our Drew division of
approximately $3,670,000. The income in the legacy Escalon companies includes
the $9,600,000 settlement reached with Intralase as described in Item 3 above.
The loss at Drew was primarily driven by revenue decreases due to the
non-renewal of two OEM agreements and the delay in the introduction of several
new key products due to development setbacks and increased research and
development expenses related to continued research on two new instruments, the
DS-360 and the XL2280 and completion of the new Trilogy Analyzer which received
FDA approval during July 2007.

                                       29
<PAGE>

             CASH FLOWS USED IN INVESTING AND FINANCING ACTIVITIES

             Cash flows used in investing activities for 2007 were approximately
$216,000. This amount is made up of the net proceeds of $75,000 realized on the
sale of the remaining Intralase securities held by the Company as available for
sale securities, purchases of fixed assets of $260,000 and investment in OTM of
$31,000.

            Cash flows generated by investing activities of approximately
$783,000 during fiscal 2006 relate primarily to the net proceeds of
approximately $1,157,000 realized on the sale of a portion of the Intralase
securities held by the Company as available for sale securities. The securities
that were sold were originally acquired in connection with the license of
intellectual laser properties to Intralase (see note 15 to the consolidated
financial statements). Partially offsetting the cash realized on the securities
sale were costs related to the purchase of fixed assets during 2006 of $327,000
and costs related to the MRP acquisition of $47,000.

            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 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 used in financing activities in the amount of $62,000
during 2007 relate to repayment of debt of $245,000, offset by the proceeds
$183,000 from the issuance of common stock options.

            Cash flows generated in financing activities were approximately
$147,000 during the fiscal year ended June 30, 2006. The Company received
proceeds of $374,000 from the issuance of common stock upon the exercise of
stock options. This was partially offset by repayment of debt of $227,000.

             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, 2007 was
$133,534. 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 on the Symbiotics as of June 30, 2007 was approximately
$16,666.

             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, 2007 and 2006. The following table
presents the Company's contractual obligations as of June 30, 2007 (interest is
not included in the table as it is not material):

                                       30
<PAGE>

<TABLE>
<CAPTION>
                                              LESS THAN                       3-5         MORE THAN
                                 TOTAL         1 YEAR        1-3 YEARS       YEARS         5 YEARS
                              ------------    ----------    -----------    ----------    ----------
<S>                           <C>             <C>           <C>            <C>           <C>
Long-term debt                $    150,200    $  150,200    $         0    $        0    $        0

Operating lease agreements       2,746,091       657,452        968,734       792,819       327,086

                              ------------    ----------    -----------    ----------    ----------
TOTAL                         $  2,896,291    $  807,652    $   968,734    $  792,819    $  327,086
                              ------------    ----------    -----------    ----------    ----------
</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. As of June 30,
2006, the Company has acquired all of the outstanding ordinary shares of Drew.
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
continues to work to reverse the situation, while at the same time seeking to
strengthen Drew's market position. The Company has loaned approximately $16
million 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. The Company may need to provide further
working capital for Drew.

             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:

      -     Shareholders' 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.

            As of June 30, 2007, 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-K. 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.

                                       31
<PAGE>

             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

            The Company 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.

             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

                                 32
<PAGE>

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, 2007, 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.

      STOCK BASED COMPENSATION

      Effective July 1, 2007, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards 123(R) ("SFAS 123(R)")
"Share-Based Payments". SFAS 123(R) is a revision of SFAS No. 123 and supersedes
ABP Opinion No. 25. The Company used the modified prospective transition method
and therefore did not have to restate results for prior periods. Under this
transition method, stock-based compensation expense for 2006 includes
compensation expense for all stock-based compensation awards granted prior to,
but not yet vested as of, July 1, 2006, based on the grant date fair value
estimate in accordance with the original provisions of SFAS 123. Stock-based
compensation expense for all stock-based compensation awards granted after July
1, 2006 is based on the grant-date fair value estimate in accordance with the
provisions of SFAS 123(R). The Company will recognize these compensation costs
on a straight-line basis over the requisite service period of the award.

      Valuations are based on highly subjective assumptions about the future,
including stock price volatility and exercise patterns. The fair value of
share-based payment awards was estimated using the Black-Scholes option pricing
model. Expected volatilities are based on the historical volatility of the
Company's stock. The Company uses historical data to estimate option exercise
and employee terminations. The expected term of options granted represents the
period of time that options granted are expected to be outstanding. The
risk-free rate for periods within the expected life of the option is based on
the U.S. Treasury yield curve in effect at the time of the grant.

      Prior to the adoption of SFAS 123(R), the Company accounted for
stock-based compensation in accordance with APB 25.

                                       33
<PAGE>

      RECENTLY ISSUED ACCOUNTING STANDARDS

      In July 2006, the Financial Accounting Standards Board, or FASB, issued
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement No. 109, or FIN 48. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in the enterprise's
financial statements. This Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in the tax return. This
Interpretation is effective for fiscal years beginning after December 15, 2006.
The Company is currently evaluating the effect this Interpretation will have on
the Company's financial position, liquidity and statement of operations, but do
not expect the effect to be significant.

      In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
or SFAS No. 157. SFAS No. 157 establishes a framework for measuring fair value
and expands the disclosures on fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. The Company is
currently evaluating the impact of the adoption of SFAS No. 157 on the Company's
consolidated financial statements. The Company does not expect the effect to be
significant.

      On September 29, 2006, the FASB issued FASB Statement No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans, and
amendment of FASB Statements Nos. 87, 88, 106 and 132(R), or FAS 158. FAS 158
requires companies to recognize a net liability or asset to report the funded
status of their defined benefit pension and post retirement benefit plans. The
Company does not any defined benefit plans and therefore the effect of adoption
at December 31, 2006 has not had an impact on the Company's financial condition,
results of operations or cash flows.

      In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108
"Considering the Effects of Prior Year Misstatement when Quantifying
Misstatements in the Current Year Financial Statements," or SAB 108. SAB 108 was
issued in order to eliminate the diversity in practice surrounding how public
companies quantify financial statement misstatements. The Company does not
expect SAB 108 will have a material effect on our financial statements.

ITEM 7A. QUANTITATIVE AND QUALIITATIVE DISCLOSURE ABOUT MARKET RISK

      Market risk represents the risk of loss that may impact our consolidated
financial position, results of operations or cash flows. In the normal course of
doing business, we are exposed to the risks associated with foreign currency
exchange rates and changes in interest rates.

            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,
2007 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.)

<TABLE>
<CAPTION>
                                               2007            TOTAL
                                          --------------    -----------
<S>                                       <C>               <C>
   Texas Mezzanine Fund Note              $      133,534    $  133,534

     Interest rate                          Prime Plus 4%

   Symbiotics, Inc. Note                  $       16,666    $   16,666

     Interest rate                                  5.00%
                                          --------------    -----------
   TOTAL                                  $      150,200    $  150,200

                                          --------------    -----------
</TABLE>

      CURRENCY FLUCTUATIONS

                                       34
<PAGE>

      For the years ended June 30, 2007, 2006 and 2005, approximately 12.5%,
12.8% and 14.5%, respectively, of our net revenues were generated in currencies
other than the United States dollar. Fluctuations in the value of foreign
currencies relative to the United States dollar affect our reported results of
operations. If the United States dollar weakens relative to the foreign
currency, then our earnings generated in the foreign currency will, in effect,
increase when converted into United States dollars and vice versa. Exchange rate
differences resulting from the strength or weakness of the United States dollar
against the Euro and the United Kingdom Pound Sterling resulted in increases of
approximately $279,000 in net revenues in 2007 compared to 2006, $37,000 in net
revenues in 2006 compared to 2005 and a decrease of approximately $52,000 in net
revenues in 2005 compared to 2004.. During the three years ended June 30, 2007,
no subsidiary was domiciled in a highly inflationary environment and the impact
of inflation and changing prices on our net sales and revenues and on loss from
continuing operations was not material.

      During 2007, our subsidiary in the United Kingdom generated 12.5% of our
net product revenues. Conducting an international business inherently involves a
number of difficulties, risks, and uncertainties, such as export and trade
restrictions, inconsistent and changing regulatory requirements, tariffs and
other trade barriers, cultural issues, longer payment cycles, problems in
collecting accounts receivable, political instability, local economic downturns,
seasonal reductions in business activity in Europe during the traditional summer
vacation months, and potentially adverse tax consequences.

                                       35
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                              ESCALON MEDICAL CORP.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                          Page
                                                                                          -----
<S>                                                                                       <C>
Report of Independent Registered Public Accounting Firm                                   37

Consolidated Balance Sheets at June 30, 2007 and 2006                                     38

Consolidated Statements of Income for the Years Ended June 30, 2007, 2006 and 2005        39

Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 2007, 2006
   and 2005                                                                               40

Consolidated Statements of Cash Flows for the Years Ended June 30, 2007, 2006 and 2005    41

Notes to Consolidated Financial Statements                                                42
</TABLE>
                                       36
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Escalon Medical Corporation

We have audited the accompanying balance sheets of Escalon Medical Corporation
as of June 30, 2007 and 2006, and the related statements of income,
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year periods ended June 30, 2007. These financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the 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 audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Escalon Medical Corporation as
of June 30, 2007 and 2006, and the results of its operations and its cash flows
for each of the years in the three-year period ended June 30, 2007 in conformity
with accounting principles generally accepted in the United States of America.

                                             Mayer Hoffman McCann P.C.

Plymouth Meeting, Pennsylvania

September 27, 2007

                                       37
<PAGE>

                     ESCALON MEDICAL CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                         JUNE 30,      JUNE 30,
                                                                                          2007           2006
                                                                                      ------------   -------------
<S>                                                                                   <C>            <C>
ASSETS
Current assets:                                                                       $  8,879,462   $   3,379,710
    Available for sale securities                                                                0          50,220
    Accounts receivable, net                                                             4,653,073       3,996,243
    Inventory, net                                                                       7,761,370       7,122,916
    Other current assets                                                                   469,107         362,160
                                                                                      ------------   -------------
          TOTAL CURRENT ASSETS                                                          21,763,012      14,911,249
                                                                                      ------------   -------------
Furniture and equipment, net                                                               873,191         969,956
Goodwill                                                                                21,072,260      21,072,260
Trademarks and trade names                                                                 620,106         620,106
Patents, net                                                                               216,228         313,702
Covenant not to compete and customer list, net                                             326,860         420,073
Other assets                                                                               145,556         337,421
                                                                                      ------------   -------------
    TOTAL ASSETS                                                                      $ 45,017,213   $  38,644,767
                                                                                      ============   =============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Current portion of long-term debt                                                 $    150,200   $     232,837
    Accounts payable                                                                     1,626,274       1,558,501
    Accrued expenses                                                                     2,748,133       2,503,771
                                                                                      ------------   -------------
          TOTAL CURRENT LIABILITIES                                                      4,524,607       4,295,109
                                                                                      ------------   -------------
Long-term debt, net of current portion                                                           0         162,551
Accrued post-retirement benefits                                                         1,087,000       1,087,000
                                                                                      ------------   -------------
    TOTAL LIABILITIES                                                                    5,611,607       5,544,660
                                                                                      ------------   -------------
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; 6,386,857 and 6,344,657
   issued and outstanding at June 30, 2007 and June 30, 2006, respectively                   6,387           6,345
Common stock warrants                                                                    1,601,346       1,601,346
Additional paid-in capital                                                              66,045,050      65,699,370
Accumulated (deficit)                                                                  (28,207,824)    (34,122,427)
Accumulated other comprehensive (loss) income                                              (39,353)        (84,527)
                                                                                      ------------   -------------
    TOTAL SHAREHOLDERS' EQUITY                                                          39,405,606      33,100,107
                                                                                      ------------   -------------
    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                        $ 45,017,213   $  38,644,767
                                                                                      ============   =============
</TABLE>

                 See notes to consolidated financial statements

                                       38
<PAGE>

                     ESCALON MEDICAL CORP. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
           FOR THE YEARS ENDED JUNE 30,                2007           2006           2005
                                                   ------------   ------------   ------------
<S>                                                <C>            <C>            <C>
NET REVENUES:
Product revenue                                    $ 27,892,738   $ 27,543,785   $ 23,864,322
Other revenue                                        10,945,042      2,246,913      3,060,300
                                                   ------------   ------------   ------------
REVENUES, NET                                        38,837,780     29,790,698     26,924,622
                                                   ------------   ------------   ------------

COSTS AND EXPENSES:
    Cost of goods sold                               15,771,254     16,003,904     13,158,061
    Marketing, general and administrative            13,806,399     13,994,788     12,556,374
    Research and development                          3,461,322      2,828,196      1,892,706
                                                   ------------   ------------   ------------
      TOTAL COSTS AND EXPENSES                       33,038,975     32,826,888     27,607,141
                                                   ------------   ------------   ------------
INCOME (LOSS) FROM OPERATIONS                         5,798,805     (3,036,190)      (682,519)
                                                   ------------   ------------   ------------

OTHER (EXPENSE) AND INCOME:
    Gain on sale of available for sale
    securities                                           75,000      1,157,336      3,411,761
    Equity in Ocular Telehealth Management, LLC         (87,852)      (173,844)       (63,613)
    Interest income                                     208,457        161,588         69,262
    Interest expense                                    (28,753)       (63,521)       (55,116)
                                                   ------------   ------------   ------------
      TOTAL OTHER INCOME                                166,852      1,081,559      3,362,294
                                                   ------------   ------------   ------------
NET INCOME (LOSS) BEFORE TAXES                        5,965,657     (1,954,631)     2,679,775
                                                   ------------   ------------   ------------
Provision for income taxes                               51,054         31,309        231,664
                                                   ------------   ------------   ------------
NET INCOME (LOSS)                                  $  5,914,603   $ (1,985,940)  $  2,448,111
                                                   ============   ============   ============

BASIC NET INCOME (LOSS) PER SHARE                  $       0.93   $      (0.32)  $       0.42
                                                   ============   ============   ============

DILUTED NET INCOME (LOSS) PER SHARE                $       0.92   $      (0.32)  $       0.39
                                                   ============   ============   ============

WEIGHTED AVERAGE SHARES - BASIC                       6,374,929      6,152,455      5,831,564
                                                   ============   ============   ============

WEIGHTED AVERAGE SHARES - DILUTED                     6,434,275      6,152,455      6,231,024
                                                   ============   ============   ============
</TABLE>

                 See notes to consolidated financial statements

                                       39
<PAGE>

                     ESCALON MEDICAL CORP. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                FOR THE YEARS ENDED JUNE 30, 2007, 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, 2005                  5,963,477   $  5,964  $1,601,346   $63,898,190   $(32,136,487)  $ 1,149,836   $34,518,849
Comprehensive Income (Loss):
    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 (LOSS)                 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                           0          0           0        77,807              0             0        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
Comprehensive Income:
    Net income                                    0          0           0             0   $  5,914,603             0     5,914,603
    Change in unrealized gains on
          available for sale securities           0          0           0             0              0       (50,220)      (50,220)
    Foreign currency translation                  0          0           0             0              0        95,394        95,394
TOTAL COMPREHENSIVE INCOME
Exercise of stock options                    42,200   $     42           0   $    84,692              0             0        84,734
Compensation expense                              0          0           0   $   162,576              0             0       162,576
Income tax benefit from exercise
       of stock options                           0          0           0   $    98,412              0             0        98,412
                                          ---------   --------  ----------   -----------   ------------   -----------   -----------
BALANCE AT JUNE 30, 2007                  6,386,857      6,387   1,601,346    66,045,050    (28,207,824)      (39,353)   39,405,606
                                          ---------   --------  ----------   -----------   ------------   -----------   -----------
</TABLE>

                                       40
<PAGE>

                     ESCALON MEDICAL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                     YEARS ENDED JUNE 30,                                              2007           2006           2005
                                                                                    -----------   -----------   ------------
<S>                                                                                 <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                                   $ 5,914,603   $(1,985,940)  $  2,448,111
Adjustments to reconcile net income (loss) to net cash provided by (used in)
     operating activities:
     Depreciation and amortization                                                      590,846       440,952        387,651
     Post retirement benefits                                                                 0             0      1,087,000
     Compensation expense related to stock options                                      162,576             0              0
     Gain on sale of available for sale securities                                      (75,000)   (1,157,336)    (3,411,761)
     Reserve on notes receivable                                                              0       100,000         50,000
     Loss on Ocular Telehealth Management, LLC                                           87,852       173,844         63,613
     Abandonment of leasehold improvements                                                    0             0         12,458
     Change in operating assets and liabilities:
        Accounts receivable, net                                                       (656,830)      761,834       (838,624)
        Inventory, net                                                                 (638,454)   (1,189,207)    (1,882,149)
        Other current and long-term assets                                               84,918        19,880         63,750
        Accounts payable, accrued and other liabilities                                 312,135       230,643     (1,330,009)
                                                                                    -----------   -----------   ------------
                    NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES               5,782,645    (2,605,330)    (3,349,960)
                                                                                    -----------   -----------   ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Proceeds from the sale of available for sale securities                             75,000     1,157,336      3,411,761
     Investment in Ocular Telehealth Management, LLC                                    (31,000)            0       (256,000)
     Purchase of fixed assets                                                          (259,705)     (327,340)      (104,396)
     Purchase of MRP, net of cash acquired                                                    0       (47,060)             0
     Purchase of Drew, net of cash acquired                                                   0             0        151,459
     Acquistion costs, related to Drew                                                        0             0     (1,015,362)
                                                                                    -----------   -----------   ------------
        NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES                            (215,705)      782,936      2,187,462
                                                                                    -----------   -----------   ------------
     CASH FLOWS FROM FINANCING ACTIVITIES:
     Principal payments on term loans                                                  (245,188)     (226,749)    (4,441,761)
     Issuance of common stock - stock options                                           183,146       374,061         29,795
     Line of credit repayment                                                                 0             0     (1,905,822)
                                                                                    -----------   -----------   ------------
                    NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                 (62,042)      147,312     (6,317,788)
                                                                                    -----------   -----------   ------------
                    Effect of exchange rate changes on cash and cash equivalents         (5,146)      (60,980)        (5,913)
                                                                                    -----------   -----------   ------------
                    NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS              5,499,752    (1,736,062)    (7,486,199)
                                                                                    -----------   -----------   ------------
Cash and cash equivalents, beginning of period                                        3,379,710     5,115,772     12,601,971
                                                                                    -----------   -----------   ------------
Cash and cash equivalents, end of period                                            $ 8,879,462   $ 3,379,710   $  5,115,772
                                                                                    ===========   ===========   ============

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:

Interest paid                                                                       $    25,217   $    37,586   $    198,647
                                                                                    ===========   ===========   ============
Income taxes refund (paid)                                                          $    98,412   $    (1,133)  $    327,176
                                                                                    ===========   ===========   ============
Issuance of common stock for Drew acquisition                                       $         0   $         0   $  7,430,438
                                                                                    ===========   ===========   ============
Issuance of common stock for MRP acquisition                                        $         0   $ 1,427,500   $          0
                                                                                    ===========   ===========   ============
(Decrease)/increase in unrealized appreciation on available for sale securities     $   (50,220)  $(1,157,097)  $  1,207,317
                                                                                    ===========   ===========   ============
</TABLE>

                 See notes to consolidated financial statements

                                       41
<PAGE>


                     ESCALON MEDICAL CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND DESCRIPTION OF BUSINESS AND BUSINESS CONDITIONS

            Escalon Medical Corp. ("Escalon" or the "Company") 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"), Escalon IP Holdings, Inc.,
Escalon Vascular IP Holdings, Inc., Sonomed IP Holdings, Inc., Drew Scientific
Holdings, Inc., and Drew Scientific Group, Plc ("Drew") and 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 to 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 growth of its 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. 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.

                                       42
<PAGE>

            FAIR VALUE OF FINANCIAL INSTRUMENTS

            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, 2007 and 2006 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 (see note 15).

            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.

                                       43
<PAGE>


            INVENTORIES

            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,
                         2007          2006
                      -----------   -----------
<S>                   <C>           <C>
Raw materials         $ 4,825,018   $ 4,219,836
Work in process           680,994       809,807
Finished goods          2,556,913     2,345,985
                      -----------   -----------
                        8,062,925     7,375,628
                      -----------   -----------
Valuation allowance      (301,555)     (252,712)
                      -----------   -----------
TOTAL INVENTORY       $ 7,761,370   $ 7,122,916
                      ===========   ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                            JUNE 30,
                                       2007          2006
                                    -----------   ---------
<S>                                 <C>           <C>
BALANCE, JULY 1                     $   252,712   $ 166,668
Provision for valuation allowance        65,221      87,475
Write-off's                             (16,378)     (1,431)
                                    -----------   ---------
BALANCE, JUNE 30                    $   301,555   $ 252,712
                                    ===========   =========
</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,
                            2007        2006
                          ---------   ---------
<S>                       <C>         <C>
BALANCE, JULY 1           $ 649,577   $ 490,465
Provision for bad debts      96,000     347,968
Write-off's                (178,699)   (188,856)
                          ---------   ---------
BALANCE, JUNE 30          $ 566,878   $ 649,577
                          =========   =========
</TABLE>

            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

                                       44
<PAGE>

years for furniture and fixtures and 5 to 10 years for production and test
equipment. Depreciation expense for the years ended June 30, 2007, 2006 and 2005
was $394,517, $324,458 and $321,142 respectively.

            Property and equipment consist of the following at:

<TABLE>
<CAPTION>
                                                           JUNE 30,
                                                  -------------------------
                                                      2007         2006
                                                  -----------   -----------
<S>                                               <C>           <C>
Equipment                                         $ 2,157,562   $ 2,289,994
Furniture and Fixtures                                 62,846        65,891
Leasehold Improvements                                135,895       128,866
                                                  -----------   -----------
                                                    2,356,303     2,484,751
                                                  -----------   -----------
Less: Accumulated depreciation and amortization    (1,483,112)   (1,514,795)
                                                  -----------   -----------
                                                  $   873,191   $  969,956
                                                  ===========   ===========
</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.

                                       45
<PAGE>

            STOCK-BASED COMPENSATION

                  Effective July 1, 2006, the Company adopted the fair value
recognition provisions of SFAS 123(R), using the modified prospective transition
method. Under this transition method, stock based compensation expense for the
year ended June 30, 2007 included compensation expense for all stock-based
compensation awards granted prior to, but not yet vested as of July 1, 2006,
based on the grant date fair value estimate in accordance with the original
provisions of SFAS 123. 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
applied 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. Since all options issued prior
to July 1, 2006 were accelerated, and therefore fully vested, there was no
compensation expense recorded in fiscal year 2007 related to these options.

      Stock-based compensation expense for all share-based payment awards
granted after July 1, 2006 is based on the grant date fair value estimate in
accordance with the provisions of SFAS 123(R). As of June 30, 2007, there was
$127,052 of total unrecognized compensation cost related to non-vested
share-based compensation arrangements under the plans. The cost is expected to
be recognized over a weighted average period of four years.

      The Company measures compensation expense for its non-employee stock-based
compensation under the Financial Accounting Standards Board (FASB) Emerging
Issues Task Force (EITF) Issue No. 96-18, "Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services ". The fair value of the option issued is used to
measure the transaction, as this is more reliable than the fair value of the
services received. Fair value is measured as the value of the Company's common
stock on the date that the commitment for performance by the counterparty has
been reached or the counterparty's performance is complete. The fair value of
the equity instrument is charged directly to compensation expense and additional
paid-in capital.

            For the years ended June 30, 2006 and 2005 the Company reported
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"), "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.

                                       46
<PAGE>

<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 and 2005 was $5.52 and
$4.93, 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 years ended June 30, 2007, 2006 and 2005 was $134,811, $279,670
and $190,963 respectively.

            NET INCOME (LOSS) PER SHARE

            Earnings (loss) per share is computed by dividing net income (loss)
by the weighted average number of shares of common stock outstanding during the
year. All outstanding stock options and warrants are considered potential common
stock. The dilutive effect, if any, of stock options and warrants is calculated
using the treasury stock method.

                                       47
<PAGE>

            A reconciliation of the denominator of the basic and diluted
earnings per share for the three years ended June 30, 2007, 2006 and 2005 is as
follows:

<TABLE>
<CAPTION>
                                                2007        2006         2005
                                              ---------   ---------   ----------
<S>                                           <C>         <C>          <C>
Basic Weighted average shares outstanding     6,374,929   6,152,455    5,831,564
Effect of diluted securities
        Stock Options and warrants               59,346           0      399,460
                                              ---------   ---------   ----------

Diluted weighted average shares outstanding   6,434,275   6,152,455    6,231,024
                                              =========   =========   ==========
</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, 2007, 2006, and 2005, 120,000
warrants, which were issued in March 2004 (see note 6), 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

            In July 2006, the Financial Accounting Standards Board, or FASB,
issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes--
an interpretation of FASB Statement No. 109, or FIN 48. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in the enterprise's
financial statements. This interpretation prescribes a recognition threshold and
measurement attribute for the


                                       48
<PAGE>

financial statement recognition and measurement of a tax position taken or
expected to be taken in the tax return. This interpretation is effective for
fiscal years beginning after December 15, 2006. The Company is currently
evaluating the effect this interpretation will have on the Company's financial
position, liquidity and statement of operations, but do not expect the effect to
be significant.

      In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
or SFAS No. 157. SFAS No. 157 establishes a framework for measuring fair value
and expands the disclosures on fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. The Company is
currently evaluating the impact of the adoption of SFAS No. 157 on the Company's
consolidated financial statements. However, the Company does not expect the
effect to be significant.

      On September 29, 2006, the FASB issued FASB Statement No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans, and
amendment of FASB Statements Nos. 87, 88, 106 and 132(R), or FAS 158. FAS 158
requires companies to recognize a net liability or asset to report the funded
status of their defined benefit pension and post retirement benefit plans. The
Company does not have any defined benefit plans and therefore the effect of
adoption has not had an impact on the Company's financial condition, results of
operations or cash flows.

      In September 2006, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin No. 108 "Considering the Effects of Prior Year
Misstatement when Quantifying Misstatements in the Current Year Financial
Statements," or SAB 108. SAB 108 was issued in order to eliminate the diversity
in practice surrounding how public companies quantify financial statement
misstatements. The Company does not expect SAB 108 will have a material effect
on the Company's financial statements.

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.

                                       49
<PAGE>

The following table presents unamortized intangible assets by business unit as
of June 30, 2007 and 2006:

<TABLE>
<CAPTION>
                      2007          2006
                       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     1,030,837
                   -----------   -----------
TOTAL              $21,072,260   $21,072,260
                   ===========   ===========
</TABLE>

<TABLE>
<CAPTION>
                              2007       2006
                               NET        NET
                            CARRYING   CARRYING
                             AMOUNT     AMOUNT
                            --------   --------
<S>                         <C>        <C>
TRADEMARKS AND TRADENAMES

Sonomed                     $616,906   $616,906
Medical/Trek/EMI               3,200      3,200
                            --------   --------
TOTAL                       $620,106   $620,106
                            --------   --------
</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 $365,729 and $263,799 at June 30, 2007 and 2006, respectively.
Amortization expense for the years ended June 30, 2007, 2006 and 2005 was
$98,404, $75,150 and $66,509, respectively.

            Amortization expense, relating entirely to patents, is estimated to
be approximately $62,000 for 2008, $42,000 for 2009 thru 2011 and $21,000 for
2012.

            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 $116,109 and $22,986 at June 30, 2007
and 2006, respectively. Amortization expense for the years ended June 30, 2007,
2006 and 2005 was $93,213, $22,986 and $0 respectively.

                                       50
<PAGE>

            The following table presents amortized intangible assets by business
unit as of June 30, 2007:

<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                       $ 279,740   $        0   $ 279,740   $   (154,474)  $    125,266
Vascular                      36,916            0      36,916        (36,916)             0
Medical/Trek/EMI             265,301            0     265,301       (174,339)        90,962
                           ---------   ----------   ---------   ------------   ------------
TOTAL                      $ 581,957   $        0   $ 581,957   $   (365,729)  $    216,228
                           =========   ==========   =========   ============   ============

 COVENANT NOT TO COMPETE/
    CUSTOMER LIST

Medical/Trek/EMI           $ 442,969   $        0   $ 442,969   $   (116,109)  $    326,860
                           ---------   ----------   ---------   ------------   ------------
TOTAL                      $ 442,969   $        0   $ 442,969   $   (116,109)  $    326,860
                           =========   ==========   =========   ============   ============
</TABLE>

Amortization expense, relating entirely to covenant not to compete and the
customer list is estimated to be approximately $93,000 each for the years 2008
thru 2010 and $47,000 for 2011.

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

<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>

4. NOTE RECEIVABLE

            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.

                                       51
<PAGE>

5. ACCRUED EXPENSES

            The following table presents accrued expenses:

<TABLE>
<CAPTION>
                         JUNE 30, 2007   JUNE 30, 2006
                         -------------   -------------
<S>                      <C>             <C>
Accrued compensation     $   1,694,394   $   1,260,139
Warranty accruals              255,740         255,740
Legal accruals                       0         221,369
Other accruals                 797,999         766,523
                         -------------   -------------
TOTAL ACCRUED EXPENSES   $   2,748,133   $   2,503,771
                         =============   =============
</TABLE>

            In addition to normal accruals, other accruals as of June 30, 2007
and 2006 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, 2007 and 2006 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 12% per annum
and 10.25% per annum as of June 30, 2007 and 2006, 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 $133,534 and $278,717 as of June
30, 2007 and 2006, 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 $16,666 and $116,671 as of
June 30, 2007 and 2006, respectively.

            The schedule below presents principal amortization for the next five
years under each of the Company's loan agreements as of June 30, 2007:

<TABLE>
<CAPTION>
TWELVE MONTHS
    ENDING          TEXAS
   JUNE 30,       MEZZANINE         SYMBIOTICS         TOTAL
--------------  --------------   ----------------   ----------
<S>             <C>              <C>                <C>
  2008          $      133,534   $         16,666      150,200
  2009                                                       0
                --------------   ----------------   ----------
  TOTAL         $      133,534   $         16,666      150,200
                ==============   ================

                Current portion of long-term debt      150,200
                                                    ----------
                Long-term portion                   $        0
                                                    ==========

</TABLE>

                                       52
<PAGE>

7. CAPITAL STOCK TRANSACTIONS

            STOCK OPTION PLANS

            As of June 30, 2007, Escalon had in effect five 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, 2007. 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, 2007,
options to purchase 810,227 shares of the Company's common stock were
outstanding and exercisable, and 416,317 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 took 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 was required to apply the
expense recognition provisions of SFAS 123R beginning in the first quarter of
fiscal 2007. 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.

            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 the date of the extension; or
(iii) termination of employment.

                                       53
<PAGE>

      The following is a summary of Escalon's stock option activity and related
information for the fiscal years ended June 30, 2007, 2006 and 2005:

<TABLE>
<CAPTION>
                                                   2007                      2006                        2005
                                          -----------------------  -------------------------  --------------------------
                                          COMMON       WEIGHTED     COMMON       WEIGHTED       COMMON       WEIGHTED
                                           STOCK        AVERAGE      STOCK       AVERAGE        STOCK         AVERAGE
                                          OPTIONS  EXERCISE PRICE   OPTIONS   EXERCISE PRICE   OPTIONS    EXERCISE PRICE
                                          -------  --------------   -------   --------------  ----------  --------------
<S>                                       <C>      <C>             <C>        <C>             <C>         <C>
Outstanding at the beginning of the year  920,685  $         5.31   847,210   $         4.20  618,706.00  $         3.40

Granted                                   117,000  $         2.65   318,400   $         6.63  242,004.00  $         6.13

Exercised                                 (42,000) $         2.00  (121,183)  $         2.22  (13,500.00) $         2.24

Forfeited                                (130,650) $         5.52  (123,742)  $         1.00           -  $            -
                                         --------  --------------   -------   --------------   ---------  --------------

Outstanding at the end of the year        865,035  $         5.31   920,685   $         5.31     847,210  $         4.20
                                         ========                  ========                   ==========

Exercisable at the end of the year        810,227                   920,685                      581,556
                                         ========                  ========                   ==========

Weighted average fair value of options
   granted during the year                         $         2.65             $         6.63              $         6.13
</TABLE>

      The following table summarizes information about stock options outstanding
as of June 30, 2007:

<TABLE>
<CAPTION>
                                             WEIGHTED
                                NUMBER       AVERAGE
                             OUTSTANDING     REMAINING    WEIGHTED        NUMBER      WEIGHTED
                                  AT        CONTRACTUAL   AVERAGE      EXERCISABLE     AVERAGE
                               JUNE, 30        LIFE      EXERCISE      AT JUNE 30,    EXERCISE
                                 2007         (YEARS)      PRICE           2007         PRICE
                             -----------    -----------  ---------     -----------   ---------
<S>                          <C>            <C>          <C>           <C>           <C>
RANGE OF EXERCISE PRICES

$1.45 to $ 2.12                   120,981          3.24  $    1.88         120,981   $    1.88

$2.37 to $ 2.77                   243,675          6.58  $    2.62         188,867   $    2.61

$4.97 to $ 5.59                    74,000          8.28  $    5.05          74,000   $    5.05

$6.19 to $ 6.19                   168,250          7.08  $    6.19         168,250   $    6.19

$6.94 to $ 8.06                   258,129          7.47  $    7.41         258,129   $    7.41
                                  -------                                  -------

Total                             865,035                                  810,227
                                  -------                                  -------
</TABLE>

                                       54
<PAGE>

      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 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.

8. INCOME TAXES

      The provision for income taxes for the years ended June 30, 2007, 2006 and
2005 consists of the following:

<TABLE>
<CAPTION>
                                      2007            2006          2005
                                   -----------    -----------    -----------
<S>                                <C>            <C>            <C>
Current income tax provision

   Federal                         $         -    $         -    $   100,000
   State                                51,054         31,309        131,664
                                   -----------    -----------    -----------
                                        51,054         31,309        231,664
                                   -----------    -----------    -----------
Deferred income tax provision

   Federal                           1,704,463     (1,962,685)     1,572,610
   State                               399,812       (460,383)       370,026
                                   -----------    -----------    -----------

   Change in valuation allowance    (2,104,275)    (2,423,068)    (1,942,636)
                                   -----------    -----------    -----------
                                             -              -              -
                                   -----------    -----------    -----------

Income tax expense                 $    51,054    $    31,309    $   231,664
                                   ===========    ===========    ===========
</TABLE>

      Income taxes as a percentage of income for the years ended June 30, 2007,
2006 and 2005 differ from statutory federal income tax rate due to the
following:

<TABLE>
<CAPTION>
                                                          2007              2006                2005
                                                          ----              ----                ----
<S>                                                     <C>                <C>                 <C>
Statutory federal income tax rate                         34.0%            -34.0%               34.0%
Change in valuation allowance                            -34.0%             34.0%              -34.0%
State income taxes, net of federal and income
tax   impact                                                                                     4.9%
Other                                                                                            3.7%

                                                        ------             -----               -----
Effective income tax rate                                    -                 -                 8.6%
                                                        ------             -----               -----
</TABLE>

                                       55
<PAGE>

      As of June 30, 2007, the Company had deferred income tax assets of
$12,347,516. The deferred income tax assets have been reduced by a $10,607,531
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, 2007 and 2006 are as follows:

<TABLE>
<CAPTION>
                                                2007               2006
                                           --------------    --------------
<S>                                        <C>               <C>
Deferred income tax assets:
   Net operating loss carryforward         $   11,063,841    $   12,837,989
   Accrued bonus                                   62,560           273,966
   Executive post retirement costs                369,580           456,540
   General business credit                        450,199           450,199
   Allowance for doubtful accounts                 90,734           146,876
   Accrued vacation                               158,885           202,722
   Inventory reserve                               83,318            84,601
   Accelerated depreciation                        41,967           382,450
   Warranty reserve                                26,432            95,574
                                           --------------    --------------
   Total deferred income tax assets            12,347,516        14,930,826
   Valuation allowance                        (10,607,531)      (12,711,806)
                                           --------------    --------------
                                                1,739,985         2,214,020
                                           --------------    --------------
Deferred income tax liabilities:
   Accelerated amortization                    (1,739,985)       (2,214,020)
                                           --------------    --------------
   Total deferred income tax liabilities       (1,739,985)       (2,214,020)
                                           --------------    --------------
                                           $            -    $            -
                                           ==============    ==============
</TABLE>

      As of June 30, 2007, the Company has a valuation allowance of $10,607,531,
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 Escalon.
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 carry
forwards of approximately $31,856,000 and $2,643,000, respectively, of which
$26,487,000 and $1,048,000, respectively, will expire over the next ten years,
and $5,369,000 and $1,595,000, respectively, will expire in years eleven through
twenty. Not included in the $31,856,000 federal net operating loss is
approximately $8.2 million federal NOL carry forward at June 30, 2007 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.

      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.

                                       56
<PAGE>

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, 2007 are as follows:

<TABLE>
<CAPTION>
                        LEASE
TWELVE MONTHS ENDING  OBLIGATIONS
--------------------
<S>                   <C>
2008                  $  657,452
2009                     497,722
2010                     471,012
2011                     410,021
2012                     382,797
Thereafter               327,086
                      ----------
TOTAL                 $2,746,091
                      ==========
</TABLE>

      Rent expense charged to operations during the years ended June 30, 2007,
2006 and 2005 was approximately $866,000, $890,000 and $772,000, 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. LEGAL PROCEEDINGS

      In 1997, Intralase and the Company entered into an agreement under which
Intralase became the exclusive licensee of certain patents, technology and
intellectual property owned by Escalon Medical. This agreement was amended and
restated in October 2000. The original and amended license agreement is referred
to as the "License Agreement." Disputes arose between the parties culminating in
litigation between the parties.

      On February 27, 2007 the Company entered into an agreement with Intralase
to settle all outstanding disputes and litigation between the parties. Under the
settlement agreement, Intralase made a lump-sum payment to the Company of
$9,600,000 in exchange for which all pending litigation between the parties was
dismissed, the parties exchanged general releases, the Company transferred to
Intralase its ownership of all patents and intellectual property formerly
licensed to Intralase by the Company, and the license agreement was terminated.
In addition, the payment from Intralase satisfies all outstanding past, current
and future royalties owed or alleged to be owed by Intralase to the Company.

                                       57
<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.

       Both parties continue to amicably negotiate a mutually agreeable solution
to this matter. The Company does not believe that the ultimate disposition of
this issue will have a material effect on the Company's financial statements.

          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, 2007, 2006 and 2005 was
$36,702, $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,
2007, 2006 and 2005 was $29,794, $10,000 and $39,817, 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 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.

                                       58
<PAGE>

   -  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, 2007 and 2006.

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 2007, 2006 and 2005 were $0,
$203,000 and $1,486,000, respectively.

      INTRALASE: LICENSING OF LASER TECHNOLOGY

        In 1997, Intralase and the Company entered into an agreement under which
Intralase became the exclusive licensee of certain patents, technology and
intellectual property owned by Escalon Medical. This agreement was amended and
restated in October 2000. The original and amended license agreement is referred
to as the "License Agreement." Disputes arose between the parties culminating in
litigation between the parties.

        As part of the settlement agreement described in footnote 9 of these
financial statements, on February 27, 2007 the Company transferred to Intralase
its ownership of all patents and intellectual property formerly licensed to
Intralase by the Company, and the license agreement was terminated. In addition,
the settlement payment from Intralase satisfies all outstanding past, current
and future royalties owed or alleged to be owed by Intralase to the Company.

                                       59
<PAGE>

        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 the settlement
            payment from Intralase described in footnote 9 of these financial
            statements in the amount of $9,600,000

      (3)   Royalty payments received from Bio-Rad.

      (4)   Settlement payment from Intralase described in footnote 9 of these
            financial statements.

      The following table presents other revenue received by the Company for the
years ended June 30, 2007, 2006 and 2005:

<TABLE>
<CAPTION>
                                      2007         2006          2005
                                  -----------   -----------   -----------
<S>                               <C>           <C>           <C>
ROYALTY INCOME:

Bio-Rad royalty                   $   242,826   $   283,000   $   240,000
Baush and Lomb                              0       203,000     1,486,000
IntraLase royalty                   1,102,216     1,761,000     1,334,000
Settlement payment (see note 9)     9,600,000             0             0
                                  -----------   -----------   -----------
TOTAL                             $10,945,042   $ 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.

                                       60
<PAGE>

      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
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.

                                       61
<PAGE>

<TABLE>
<CAPTION>
                                                         Fiscal year ended
                                             2007            2006             2005
<S>                                       <C>            <C>             <C>
Revenues, net                             $ 38,837,780   $ 29,790,698    $ 26,924,622
Cost of goods sold                          15,771,254     16,003,904      13,158,061
                                          ------------   ------------    ------------
Gross profit                                23,066,526     13,786,794      13,766,561
                                          ------------   ------------    ------------
Operating expenses                          17,267,721     16,822,984      14,449,080
Other income and (expense)                     166,852      1,081,559       3,362,294
                                          ------------   ------------    ------------
Net (loss) income before taxes               5,965,657     (1,954,631)      2,679,775
                                          ------------   ------------    ------------
Provision for income taxes                      51,054         31,309         231,664
                                          ------------   ------------    ------------
Net (loss) income                         $  5,914,603   $ (1,985,940)   $  2,448,111
                                          ============   ============    ============

Basic net (loss) income per share         $      0.928   $     (0.323)   $      0.420
                                          ============   ============    ============

Diluted net (loss) income per share       $      0.919   $     (0.323)   $      0.393
                                          ============   ============    ============

Weighted average shares - basic              6,374,929      6,152,455       5,831,564
                                          ============   ============    ============

Weighted average shares - diluted            6,434,275      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. The values of certain
assets and liabilities are based on preliminary valuations and are subject to
adjustment as additional information is obtained. The Company will have 12
months from the closing of the acquisition to finalize the valuation. 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.

      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
</TABLE>

                                       62
<PAGE>

<TABLE>
<S>                             <C>
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 five principal reporting
segments for 2007 and 2006 and four principal reporting segments in 2005. In
2005, Medical/Trek and EMI were combined.

      Table amounts in thousands:

                                       63
<PAGE>

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

<TABLE>
<CAPTION>
                                             DREW                           SONOMED                       VASCULAR
                                  2007       2006       2005       2007      2006      2005      2007       2006       2005
                                --------   --------   --------   --------  --------  --------  --------   --------   --------
<S>                             <C>        <C>        <C>        <C>       <C>       <C>       <C>        <C>        <C>
REVENUES, NET:

Product revenue                 $ 11,627   $ 14,253   $ 11,294   $  9,823  $  7,737  $  7,663  $  3,467   $  3,640   $  3,180
Other revenue                        243        283        240         --        --        --        --         --         --
                                --------   --------   --------   --------  --------  --------  --------   --------   --------
TOTAL REVENUE, NET                11,870     14,536     11,534      9,823     7,737     7,663     3,467      3,640      3,180
                                --------   --------   --------   --------  --------  --------  --------   --------   --------
COSTS AND EXPENSES:
Cost of goods sold                 7,681      9,225      7,554      4,976     3,962     3,115     1,393      1,535      1,432
Operating expenses                 7,830      7,740      5,211      3,779     3,670     3,593     2,108      2,112      1,747
                                --------   --------   --------   --------  --------  --------  --------   --------   --------
TOTAL COSTS AND EXPENSES          15,511     16,965     12,765      8,755     7,632     6,708     3,501      3,647      3,179
                                --------   --------   --------   --------  --------  --------  --------   --------   --------
(LOSS) INCOME FROM
   OPERATIONS                     (3,641)    (2,429)    (1,231)     1,068       105       955       (34)        (7)         1
                                --------   --------   --------   --------  --------  --------  --------   --------   --------
OTHER (EXPENSE) AND
   INCOME:
Gain on sale of available
   for sale securities                 -          -          -          -         -         -         -          -          -
Equity in OTM                          -          -          -          -         -         -         -          -          -
Interest income                        -          -       4.00          -         -         -         -          -          -
Interest expense                     (28)       (63)       (83)         -         -         -         -          -         (1)
                                --------   --------   --------   --------  --------  --------  --------   --------   --------
TOTAL OTHER (EXPENSE) AND
   INCOME                            (28)       (63)       (79)         -         -         -         -          -         (1)
                                --------   --------   --------   --------  --------  --------  --------   --------   --------
(LOSS) AND INCOME BEFORE TAXES    (3,669)    (2,492)    (1,310)     1,068       105       955       (34)        (7)         0
                                --------   --------   --------   --------  --------  --------  --------   --------   --------
Income taxes                           0          0          0         37        21        21         1          0          0
                                --------   --------   --------   --------  --------  --------  --------   --------   --------
NET (LOSS) INCOME               $ (3,669)  $ (2,492)  $ (1,310)  $  1,031  $     84  $    934  $    (35)  $     (7)  $      0
                                ========   ========   ========   ========  ========  ========  ========   ========   ========

Depreciation and
   amortization                 $    320   $    271   $    213   $     19  $     22  $     24  $     70   $     94   $     45
Assets                          $ 17,569   $ 17,205   $  7,977   $ 14,073  $ 13,381  $ 13,472  $  1,848   $  3,838   $  2,174
Expenditures for
   long-lived assets            $    269   $    167   $     26   $      0  $     15  $     23  $      0   $     14   $     11
</TABLE>

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

<TABLE>
<CAPTION>
                                              EMI                        MEDICAL/TREK                        TOTAL
                                  2007       2006       2005      2007       2006       2005       2007       2006       2005
                                --------   --------   --------  --------   --------   --------   --------   --------   --------
<S>                             <C>        <C>        <C>       <C>        <C>        <C>        <C>        <C>        <C>
REVENUES, NET:

Product revenue                 $  1,484   $    434   $      0  $  1,492   $  1,480   $  1,727   $ 27,893   $ 27,544   $ 23,864
Other revenue                          -          -          -    10,702      1,964      2,820     10,945      2,247      3,060
                                --------   --------   --------  --------   --------   --------   --------   --------   --------
TOTAL REVENUE, NET                 1,484        434          0    12,194      3,444      4,547     38,838     29,791     26,924
                                --------   --------   --------  --------   --------   --------   --------   --------   --------
COSTS AND EXPENSES:
Cost of goods sold                   711        290          0     1,011        992      1,058     15,772     16,004     13,159
Operating expenses                   830        635          0     2,722      2,668      3,897     17,269     16,825     14,448
                                --------   --------   --------  --------   --------   --------   --------   --------   --------
TOTAL COSTS AND EXPENSES           1,541        925          0     3,733      3,660      4,955     33,041     32,829     27,607
                                --------   --------   --------  --------   --------   --------   --------   --------   --------
(LOSS) INCOME FROM
   OPERATIONS                        (57)      (491)         0     8,461       (216)      (408)     5,797     (3,038)      (683)
                                --------   --------   --------  --------   --------   --------   --------   --------   --------
OTHER (EXPENSE) AND
   INCOME:
Gain on sale of available
   for sale securities                 -          -          -     75.00      1,157      3,412         75      1,157      3,412
Equity in OTM                          -          -          -       (88)      (174)       (64)       (88)      (174)       (64)
Interest income                        -          -          -       208        162         66        208        162         70
Interest expense                       -          -          -        --         --      29.00        (28)       (63)       (55)
                                --------   --------   --------  --------   --------   --------   --------   --------   --------
TOTAL OTHER (EXPENSE) AND
   INCOME                              0          0          0       195      1,145      3,443        167      1,082      3,363
                                --------   --------   --------  --------   --------   --------   --------   --------   --------
(LOSS) AND INCOME BEFORE TAXES       (57)      (491)         0     8,656        929      3,035      5,964     (1,956)     2,680
                                --------   --------   --------  --------   --------   --------   --------   --------   --------
Income taxes                           -          -          -        14         10        211         52         31        232
                                --------   --------   --------  --------   --------   --------   --------   --------   --------
NET (LOSS) INCOME               $    (57)  $   (491)  $      0  $  8,642   $    919   $  2,824   $  5,912   $ (1,987)  $  2,448
                                ========   ========   ========  ========   ========   ========   ========   ========   ========
Depreciation and
   amortization                 $    107   $     33   $      0  $     85   $     63   $    106   $    601        483        388
Assets                          $  1,907   $  1,750   $      0  $  9,619   $  2,471   $ 16,426   $ 45,016     38,645     40,049
Expenditures for
   long-lived assets            $      0   $     56   $      0  $      9   $     82   $     44   $    278        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")

                                       64
<PAGE>

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 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 derived its revenue from the sale of
ISPAN(TM) gas products, various disposable ophthalmic surgical 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 Increase's
licensing of the Company's intellectual laser technology. EMI derived its
revenue CFA digital imaging systems and related products.

      No customer represented more than 10% of consolidated revenue during the
years ended June 30, 2007, 2006 and 2005. Of the external revenue reported
above, the following amounts were derived internationally during the years ended
June 30:

<TABLE>
<CAPTION>
                        2007          2006            2005
                     -----------   -----------   -----------
<S>                  <C>           <C>           <C>
Drew                 $ 5,177,708   $ 8,471,608   $ 5,616,000
Sonomed                5,901,532     4,316,856     3,818,000
Vascular                 126,854       226,665       323,000
EMI                        8,900            --            --
Medical/Trek              40,400        29,671        48,000
                     -----------   -----------   -----------
                     $11,255,394   $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, 2007,
Escalon had invested $288,000 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 2007,
2006 and 2005 the Company recorded losses of $87,852, $173,844 and $63,613,
respectively.

                                       65
<PAGE>

      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 Chief Operating Officer and General
Counsel to the Company, Mr. DePiano's salary plus bonus for the years 2007, 2006
and 2005 were approximately $185,000, $180,000 and $165,000, respectively. Caryn
Lindsey (daughter-in-law of the CEO) acted as a consultant and employee for the
Company during 2006 and 2005. Ms. Lindsey in 2007, 2006 and 2005 received
consulting fees and salary of $ 0, $110,939 and $118,000, respectively. Also, in
2005 3,000 options to purchase common stock of the Company at an exercise price
of $4.97 per share were granted to Ms. Lindsey.

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. During 2007, Intralase accepted a $25 per share tender
offer for all its outstanding shares, as such,, Escalon received $75,000 for its
remaining holdings in Intralase of 3,000 shares.. 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. During
2007, Intralase accepted a $25 per share tender offer for all of its outstanding
shares. In April 2007, the Company received $75,000 for its remaining 3,000
shares of Intralase stock. The net proceeds from the sales were recorded in
other income and expense. As of June 30, 2007 and 2006, the Company had -0- and
3,000 shares, respectively of Intralase that were classified as
available-for-sale securities and had a market value of $-0- and $50,220.

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 is
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 and expects timely repayment. The loan was paid in full
in April 2006.

                                       66
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

        NONE

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

        As of the end of the period covered by this Form 10-K annual report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the "Exchange Act")). Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective in
recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by the Company in the reports that the Company files or
submits under the Exchange Act and the Company's controls and procedures are
also effective to ensure that information required to be disclosed in the
reports the Company files or submit under the Exchange Act is accumulated and
communicated to the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, to allow timely decisions
regarding disclosure.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

      There were no changes in our internal control over financial reporting
that occurred during our fourth fiscal quarter of 2007 that would have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

REQUIREMENTS OF SECTION 404

      Under the rules and regulations of the SEC, the Company is currently not
required to comply with the requirements of Section 404 of the Sarbanes-Oxley
Act of 2002 until the Company files its Annual Report on Form 10-K for the
Company's fiscal year ending June 30, 2008, so long as the Company continues to
meet the definition of a non-accelerated filer. In the Company's Annual Report
on Form 10-K for the year ending June 30, 2008, the Company's management will be
required to provide an assessment as to the effectiveness of the Company's
internal control over financial reporting, which assessment will be deemed
furnished to rather than filed with the SEC. In the Company's Annual Report on
Form 10-K for the year ending June 30, 2009 and for each fiscal year thereafter,
the Company's management will be required to provide an assessment as to the
effectiveness of our internal control over financial reporting and the Company's
independent registered public accounting firm will be required to provide an
attestation as to the Company's management's assessment, which assessment and
attestation will be filed with the SEC. The assessment and attestation processes
required by Section 404 are relatively new to the Company. Accordingly, the
Company may encounter problems or delays in completing the Company's obligations
and receiving an unqualified report on the Company's internal control over
financial reporting by the Company's independent registered public accounting
firm.

      While the Company believes that we will be able to timely meet our
obligations under Section 404 and that the Company's management will be able to
certify as to the effectiveness of the Company's internal control over financial
reporting, there is no assurance that we will do so. If the Companyis unable to
timely comply with Section 404, the Company's management is unable to certify as
to the effectiveness of the Company's internal control over financial reporting
or the Company's independent registered public accounting firm is unable to
attest to that certification, the price of the Company's common stock may be
adversely affected. Even if the Company timely meets the certification and
attestation requirements of Section 404, it is possible that the Company's
independent registered public accounting firm will advise the Company that they
have identified significant deficiencies and/or material weaknesses.

                                       67
<PAGE>

ITEM 9B. OTHER INFORMATION

         NONE

                                    PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

      Item 10 will be provided by incorporating the information required under
such item by reference to the Company's Proxy Statement to be filed with the SEC
no later than 120 days after the end of the fiscal year covered by this Form
10-K annual report, or, alternatively, by amendment to this Form 10-K annual
report under cover of Form 10-K/A no later than the end of such 120-day period.

ITEM 11. EXECUTIVE COMPENSATION

      Item 11 will be provided by incorporating the information required under
such item by reference to the Company's Proxy Statement to be filed with the SEC
no later than 120 days after the end of the fiscal year covered by this Form
10-K annual report, or, alternatively, by amendment to this Form 10-K annual
report under cover of Form 10-K/A no later than the end of such 120-day period.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

      Item 12 will be provided by incorporating the information required under
such item by reference to the Company's Proxy Statement to be filed with the SEC
no later than 120 days after the end of the fiscal year covered by this Form
10-K annual report, or, alternatively, by amendment to this Form 10-K annual
report under cover of Form 10-K/A no later than the end of such 120-day period..

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
         INDEPENDENCE

      Item 13 will be provided by incorporating the information required under
such item by reference to the Company's Proxy Statement to be filed with the SEC
no later than 120 days after the end of the fiscal year covered by this Form
10-K annual report, or, alternatively, by amendment to this Form 10-K annual
report under cover of Form 10-K/A no later than the end of such 120-day period.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

      Item 14 will be provided by incorporating the information required under
such item by reference to the Company's Proxy Statement to be filed with the SEC
no later than 120 days after the end of the fiscal year covered by this Form
10-K annual report, or, alternatively, by amendment to this Form 10-K annual
report under cover of Form 10-K/A no later than the end of such 120-day period.

                                       68
<PAGE>

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) DOCUMENTS FILED AS PART OF THIS ANNUAL REPORT ON FORM 10-K:

    (1) FINANCIAL STATEMENTS

            The following consolidated financial statements of the Company and
            its subsidiaries are included in Part II, Item 8 of this Annual
            Report on Form 10-K:

            Reports of Independent Registered Public Accounting Firms

            Consolidated Balance Sheets as of June 30, 2007 and 2006

            Consolidated Statements of Operations for the years ended June 20,
            2007, 2006 and 2005

            Consolidated Statements of Shareholders' Equity for the years ended
            June 20, 2007, 2006 and 2005

            Consolidated Statements of Cash Flows for the years ended June 20,
            2007, 2006 and 2005

            Notes to Consolidated Financial Statements

    (2) FINANCIAL STATEMENT SCHEDULES

            All other schedules have been omitted because the required
      information is not applicable or the information is included in our
      Consolidated Financial Statements or the related Notes to Consolidated
      Financial Statements.

                                       69
<PAGE>

    (3) EXHIBITS

The following is a list of exhibits filed as part of this Annual Report on Form
10-K, 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.

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)

10.16    2003 Amendment to Loan Agreement. (12)

10.17    Allonge to the Amended and Restated Term/Time Note. (12)

10.18    Allonge to the Amended and Restated Line of Credit Note. (12)

10.20    PNC Bank, N.A. Letter Agreement dated November 16, 2001. (11)

10.21    PNC Bank, N.A. Amended and Restated Committed Line of Credit Note dated
         November 16, 2001. (11)

10.22    PNC Bank, N.A. Amended and Restated Time Note dated November 16, 2001.
         (11)

10.23    PNC Bank, N.A. Pledge Agreement dated November 16, 2001. (11)

10.24    PNC Bank, N.A. Amended and Restated Security Agreement dated November
         16, 2001. (11)

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)

                                       70
<PAGE>

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

10.35    Settlement Agreement with Intralase Corp, dated February 27, 2007 (*).

21       Subsidiaries. (11)

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

31.1     Certification of the Chief Executive Officer pursuant to Section 302 of
         the Sarbanes Oxley Act of 2002 (*).

31.2     Certification of the Chief Financial Officer Section 302 of the
         Sarbanes Oxley Act of 2002 (*).

32.1     Certification of the Chief Executive Officer pursuant to Section 906 of
         the Sarbanes Oxley Act of 2002 (*).

32.2     Certification of the Chief Financial Officer pursuant to Section 906 of
         the Sarbanes Oxley Act of 2002 (*).

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

*        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)      Filed as an exhibit to the Company's Registration Statement on Form s-*
         dated February 25, 2000 (Registration No. 333-31138).

(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)     Filed as an exhibit to the Company's Form 10-Q for the quarter ended
         March 31, 2001.

(11)     Filed as an exhibit to the Company's Form 10-KSB/A for the year ended
         June 30, 2002.

(12)     Filed as an exhibit to the Company's Form 10-Q for the quarter ended
         December 31, 2002.

(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.

                                       71
<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, 2007

      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, 2007
    -----------------------              Officer (Principal Executive
         Richard J. DePiano              Officer) and Director

By: /s/  Robert M. O'Connor              Chief Financial Officer             September 28, 2007
    -----------------------              (Principal Financial Officer)
         Robert M. O'Connor

By: /s/  Anthony Coppola                 Director                            September 28, 2007
    --------------------
         Anthony Coppola

By: /s/  Jay L. Federman                 Director                            September 28, 2007
    --------------------
         Jay L. Federman

By: /s/  William L.G. Kwan               Director                            September 28, 2007
    ----------------------
         William L.G. Kwan

By: /s/  Lisa Napolitano                 Director                            September 28, 2007
    --------------------
         Lisa Napolitano

By: /s/  Fred Choate                     Director                            September 28, 2007
    ----------------
         Fred Choate
</TABLE>

                                       72