<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark One)
[X]       Annual report pursuant to section 13 or 15(d) of the Securities
          Exchange Act of 1934 For the fiscal year ended JUNE 30, 2000
                                            or
[ ]       Transition report pursuant to section 13 or 15(d) of the Securities
          Exchange Act of 1934 For the transition period from _____________ to
          _____________

                         COMMISSION FILE NUMBER 0-20127

                              ESCALON MEDICAL CORP.
             (Exact name of registrant as specified in its charter)


Delaware                                          33-0272839
(State or other jurisdiction of                   (I.R.S. Employer
incorporation or organization)                    Identification No.)

351 East Conestoga Road
Wayne, PA                                         19087
(Address of principal executive offices)          (Zip Code)


         Registrant's telephone number, including area code 610-688-6830

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

Title of Each Class:                Name of each exchange on which registered:
      None                                          None


           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                    Common Stock, Par Value $0.001 per share

          Class A Redeemable Common Stock Purchase Warrants, 4 warrants
          plus $25 exercisable for the purchase of one share of Common
                        Stock, Par Value $0.001 per share

          Class B Redeemable Common Stock Purchase Warrants, 4 warrants
          plus $30 exercisable for the purchase of one share of Common
                        Stock, Par Value $0.001 per share

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for 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 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. [ ]

On September 22, 2000, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $8,101,207

The number of shares of the Registrant's Common Stock outstanding as of
September 22, 2000, was 3,242,184.

                       DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>   2
                              ESCALON MEDICAL CORP.

                             FORM 10-K ANNUAL REPORT
                       For Fiscal Year Ended June 30, 2000

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
PART I.
                                                                                                         Page
                                                                                                         ----
<S>            <C>                                                                                       <C>
Item 1.        Business                                                                                    1

Item 2.        Properties                                                                                  5

Item 3.        Legal Proceedings                                                                           5

Item 4.        Submission of Matters to a Vote of Security Holders                                         6

PART II.

Item 5.        Market for Registrant's common equity and related stockholder matters                       6

Item 6.        Selected financial data                                                                     7

Item 7.        Management's discussion and analysis of financial condition and results of operations       8

Item 7A.       Quantitative and qualitative disclosures about market risk                                 11

Item 8.        Financial statements and supplementary data                                                11

Item 9.        Changes in and disagreements with accountants on accounting and financial disclosure       11

PART III.

Item 10.       Directors and executive officers of the Registrant                                         11

Item 11.       Executive compensation                                                                     13

Item 12.       Security ownership of certain beneficial owners and management                             15

Item 13.       Certain relationships and related transactions                                             16

PART IV.

Item 14.       Exhibits, financial statement schedules and reports on Form 8-K                            17
</TABLE>
<PAGE>   3
This document contains certain forward-looking statements that are subject to
risks and uncertainties. Forward-looking statements include certain information
relating to general business strategy, the introduction of new products, the
potential market and uses for the Company's products, expansion plans, the
Company's plans to file applications with the Food and Drug Administration (the
"FDA"), the development of joint venture opportunities, the effects of
competition on the structure of the markets in which the Company competes,
defending itself in litigation matters, operating performance and liquidity, as
well as information contained elsewhere in this Report where statements are
preceded by, followed by or include the words "believes," "expects,"
"anticipates" or similar expressions. For such statements the Company claims the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. The forward-looking statements
in this document are subject to risks and uncertainties that could cause the
assumptions underlying such forward-looking statements and the actual results to
differ materially from those expressed in or implied by the statements. The most
important factors that could prevent the Company from achieving its goals -- and
cause the assumptions underlying the forward-looking statements and the actual
results of the Company to differ materially from those expressed in or implied
by those forward-looking statements -- include, without limitation, the
following: (i) the competitive nature of the industries in which the Company
competes and the ability of the Company to (a) successfully maintain existing
strategic relationships and (b) negotiate and enter into new strategic
relationships and otherwise distinguish its products from those of other
companies on the basis of quality, value and reliability; (ii) economic and
regulatory conditions which could adversely affect sales of the Company's
products, including the uncertainty of FDA approval for any new applications;
(iii) the ability of the Company to successfully develop and market new
products; (iv) future capital needs and the uncertainty of additional funding
(whether through the financial markets, collaborative or other arrangements with
strategic partners, or from other sources); (v) uncertain protection of
important proprietary technology; (vi) the outcome of litigation matters; (vii)
limitation on third-party reimbursement and the possible adverse impact of
health care reform on the payment of health care services; (viii) dependence on
key personnel; and (ix) the ability of the Company to maintain its listing on
the NASDAQ SmallCap Market.

                                     PART I

ITEM 1. BUSINESS

COMPANY OVERVIEW

        Escalon Medical Corp. (formerly known as Intelligent Surgical Lasers,
Inc.) and its subsidiaries Sonomed, Inc., Escalon Pharmaceutical Inc., Escalon
Vascular Access, Inc. and Escalon Digital Vision, Inc. (jointly referred to as
"Escalon" or the "Company"), operates in the healthcare market specializing in
the development, manufacture, marketing and distribution of ophthalmic medical
devices, pharmaceutical and vascular access products.

        In February 1996, the Company acquired substantially all of the assets
and certain liabilities of Escalon Ophthalmics, Inc. ("EOI"), a developer and
distributor of ophthalmic surgical products. Prior to this acquisition, the
Company devoted substantially all of its resources to research and development
of ultrafast laser systems designed for treatment of ophthalmic disorders. As a
result of the EOI acquisition, Escalon changed its market focus and is no longer
developing laser technology. In October 1997, the Company licensed its
intellectual laser properties to a newly formed company, IntraLase Corporation
("IntraLase"), in return for an equity interest and future royalties on product
sales. IntraLase will have the responsibility of funding and developing laser
technology through to commercialization.

        To further diversify its product portfolio, in January 1999, the Company
acquired the vascular access product line from Radiance Medical Systems, Inc.
These products use doppler technology to aid medical personnel in locating
difficult arteries and veins. Currently, this product line concentrates on the
cardiac catheterization market. This was the first step in a plan of
diversification to acquire profitable niche medical products. In January 2000,
the Company purchased Sonomed, Inc., a privately held manufacturer of ophthalmic
ultrasound diagnostic equipment. In April 2000, the Company established Escalon
Digital Vision, Inc. as a wholly-owned subsidiary. This subsidiary formed a
joint venture with MegaVision to develop and market a digital camera back for
ophthalmic photography.



                                       1
<PAGE>   4
        The Company expects that results of operations may fluctuate from
quarter to quarter for a number of reasons, including: (i) anticipated order and
shipment patterns of the Company's products; (ii) lead times to produce the
Company's products; and (iii) general competitive and economic conditions of the
health care market.

SONOMED EQUIPMENT

        Sonomed develops, manufactures and markets ultrasound systems used for
diagnostic or biometric applications in ophthalmology. The systems are of three
types: A-scans, B-scans and Pachymeters. 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 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. This allows the ophthalmologist to view
structures within the eye and differentiate between normal tissue and pathology,
such as tumors and cysts. The A-scan also contains software for measuring
distances within the eye. This information is primarily used to calculate lens
power for implants; e.g. in preparation for cataract operations.

        The B-scan is primarily a diagnostic tool, which supplies information to
the physician where the media within the eye are cloudy or opaque. Whereas the
physician normally uses 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.

        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. The surgeon 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 ACCESS PRODUCTS BUSINESS

        In January 1999, the Company acquired the vascular access product line
from Radiance Medical Systems, Inc. This added the PD Access(TM) and
Smartneedle(TM) lines of monitors, needles and catheter products. These patented
devices utilize a miniature doppler ultrasound probe that is inserted in the
lumen of a vascular access needle. When the device is placed subcutaneously in a
patient, the probe and monitor can determine if the user is approaching an
artery or vein, guiding them to a successful access. The Company has focused
it's efforts on marketing to the cardiac catheterization laboratories.

ESCALON DIGITAL VISION

        The CFA camera back is being developed by Escalon Medical Imaging, LLC;
a joint venture with MegaVision, a privately held company based in Santa
Barbara, CA. The camera back technology developed by MegaVision is at the
cutting edge of digital photography. The images produced by this system furnish
a very high level of detail. This camera back will be sold to ophthalmologists
for photographic diagnosis of retinal disorders. Development began in the fourth
quarter of fiscal 2000 and should be completed in the second quarter of fiscal
2001.

SURGICAL PRODUCTS BUSINESS

        The Company develops, manufactures and distributes ophthalmic surgical
products, which are utilized primarily by the vitreoretinal ophthalmic surgeon.
In addition, the Company manufactures, on a contract basis, certain of its
products for other companies. The following is a summary of the Company's key
surgical product lines:

ISPAN Intraocular Gases

        The Company distributes two intraocular gas products, C(3)F(8) and
SF(6), which are used by vitreoretinal surgeons as a temporary tamponade in
detached retina surgery. Under a non-exclusive distribution agreement with





                                       2
<PAGE>   5
Scott Medical Products ("Scott"), Escalon distributes packages of Scott gases in
canisters containing 25 grams or less 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.

Fiber Optic Light Source Products

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

AdatoSil(R)5000 Silicone Oil ("Silicone Oil")

        Until August, 1999 the Company distributed AdatoSil(R)5000 Silicone Oil,
a specialty product used in "worst case" detached retina surgery as a mechanical
aid in the reattachment procedure. The license and distribution rights for this
product were sold to Bausch & Lomb Surgical, Inc. for $2.1 million and
additional cash consideration payable over the next four years. See Form 8-K, as
filed on August 26, 1999, for additional details.

Viscous Fluid Transfer Systems

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

PHARMACEUTICAL PRODUCTS BUSINESS

         The Company retains the license and rights for Povidone-Iodine 2.5%
Solution. The product requires further development before achieving FDA
approval. The Company has suspended further development pending the
establishment of strategic partnership arrangements.

        Povidone-Iodine 2.5% Solution is a broad-spectrum antimicrobial intended
to prevent ophthalmia neonatorum in newborns.


RESEARCH AND DEVELOPMENT

        The Company conducts medical device and vascular access product
development at its New Berlin, Wisconsin facility. The development of the
ultrasound ophthalmic equipment is performed at the Company's Long Island, NY
facility. Research and development expenditures for fiscal years 2000, 1999 and
1998 amounted to $1.0 million, $.7 million and $.5 million, respectively.
Following the suspension of development of Ocufit SR, the Company took a net
write down of $418,000.

MANUFACTURING AND DISTRIBUTION

        Escalon leases 13,500 square feet of space in New Berlin, Wisconsin for
its surgical products and vascular access operations. The facility is currently
used for engineering, product design and development, manufacturing and product
assembly. Various vendors are used for subcontract component manufacture,
assembly and sterilization. Manufacturing facilities include a class 10,000
clean room. All of the Company's ophthalmic surgical products are distributed
from its Wisconsin facility. The manufacture, testing and marketing of each of
the Company's products entails risk of product liability. Product liability
insurance is carried by Escalon to cover the primary risk.

        The Company designs, develops and services its ultrasound ophthalmic
products at its Sonomed facility in Long Island, New York. This facility
contains 7,100 square feet.

        The Company has aggressively pursued and achieved ISO9001 certification
in both manufacturing facilities for all medical devices produced. CE
certification has been obtained for disposable delivery systems, vascular access
products and certain high end ultrasound models manufactured by Sonomed.



                                       3
<PAGE>   6
MARKETING AND SALES

        Escalon sells most of its ophthalmic device and instrument products
directly to the end user through seven independent sales representatives. They
are based in Kansas, New Jersey, New York, Massachusetts, Minnesota, Florida and
California. These independent representatives market to teaching institutions,
key hospitals and eye surgery centers, focusing primarily on physicians and
operating room personnel performing vitreoretinal surgery.

        Vascular access products are marketed domestically through a series of
ten specialty distributors managed by the Company's sales team.

        The Sonomed product range is sold through distributors and directly to
medical institutions in the USA and overseas.

SERVICE AND SUPPORT

        Escalon maintains a full service program for all products sold.
Warranties exist on all products against defects and performance. Product
repairs are made at the Wisconsin facility for surgical devices and vascular
access products. The Sonomed products are serviced at the Long Island facility.

THIRD PARTY REIMBURSEMENT

         It is expected that physicians and hospitals will purchase the
Company's ophthalmic products. They in turn will bill various third-party payors
for health care services provided to their patients. These payors include
Medicare, Medicaid and private insurers. Government agencies generally reimburse
at a fixed rate based on the procedure performed. In addition, 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 AND ROYALTIES

        The pharmaceutical and medical device communities place considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes. Escalon's policy is to protect its technology by
aggressively obtaining patent protection for all of its developments and
products, both in the United States and in selected countries outside the United
States. Ten United States issued patents, and thirteen patents issued overseas,
cover the Company's surgical products and pharmaceutical technology. With
respect to the Company's ultrafast laser systems (licensed to IntraLase), three
patents have been issued in the United States and twelve overseas. Vascular
access products are covered by a total of five patents, which provide protection
in the United States, Europe, Japan and overseas. 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
Company intends to vigorously defend its patents if the need arises.

COMPETITION

        There are numerous direct and indirect competitors of Escalon in the
United States and abroad. These companies include: ophthalmic-oriented companies
that market a broad portfolio of products, including prescription ophthalmic
pharmaceuticals, ophthalmic devices, consumer products (such as contact lens
cleaning solution) and other eye care products; large integrated pharmaceutical
companies that market a limited number of ophthalmic pharmaceuticals in addition
to many other pharmaceuticals; and smaller specialty pharmaceutical and
biotechnology companies that are engaged in the development and
commercialization of prescription ophthalmic pharmaceuticals and products, and
possibly drug delivery systems.




                                       4
<PAGE>   7
        The ophthalmic market is highly fragmented with several large companies
dominating the industry. The Company believes that these large companies capture
approximately 85% of the overall ophthalmic market. The balance of the market is
composed of smaller companies ranging from start-up entities to established
niche market players. The ophthalmic market in general is intensely competitive
with each company eager to expand its market share. As a result of this
competition, the Company believes that many of the industry's smaller companies
will either consolidate or fail. Escalon's strategy is to compete primarily on
the basis of technological innovation to which it has proprietary rights.
Escalon believes, therefore, that its success will depend in large part upon
protecting its intellectual property through patents and other government
registrations. At the same time, Escalon recognizes that there are other young
and innovative companies, which may develop competitive technologies.

        The vascular access product is a low-price, disposable device, and as
such it has no competition. However, there is a significantly higher-priced
non-disposable device marketed which also facilitates vascular access.

        There are a variety of other devices that directly compete with the
products acquired from Sonomed and the product being developed by Escalon
Medical Imaging.

HUMAN RESOURCES

        As of June 30, 2000, Escalon employed 63 full-time employees and one
part-time employee. Fifteen of Escalon's full-time employees are in general
administrative and marketing positions, eight are employed in sales, 34 are in
manufacturing, two and a half are in R&D and three and a half are in service.
Escalon's employees are not covered by a collective bargaining agreement and
Escalon considers its relations with employees to be good.

ITEM 2. PROPERTIES

        The Company leases an aggregate of approximately 22,000 square feet of
space for its (a) executive offices in Wayne, Pennsylvania, (b)
manufacturing/warehouse facility in New Berlin, Wisconsin, (c) manufacturing
facility in Long Island, New York and (d) consultant's office/storage facility
in Turnersville, New Jersey. The Wisconsin facility lease covering approximately
13,500 square feet of space expires in April 2007. The consultant's office space
leases expire in December 2000. The property leased in Wayne, Pennsylvania was
subleased from a company that is 100% owned by the Chief Executive Officer and
Chairman of the Board of the Company. This property was sold to a third party on
July 26th 2000; the Company continues to lease 700 square feet from the new
owner. The Long Island facility lease, covering approximately 7,100 square feet
expires during fiscal 2005. Annual rent under all of the Company's lease
arrangements approximates $186,000.

ITEM 3. LEGAL PROCEEDINGS

        As previously reported in reports filed with the Securities and Exchange
Commission, on or about June 8, 1995, a purported class action complaint
captioned George Kozloski v. Intelligent Surgical Lasers, Inc., et al., 95 Civ.
4299, was filed in the U.S. District Court for the Southern District of New York
as a "related action" to In Re Blech Securities Litigation (a litigation matter
to which the Company is no longer a party). The plaintiff purports to represent
a class of all purchasers of the Company's stock from November 17, 1993, to and
including September 21, 1994. The complaint alleges that the Company, together
with certain of its officers and directors, David Blech and D. Blech & Co.,
Inc., issued a false and misleading prospectus in November 1993 in violation of
Sections 11, 12 and 15 of the Securities Act of 1933. The complaint also asserts
claims under Section 10(b) of the Securities Exchange Act of 1934 and common
law. Actual and punitive damages in an unspecified amount are sought, as well as
a constructive trust over the proceeds from the sale of stock pursuant to the
offering.

        On June 6, 1996, the court denied a motion by the Company and the named
officers and directors to dismiss the Kozloski complaint and, on July 22, 1996,
the Company Defendants filed an answer to the complaint denying all allegations
of wrongdoing and asserting various affirmative defenses.

        In an effort to curtail its legal expenses related to this litigation,
while continuing to deny any wrongdoing, the Company has reached an agreement,
subject to final court approval, to settle this action on its behalf and on
behalf of its former and present officers and directors, for $500,000. The
Company's directors and officers




                                       5
<PAGE>   8
insurance carrier has agreed to fund a significant portion of the settlement
amount. Both the Company and insurance carrier have deposited such funds in an
escrow account.


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

        None.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        Beginning June 7, 2000, the Company's Common Stock is traded on the
Nasdaq SmallCap market under the symbol "ESMC." The following table sets forth,
for the periods indicated the high and low sales prices as quoted on the Nasdaq
Stock Market.

<TABLE>
<CAPTION>
       Period                                                 High       Low
       ------                                                 ----       ---
<S>                                                           <C>       <C>
        Fiscal 1999:
           First Quarter                                      $1.00     $0.56
           Second Quarter                                     $2.19     $0.56
           Third Quarter                                      $3.38     $2.31
           Fourth Quarter                                     $2.81     $1.88
        Fiscal 2000:
           First Quarter                                      $2.50     $1.82
           Second Quarter                                     $2.50     $1.50
           Third Quarter                                      $7.38     $2.00
           Fourth Quarter                                     $4.25     $1.50
</TABLE>


        As of September 22, 2000, there were 1,303 holders of record of the
Company's Common Stock. On September 22, 2000, the closing sale price of the
Common Stock as reported by the Nasdaq Stock Market was $2.563.

        The Common stock is currently listed on the Nasdaq SmallCap Market. In
order to continue to be listed on the Nasdaq SmallCap Market, certain listing
requirements must be met. If the Company's securities were delisted, an investor
could find it more difficult to dispose of them, or to obtain accurate
quotations as to the market value of the Company's securities.

        The Company has never declared or paid cash dividends on its Common
Stock. The Company currently intends to retain its earnings to finance future
growth and working capital needs and therefore does not anticipate paying any
cash dividends in the foreseeable future.




                                       6
<PAGE>   9
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" and the financial statements and related notes thereto included
herein in Item 8.

<TABLE>
<CAPTION>
                                                              FOR THE YEARS ENDED JUNE 30,
STATEMENT OF OPERATIONS DATA:             1996            1997            1998            1999            2000
                                        --------        --------        --------        --------        --------
                                                        (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                     <C>             <C>             <C>             <C>             <C>
Net sales                               $  2,341        $  5,431        $  5,942        $  7,559        $  6,670
Costs and expenses:
  Cost of goods sold                       1,229           2,650           2,589           3,282           2,874
  Research and development                 1,723           1,571             495             738             984
  Marketing, general and
    administrative                         2,723           3,716           2,805           3,332           4,661
  Write down of goodwill,
    license and distribution
    rights and patents                        --           3,319              --              --             418
  Acquired research and
       development                         1,000              --              --              --              --
                                        --------        --------        --------        --------        --------
    Total costs and expenses               6,675          11,256           5,889           7,352           8,937
                                        --------        --------        --------        --------        --------

Income (loss) from operations             (4,334)         (5,825)             53             207          (2,267)
Sale of Silicone Oil product line             --              --              --              --           1,864
Sale of Betadine product line                 --              --              --             879              --
Equity in loss of unconsolidated
   joint venture                              --              --              --              --             (33)
Interest income                              257             141             119             145             149
Interest expense                              (5)             (1)             (1)            (37)           (576)
                                        --------        --------        --------        --------        --------
Net income (loss)                       $ (4,082)       $ (5,685)       $    171        $  1,194        $   (863)
                                        ========        ========        ========        ========        ========
Basic net income (loss)
  per share                             $  (2.97)       $  (2.16)       $  (0.04)       $   0.10        $  (0.27)
                                        ========        ========        ========        ========        ========
Diluted net income (loss)
  per share                             $  (2.97)       $  (2.16)       $  (0.04)       $   0.10        $  (0.27)
                                        ========        ========        ========        ========        ========
Weighted average shares-basic
  Used in per share computation            1,893           2,630           2,673           3,115           3,242
                                        ========        ========        ========        ========        ========
Weighted average shares-diluted
  Used in per share computation            1,893           2,630           2,673           3,115           3,242
                                        ========        ========        ========        ========        ========
</TABLE>



<TABLE>
<CAPTION>
                                                               FOR THE YEARS ENDED JUNE 30,
BALANCE SHEET DATA:                       1996             1997            1998            1999            2000
                                        --------         --------        --------        --------        --------
                                                         (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                     <C>              <C>             <C>             <C>             <C>
Cash and cash equivalents               $  2,585         $  1,753        $  2,264        $  3,854        $    177
Working capital (deficit)                  3,754            2,170           3,465           3,801          (3,211)
Total assets                              11,600            5,834           6,734          10,403          16,845
Accumulated deficit                      (34,162)         (39,847)        (39,952)        (39,629)        (40,610)
Total shareholders' equity                10,483            4,798           6,049           6,278           5,415
</TABLE>

         Note: No cash dividends were paid in any of the years presented




                                       7
<PAGE>   10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

               The following discussion should be read in conjunction with the
consolidated financial statements and the notes thereto, which are set forth
elsewhere herein.

OVERVIEW

               Escalon Medical Corp. and its subsidiaries, Sonomed, Inc.,
Escalon Pharmaceutical Inc., Escalon Vascular Access Inc. and Escalon Digital
Vision, Inc., (jointly referred to as "Escalon" or the "Company") operate in the
healthcare market specializing in the development, manufacture, marketing and
distribution of ophthalmic diagnostic, surgical and pharmaceutical products, as
well as, vascular access devices.

               On February 12, 1996, the Company acquired all of the assets and
certain liabilities of Escalon Ophthalmics, Inc. ("EOI"). Prior to the
acquisition, the Company was in the development stage and devoting substantially
all of its resources to the research and development of laser systems designed
for the treatment of ophthalmic disorders. Upon the completion of the
acquisition, the Company changed its market focus and is now engaged in
developing, marketing and distributing ophthalmic medical devices,
pharmaceuticals and niche medical products. Sales of the products acquired from
EOI are made primarily to hospitals and physicians throughout the United States.

               Escalon purchased the vascular access business unit of Radiance
Medical Systems, Inc. in January 1999. This was significant as the Company's
first step in diversification. The vascular access product line was the first
niche product acquired outside the ophthalmic medical field. Vascular products
are marketed to the cardiac catheterization laboratories through a series of
independent distributors.

               In January 2000, the Company purchased Sonomed, Inc., a privately
held manufacturer and marketer of ophthalmic ultrasound diagnostic devices.
These products are sold domestically and internationally either directly to the
customer or through a series of independent distributors.

               The Company entered into a joint venture with MegaVision, Inc. in
April 2000. The joint venture has been named Escalon Medical Imaging, LLC
("Imaging"). The purpose of Imaging is to develop, manufacture and market
hardware and software to retro-fit existing ophthalmic photographic equipment to
digital technology. The company and MegaVision, Inc. each own 50% of Imaging.

               Escalon's market strategy is to locate and acquire profitable
niche medical products that it will own and control rights to. To finance this
program, the Company sold its license and distribution rights to Betadine (R) 5%
Sterile Ophthalmic Prep Solution ("Betadine") and AdatoSil (R) 5000 Silicone Oil
("Silicone Oil"), in the third quarter of fiscal 1999 and the first quarter of
2000, respectively.

               To further develop and commercialize its proprietary laser
technology, in October 1997, the Company licensed its intellectual laser
properties to a newly formed company, IntraLase, in return for an equity
interest in IntraLase and future royalties on product sales. IntraLase has the
responsibility of funding and developing the laser technology through to
commercialization.

               The Company expects that results of operations may fluctuate from
quarter to quarter for a number of reasons, including: (i) anticipated order and
shipment patterns of the Company's products; (ii) lead times to produce the
Company's products; and (iii) general competitive and economic conditions of the
healthcare market.

RESULTS OF OPERATIONS

Years Ended June 30, 1999 and 2000

               Product revenues decreased $889,000, or 11.76%, to $6,670,000 in
fiscal year 2000 as compared to $7,559,000 in fiscal year 1999. Product revenue
from Silicone Oil and Betadine declined $4,390,000 as compared to fiscal 1999 as
a result of the sale of the license and distribution rights to those product
lines in August



                                       8
<PAGE>   11
and March of 1999, respectively. The five and a half months of revenue acquired
from Sonomed contributed $2,536,000 and revenue from the Company's vascular
access business increased $1,405,000, or 149.47%, to $2,345,000 in fiscal year
2000 as compared to $940,000 in fiscal year 1999. Escalon experienced a decline
in sales of OEM, ISPAN(TM) gas products, capital equipment and disposable
products of $377,000 or 25.89% to $1,079,000 in fiscal year 2000 as compared to
$1,456,000 in fiscal year 1999. The Company did not change the price of any of
its' products over this period.

               Cost of goods sold totaled $2,874,000, or 43.09% of revenue, for
fiscal year 2000, as compared to $3,282,000, or 43.42% of revenue, for fiscal
year 1999. The $408,000 decrease in total cost of goods sold is due to
discontinued product lines (Betadine and Silicone Oil) in the Company's medical
business unit. Cost of goods sold in the medical business unit decreased
$1,927,000 to $937,000 for fiscal 2000 as compared to $2,864,000 for fiscal
1999. Sonomed's product line costs for the 2000 fiscal year were $927,000; there
were no comparable costs for fiscal 1999 as the Company began selling the
Sonomed product line in mid-January 2000. In fiscal 2000, the vascular business
unit's product manufacturing costs increased $592,000 when compared to fiscal
1999. This increase is in proportion to the corresponding increase in vascular
revenues. Vascular's costs represent a full year of operation in fiscal 2000 as
compared to only five and a half months of activity for fiscal 1999.

               Marketing, general and administrative expenses increased
$1,329,262, or 39.90% for fiscal 2000 as compared to fiscal 1999. Marketing,
general and administrative expenses related to Sonomed contributed $951,000 to
the increase, as there were no comparable expenses for fiscal 1999. Marketing,
general and administrative expenses in the vascular business unit increased
$773,000 to $1,310,000. This is due to the fact that there was only five and a
half months of activity in vascular in 1999 as compared to a full year in fiscal
2000. Expenses in the medical business unit offset the Sonomed and vascular
increases by $395,000. This decrease is attributed to discontinued product lines
(Betadine and Silicone Oil). Specifically, employee-related expenses (salaries,
bonuses, commissions and benefits) decreased $371,000 to $163,000, product
royalties (mainly Betadine and Silicone Oil) decreased $71,000 to $51,000 and
meeting expenses decreased $37,000 to $24,000 in fiscal 2000 as compared to
fiscal 1999.

               Research and development expenses increased $246,000, or 33.33%,
for fiscal 2000 as compared to fiscal 1999. Research and development related to
Sonomed increased $126,000 in fiscal 2000 as there were no comparable expenses
in fiscal 1999. Research and development in the vascular business unit increased
$47,000 to $72,000. This is due to the fact that there was only five and a half
months of activity in vascular in 1999 as compared to a full year in fiscal
2000. Expenses in the medical business unit increased $72,000 to $786,000. The
increase is explained by the growth in the number of personnel necessary at the
Wisconsin facility to support the vascular business.

               After completing the initial Phase I human clinical trials in
late December 1999, management reevaluated its Ocufit SR (R) ophthalmic drug
delivery system project. It was decided that further expenditures on this
project were not in the shareholders' best interest, and the project was
discontinued. This decision resulted in the company taking a charge of $418,000,
which included write-off of the net book value for remaining goodwill and patent
costs associated with this project.

               In March 1999, the Company sold its inventory, license and
distribution rights for Betadine. This sale resulted in a $879,000 gain, after
adjusting for the cost of inventory sold, and the write-off of the remaining
goodwill and license and distribution rights associated with that product line.

               In August 1999, the Company sold its license and distribution
rights for Silicone Oil. 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. Beginning in the second quarter of fiscal 2001, the
Company will also receive additional payments based upon future sales of
Silicone Oil through 2004.


                 At June 30, 2000, Escalon Medical Imaging was still in the
development stage. Escalon has recognized a $33,000 loss for its portion of
fourth quarter 2000 activity of the joint venture. The expenses relate to
initial marketing ($20,000) and development/engineering ($13,000).



                                       9
<PAGE>   12
               Interest expense increased $539,000 to $576,000 in fiscal 2000
from $37,000 in fiscal 1999. This is the result of corporate borrowing
arrangements that did not exist until the third quarter of fiscal 1999 and 2000.
In connection with the Sonomed acquisition, PNC Bank, NA refinanced its existing
debt, providing $12,000,000 of financing to the Company.

               There is no provision for federal income taxes for fiscal years
2000 and 1999 due to the allowance against the tax benefit of the net operating
loss incurred in fiscal 2000, and due to the utilization of the net operating
loss carryforward for fiscal 1999.

Years Ended June 30, 1998 and 1999

               Product revenues increased to $7,559,000 in fiscal year 1999 from
$5,942,000 in fiscal year 1998. This increase of $1,617,000 or 27.21%, is due to
the increase in unit sales of Adatosil (R) 5000 Silicone Oil, vascular access
products, contract manufactured equipment and ISPAN(TM) Intraocular Gases. These
increases were negatively impacted by a decrease in the unit sales of the
Company's equipment, related disposable product lines and Betadine (R) 5%
Sterile Ophthalmic Prep Solution (this product line was sold in March 1999).
Contract manufacturing revenues vary from quarter to quarter depending on when
orders are received and the lead times to produce such products.

               Cost of goods sold totaled $3,282,000, or 43.42% of revenues, for
fiscal year 1999 as compared to $2,589,000, or 43.57% of revenues, for the year
ended June 30, 1998. The slight decrease in cost of goods sold as a percentage
of revenues is due primarily to a change in the product mix during the
respective periods, with the addition of vascular access products and the
disposal of the Betadine product line.

               Research and development expenses increased from $495,000 in
fiscal year 1998 to $738,000 in fiscal year 1999, an increase of $243,000, or
49.09%. This represents increased spending for Ocufit SR (R), which entered the
clinical trial stage; and preliminary spending for Povidone-Iodine 2.5%
Solution, which will enter development by the second quarter of fiscal 2000,
these categories contributed $120,000 over fiscal 1998 spending. The addition of
vascular access manufacturing to the Wisconsin facility caused the Company to
incur $45,000 in additional costs, in preparation for the relocation. The
abandonment of two medical patents and additional ISO 9000 expenses contributed
$25,000 and $35,000, respectively. Staffing levels for Wisconsin also increased
to help prepare for future growth and maintain the required documentation for
the ISO/CE program.

               Marketing and general and administrative expenses increased
$526,000, or 18.75%, to $3,332,000 for the year ended June 30, 1999 as compared
to $2,805,000 in fiscal year 1998.

LIQUIDITY AND CAPITAL RESOURCES

               At June 30, 2000, the Company had cash and cash equivalents of
$177,106 as compared to $3,854,240 at June 30, 1999; during the year ended June
30, 2000, cash and cash equivalents decreased $3,677,134. The major items
contributing to this change in cash were the purchase of Sonomed, Inc. (net of
cash acquired) reducing cash by $12,250,540, proceeds from the term loan (net of
principal payments) and net borrowings on the line of credit, both of which were
used to finance the Sonomed acquisition, which increased cash by $8,398773, and
the proceeds from the sale of Silicone Oil which provided $2,117,180. Cash used
in operating activities was $1,440,746.

               On January 14, 2000, the Company completed the acquisition of
Sonomed, Inc. ("Sonomed"), a manufacturer of ophthalmic ultrasound diagnostic
devices. The purchase price was $12,250,540, of which $12,050,000 was paid in
cash and the balance was represented by a promissory note, bearing interest at
10% per annum and due in 125 days.

               On January 14, 2000, the Company replaced the $2,000,000 credit
facility obtained in January 1999. The Bank granted a new $12,000,000 credit
facility to assist in the Sonomed acquisition. This included a $7,000,000
five-year term loan, a $5,000,000 reducing line of credit and the release of the
requirement to maintain a $1,000,000 certificate of deposit with the Bank. The
interest rate on the line of credit is based upon prime plus 0.75% and the term
loan is based on prime plus 1.0%. Floating interest rate protection is in place
to cover the




                                       10
<PAGE>   13
$7,000,000 through January 2003 and $3,000,000 of the line of credit through
January 2002. The maximum interest rate that may be charged on the term loan for
calendar year 2000, and on the protected portion of the line of credit is 9%.
The maximum rate on the term loan for calendar years 2001 and 2002 is 9.5% and
10% respectively. The protection on the line of credit remains at 9% until
January 1, 2002. Escalon paid $100,000 in finance fees and $122,800 in interest
rate cap protection fees that are recorded in other assets. These will be
amortized over the term of the loans using the effective interest method. All of
the Company's assets, including those acquired from Sonomed, collateralize these
agreements.

               The terms of these credit facilities include certain financial
covenants with which the Company is required to comply. As of June 30, 2000, the
Company failed to comply with five such financial covenants, at which time, the
total amount of indebtedness to the Bank was $9,801,009. The Bank has agreed to
waive the right to accelerate payments as a result of this default, until July
1, 2001.

               The Company anticipates that the cash generated from future
product sales, together with cash received from the Silicone Oil divestment
should be adequate to satisfy its capital requirements, based on current levels
of operations. In the longer term, the Company will seek corporate partnering,
licensing and other financing opportunities to satisfy the significant
expenditures needed to fund its' aggressive growth-through-acquisition strategy.

               The Common stock is currently listed on the Nasdaq SmallCap
Market. In order to continue to be listed on the Nasdaq SmallCap Market, certain
listing requirements must be met. If the Company's securities were delisted, an
investor could find it more difficult to dispose of them, or to obtain accurate
quotations as to the market value of the Company's securities.

               The Board of Directors has authorized the repurchase of up to
500,000 shares of the Company's Common Stock. The price, timing and manner of
these purchases will be at the discretion of management

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

               The interest rate risk associated with the loans from PNC Bank,
NA has been limited by an interest cap agreement, see note 5. In fiscal 2000
approximately 23% of the Company's revenue was derived from overseas sales. The
price of all product sold overseas is denominated in US dollars and consequently
incurs no exchange rate risk.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The financial statements of the Company are filed under this Item 8,
beginning on page F-2 of this report.

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

        None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The names of the nominees for Class I directors and the Class II directors and
Class III directors who will continue in office after the annual meeting until
the expiration of their respective terms, together with certain information
regarding them, are as follows:


                                       11
<PAGE>   14
<TABLE>
<CAPTION>
Class I Directors *                                             NOMINEES FOR ELECTION
-------------------------------------------------------------------------------------------------------------
                         DIRECTOR        YEAR         AGE       PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
                           SINCE       TERM WILL                AND CERTAIN DIRECTORSHIPS
NAME OF DIRECTOR                       EXPIRE*
-------------------------------------------------------------------------------------------------------------
<S>                      <C>           <C>           <C>        <C>
William Kwan               1999         2003          60        Retired; Vice President of Business Development of
                                                                Alcon Laboratories, Inc., a
                                                                medical products company, from
                                                                October 1996 to 1999, and Vice
                                                                President of International
                                                                Surgical and Instruments from
                                                                November 1989 to October 1996.

                                                                Principal and operator of real estate and
Anthony Coppola            2000         2003          63        commercial property, from 1988 to present;
                                                                Retired Division President of SKF
                                                                Industries, a manufacturing
                                                                company, from 1963 to 1986.
</TABLE>


* If elected at the annual meeting.


<TABLE>
<CAPTION>
Class III Directors                Directors Continuing in Office
-------------------------------------------------------------------------------------------------------------
                                   YEAR FIRST BECAME DIRECTOR, YEAR TERM WILL EXPIRE, PRINCIPAL OCCUPATIONS
Name of Director          Age      DURING PAST FIVE YEARS AND  Certain Directorships
-------------------------------------------------------------------------------------------------------------
<S>                       <C>      <C>
Richard J. DePiano        59       Mr. DePiano has been a director of the Company since February 1996 and has
                                   served as Chairman and Chief Executive Officer of the Company since March
                                   1997.  Mr. DePiano's term will expire in 2002.  Mr. DePiano has been the
                                   Chief Executive Officer of the Sandhurst Company, L.P. and Managing
                                   Director of the Sandhurst Venture Fund since 1986.  Mr. DePiano is Chairman
                                   of the Board of Directors of Surgical Laser Technologies, Inc. and a
                                   director of PhotoMedex, Inc.

Jay L. Federman, MD       62       Dr. Federman served as the Chairman of the Board of Directors of the
                                   Company from February 1996 to March 1997 and continues to serve on the
                                   Board of Directors.  Dr. Federman's term will expire in 2002.  Dr. Federman
                                   has served as the Chief of the Division of Ophthalmology at the Medical
                                   College Pennsylvania and M.C.P. Hahnemann School of Medicine and as
                                   Co-Director of the Retina Service at Wills Eye Hospital in Philadelphia,
                                   Pennsylvania.  Dr. Federman is a director of Surgical Laser Technologies,
                                   Inc.
</TABLE>





                                       12
<PAGE>   15
<TABLE>
<CAPTION>
CLASS II DIRECTORS                 DIRECTORS CONTINUING IN OFFICE
-------------------------------------------------------------------------------------------------------------
NAME OF DIRECTOR           AGE     Year First Became Director, Year Term Will Expire, Principal Occupations
                                   During Past Five Years and Certain Directorships
-------------------------------------------------------------------------------------------------------------
<S>                        <C>     <C>
Fred G. Choate             54      Mr. Choate has been a director of the Company since November 1998.  Mr.
                                   Choate's term will expire in 2001.  Mr. Choate has served as President of
                                   Beaumark Capital LLP, a venture capital firm, since January 1999.  Mr.
                                   Choate served as Manager of the Greater Philadelphia Venture Capital Corp.
                                   from 1992 through 1998.

Jeffrey F. O'Donnell      40       President and CEO of PhotoMedex, Inc. since November 1999.  Mr.
                                   O'Donnell's term will expire in 2001.  Mr. O'Donnell was President and CEO
                                   of X-SITE Medical L.L.C. from January 1999 until November 1999. President
                                   of Radiance Medical Systems Inc., cardiology products, from May 1997 to
                                   January 1999; Vice President of Sales of Kensey Nash Corporation,
                                   cardiology products, from January 1995 to May 1997.
</TABLE>


  Section 16(a) Beneficial ownership reporting compliance

         Section 16(a) of the Securities Exchange Act of 1934 requires the
         Company's directors executive officers, and persons who own more than
         ten percent of the Company's Common Stock, to file with the Commission
         reports of ownership and changes in ownership. To the Company's
         knowledge, based solely on its review of the copies of such reports
         furnished to the Company and written representations that no other
         reports were required, the Company believes that during the period July
         1, 1999 through June, 30, 2000, all filing requirements applicable to
         its officers and directors were complied with, except that Richard J.
         DePiano, Jay L. Federman, Ronald L. Hueneke, Fred G. Choate, William
         Kwan and Jeffrey O'Donnell each reported one transaction during the
         year ended June 30, 2000 late and Fred G. Choate and William Kwan file
         their respective initial reports on Form 3 late and each filed their
         respective Form 5 late.

ITEM 11.       EXECUTIVE COMPENSATION

        The following table sets forth certain compensation paid by the Company
to its Chief Executive Officer and its President for all services rendered in
all capacities for the periods shown.


                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                             ANNUAL COMPENSATION               LONG-TERM
                                                             COMPENSATION
                                                                 AWARDS
-------------------------------------------------------------------------------------------------------------
NAME AND                 YEAR   SALARY     BONUS      OTHER ANNUAL    SECURITIES      ALL OTHER
PRINCIPAL POSITION                                    COMPENSATION    UNDERLYING   COMPENSATION(3)
                                                                       OPTIONS
-------------------------------------------------------------------------------------------------------------
<S>                      <C>    <C>        <C>        <C>             <C>          <C>
 Richard J. DePiano(1)   2000   $240,000      --            --            --           $27,400
 Chairman and Chief      1999   $240,000   $120,000         --          $10,938           --
 Executive Officer       1998   $240,000      --            --            --              --

 Ronald L. Hueneke(2)    2000   $105,000      --            --            --            6,500
 President and Chief     1999   $105,000    $40,000         --          $ 3,125           --
 Operating Officer       1998   $105,000    $20,000         --          $ 5,625           --
</TABLE>


(1)   Mr. DePiano became Chairman and Chief Executive Officer of the Company on
      March 1, 1997.

(2)   Mr. Hueneke became President and Chief Operating Officer of the Company on
      July 1, 1998.



                                       13
<PAGE>   16
(3)   Includes payment by the Company of (i) in the case of Mr. DePiano, (a) an
      automobile allowance in the amount of $10,400 and (b) $17,000 in insurance
      premiums paid for life insurance; (ii) in the case of Mr. Hueneke an
      automobile allowance in the amount of $6,500.



                        OPTION GRANTS IN LAST FISCAL YEAR
                                INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
         NAME            NUMBER OF     % OF TOTAL
                         SECURITIES     OPTIONS
                         UNDERLYING    GRANTED TO        EXERCISE
                          OPTIONS      EMPLOYEES         PRICE EXPIRATION
                         GRANTED(1)    IN FISCAL YEAR    (PER SHARE)            DATE
--------------------------------------------------------------------------------------
<S>                     <C>            <C>               <C>                  <C>
 Richard J. DePiano        90,000          41%              $2.06             11/09/09
 Ronald L. Hueneke         27,500          13%              $2.06             11/09/09
</TABLE>


  (1)    These options were granted under the Company's 1999 Equity Incentive
         Plan and have a term of ten years, subject to earlier termination in
         certain events. See "Employment Agreements." The options of Mr. Hueneke
         vest over a five-year period. The options of Mr.
         DePiano vested over a twenty-four month period.


 AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUE

<TABLE>
<CAPTION>
 NAME                   SHARES      VALUE         NUMBER OF UNEXERCISED          VALUE OF UNEXERCISED
                       ACQUIRED    REALIZED      OPTIONS AT JUNE 30, 2000        IN-THE-MONEY OPTIONS
                          ON                                                    AT JUNE 30, 2000(1)
                       EXERCISE                EXERCISABLE   UNEXERCISABLE

                                                                              EXERCISABLE  UNEXERCISABLE
--------------------------------------------------------------------------------------------------------
<S>                    <C>          <C>         <C>            <C>            <C>          <C>
 Richard J. DePiano       --          --          180,417        109,583            0            0

 Ronald L. Hueneke        --          --           16,042         51,458         $1,295        $2,775
</TABLE>

  (1)    Potential unrealized value is (i) the fair market value at fiscal 2000
         year-end less the option exercise price times (ii) the number of
         options. Fair market value as of fiscal 2000 year-end was determined
         based on a closing sale price on June 30, 2000 of $2.06.

        No awards were made to any named executive officer during such fiscal
  year under any long-term incentive plan. The Company does not sponsor any
  defined benefit or actuarial plans at this time.

  EMPLOYMENT AGREEMENTS

        On May 12, 1998, the Company entered into an employment agreement with
  Richard J. DePiano as the Chairman and Chief Executive Officer of the Company.
  The term of the employment agreement commenced on May 12, 1998 and continue
  through June 30, 2001. The employment agreement renews on July 1 of each year
  for successive terms of three years unless either party notifies the other
  party at least 30 days prior to such date of the notifying party's
  determination not to renew the agreement. The agreement provides for a base
  salary of $240,000 per year plus incentive compensation in the form of a cash
  bonus to be paid by the Company to Mr. DePiano at the discretion of the Board
  of Directors in a maximum annual amount equal to 50% base salary, or $120,000.
  The agreement also provides for health and long term disability insurance and
  other fringe benefits as well as an automobile allowance of $800 per month.



                                       14
<PAGE>   17
        Ronald L. Hueneke entered into an employment agreement with a
predecessor of the Company in October 1991, which has been assumed by the
Company. Mr. Hueneke's employment agreement provides for a base salary at a rate
established by the Company's Board of Directors, which is currently set as
$105,000 per annum. Mr. Hueneke is also entitled to receive incentive
compensation in the form of a cash bonus to be paid to Mr. Hueneke at the
discretion of the Board of Directors in a maximum annual amount of 40% of base
salary, or $40,000. The agreement also provides for health, life and long-term
disability insurance and other fringe benefits. The employment agreement, which
had an initial term of five years, renews automatically from year to year unless
either party notifies the other in writing at least 90 days prior to the
expiration of the then current term of its determination not to renew the
agreement.


ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The following table sets forth, as of September 25, 2000 certain
information regarding the beneficial ownership of the Common Stock by (i) each
stockholder known by the Company to be a beneficial owner of more than 5% of the
Common Stock, (ii) each director and nominee for election as director of the
Company, (iii) each of the Named Executive Officers as such term is defined in
Item 402(a)(3) of Regulation S-K and (iv) all directors and executive officers
of the Company as a group. Pursuant to the rules and regulations promulgated
under the Exchange Act the table sets forth the most recent information provided
in filings made with the SEC by the reporting persons.

        The calculation of percentage ownership as shown for each person in the
following table assumes the exercise of all options and warrants held by such
person but not the exercise of any other person's options or warrants.
Additionally, certain of the reporting persons share beneficial ownership of
certain securities of the Company. Any securities as to which beneficial
ownership is shared are set forth on the table below as beneficially owned by
each person to whom beneficial ownership may be attributed. See the footnotes to
the table for information as to shared beneficial ownership of the Company's
securities.

                           BENEFICIAL OWNERSHIP TABLE

<TABLE>
<CAPTION>
NAME AND ADDRESS                     AMOUNT OF      PERCENT         AMOUNT OF           AMOUNT OF     AGGREGATE
OF BENEFICIAL OWNER                  BENEFICIAL      OF         BENEFICIAL OWNERSHIP     AGGREGATE     PERCENT
                                    OWNERSHIP OF     CLASS           OF SHARES          BENEFICIAL     OF CLASS
                                    OUT STANDING                UNDERLYING OPTIONS/      OWNERSHIP
                                     SHARES(1)**                    WARRANTS***
----------------------------------------------------------------------------------------------------------------
<S>                                 <C>              <C>        <C>                     <C>            <C>
 D. Blech and D. Blech &                 --            --             565,000             565,000       14.8%
 Company, Incorporated(2)
 599 Lexington Avenue
 New York, NY  10022

 Fred G. Choate(3)                       816            *              15,000             15,816          *

 Richard J. DePiano                    16,528           *             350,000             366,528       10.2%

 Jay L. Federman, M.D.                 41,184         1.3%             35,000             76,184         2.3%

 Jeffrey F. O'Donnell                   1,000           *              15,000             16,000          *

 William Kwan                            --            --              30,000             30,000          *

 Ronald L. Hueneke                     16,995           *              87,500             104,495        3.1%

 Anthony Coppola                         --            --                --                 --            --

 All directors and executive           76,523         2.5%            532,500             609,023       15.8%
 officers as a group (7 persons)
</TABLE>


                                       15
<PAGE>   18
  *      Less than 1%.

  **     Includes outstanding shares owned by the named person but does not
         include shares as to which such person has the right to acquire.

  ***    Represents shares underlying Class A Redeemable Common Stock Purchase
         Warrants ("Class A Warrants") and Class B Redeemable Common Stock
         Purchase Warrants ("Class B Warrants"), each of which (i) entitles the
         holder thereof to purchase one-quarter of a share of Common Stock at a
         price of $6.25 and $7.50, respectively, and (ii) was issued in
         connection with a November 1993 offering.

  (1)    Except as indicated in the footnotes to this table and pursuant to
         applicable community property laws, where applicable, the persons named
         in the table above have sole voting and investment power with respect
         to all shares shown as beneficially owned by them.

  (2)    As reported on Amendment No. 3 to the Statement on Schedule 13D dated
         October 5, 1995. The ownership of shares underlying options and
         warrants, as set forth for Mr. Blech, consists entirely of shares
         underlying 1,380,000 Class A Warrants and 880,000 Class B Warrants
         owned by D. Blech & Company.

  (3)    Mr. Choate shares voting power of 215 of these shares with his wife.


ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

               On February 12, 1996, the Company acquired substantially all of
  the assets and certain of the liabilities of EOI Corp., a Pennsylvania
  corporation ("EOI"), pursuant to an Assets Sale and Purchase Agreement, in
  exchange for shares of the Company's Common Stock. The total estimated cost of
  the acquisition was $8,900,000, including liabilities assumed (which includes
  the assumption of costs associated with certain litigation involving EOI) of
  $1,016,340 and estimated transaction costs of approximately $928,000. The
  acquisition was accounted for using the purchase method of accounting and
  included the acquisition of accounts receivable, inventories, equipment and
  various other tangible and intangible assets. The total purchase price over
  the fair value of net assets acquired approximates $4,100,000. Another
  $1,000,000 of the purchase price was assigned to in-process technology and was
  charged to operations immediately following the acquisition. Mr. DePiano and
  Dr. Federman were members of the Board of Directors of EOI at the time of the
  acquisition. Ronald L. Hueneke, President of the Company, served as a Vice
  President of EOI prior to the consummation of the acquisition. EOI through
  August 1998 was the beneficial owner of 42.2% of the outstanding Common Stock
  of the Company, and since such date EOI has distributed to its individual
  stockholders all of the outstanding Common Stock of the Company in accordance
  with its winding up process.

        Commencing November 17, 1994, upon the exercise of any Class A
  Redeemable Common Stock Purchase Warrant or Class B Redeemable Common Stock
  Purchase Warrant (a "Warrant"), to the extent not inconsistent with the
  guidelines of the NASD and the rules and regulations of the Securities and
  Exchange Commission (the "Commission"), the Company has agreed to pay D. Blech
  & Company, Incorporated ("Blech"), except in certain limited circumstances, a
  fee of 5% of the exercise price of such Warrant if (i) the market price of the
  Common Stock is greater than the exercise price of such Warrant on the date of
  exercise; (ii) on the date of exercise Blech is a registered broker-dealer and
  its registration has not been suspended; (iii) such Warrant is not held in a
  discretionary account; and (iv) the solicitation of such Warrant was not in
  violation of Rule 10b-6 promulgated under the Securities Exchange Act of 1934,
  as amended. The Company has agreed not to solicit the exercise of any Warrant
  other than through Blech unless Blech is legally unable to solicit such
  exercise or is prohibited from doing so by the rules of the NASD or otherwise,
  in which event the Company may solicit such exercise, either itself or with
  the assistance of a third party.



                                       16
<PAGE>   19
PART IV.

ITEM 14.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

Consolidated Financial Statements

               See Index to Consolidated Financial Statements at page F-1.

Consolidated Financial Statement Schedules

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

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.

<TABLE>
<S>     <C>    <C>
3.1     (a)    Restated Articles of Incorporation of Registrant. (6)
        (b)    Certificate of Amendment of Restated Articles of Incorporation of Registrant dated November 8, 1993. 6)
        (c)    Certificate of Amendment of Restated Articles of Incorporation of Registrant dated February 12, 1996. (6)
        (d)    Certificate of Determination of Series A 6% Convertible Preferred Stock. (8)
3.2            Amended and Restated Bylaws of Registrant. (9)
4.1            Form of Class A Redeemable Common Stock Purchase Warrants. (2)
4.2            Form of Class B Redeemable Common Stock Purchase Warrants. (2)
4.3            Form of Underwriters Class A Common Stock Purchase Warrants. (2)
4.4            Form of Underwriters Class B Common Stock Purchase Warrants. (2)
4.5     (a)    Warrant Agreement between the Registrant and U.S. Stock Transfer Corporation. (2)
        (b)    Amendment to Warrant Agreement between Registrant and U.S. Stock Transfer Corporation.(4)
        (c)    Amendment to Warrant Agreement between Registrant and American Stock Transfer Company.(5)
4.6            Securities Purchase Agreement, dated as of December 31, 1997 by and among the Company and Combination. (8)
4.7            Registration Rights Agreement, dated as of December 31, 1997 by and among the Company and Combination.  (8)
4.8            Warrant to Purchase Common Stock issued December 31, 1997 to David Stefansky.(8)
4.9            Warrant to Purchase Common Stock issued December 31, 1997 to Combination. (8)
4.10           Warrant to Purchase Common Stock issued December 31, 1997 to Richard Rosenblum. (8)
4.11           Warrant to Purchase Common Stock issued December 31, 1997 to Trautman Kramer & Company. (8)
10.1    (a)    1993 Stock Option Plan of Registrant. (3)
        (b)    Form of Nonqualified Stock Option Agreement of Registrant under the 1993 Stock Option Plan. (3)
        (c)    Form of Incentive Stock Stock Option Agreement of Registrant under the 1993 Stock Option Plan. (3)
10.2           Form of Indemnification Agreement between the Registrant and each of its directors and executive officers. (9)
10.3           Underwriting Agreement between the Registrant and the Underwriter.  (2)
10.4           Unit Purchase Option between the Registrant and the Underwriter.  (2)
10.5           Employment Agreement between Registrant and Ronald Hueneke dated October 4, 1991.  (6)
10.6           Employment Agreement between Registrant and Richard J. DePiano dated March 1, 1997, as
</TABLE>





                                       17
<PAGE>   20
<TABLE>
<S>            <C>
               amended. (7)
10.7           Distributorship Agreement between Registrant and Scott Medical Products dated as of September 8, 1992,
               as amended September 8, 1995. (6)
10.8           Research and Development Agreement between Registrant and The West Company, Incorporated dated April 3, 1995. (6)
10.9           Assets Sale and Purchase Agreement between the Registrant and Radiance Medical Systems, Inc.
               dated January 21, 1999. (9)
10.10          Bill of Sale and Acceptance Agreement between the Registrant and Alcon Laboratories, Inc. dated March 5, 1999. (9)
10.11          Bill of Sale and Acceptance Agreement between the Registrant and Alcon Universal, Ltd. dated March 5, 1999. (9)
10.12          Termination Agreement between the Registrant and Bausch & Lomb Surgical, Inc., dated August 13, 1999.  (9)
10.13          Supply Agreement between the Registrant and Bausch & Lomb Surgical, Inc. dated August 13, 1999. (9)
10.14          Registrant's Equity Incentive Plan dated November 11, 1999.  (10)
11.1           Stock Purchase Agreement between the Registrant and the stockholders of Sonomed, Inc. dated January 14, 2000. (11)
11.2           Employment Agreement between the Registrant and Louis Katz dated January 14, 2000. (11)
11.3           Registrant's 1999 Equity Incentive Plan and Registrant's Equity Incentive Plan for Employees of Sonomed, Inc. (12)
21             Subsidiaries. *
23.1           Consent of ParenteRandolph, LLC, independent auditors. (9)
27.1           Financial Data Schedule. *
</TABLE>

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

(1)   Filed as an exhibit to Pre-Effective Amendment No. 7 to the Company's
      Registration Statement on Form S-1 dated August 20, 1992 (Registration No.
      33-47439).

(2)   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).

(3)   Filed as an exhibit to the Company's Registration Statement on Form S-8
      dated June 13, 1994 (Registration Number 33-80162).

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

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

(6)   Filed as an exhibit to the Company's Form 10-K for the year ended June 30,
      1996.

(7)   Filed as an exhibit to the Company's Form 10-K for the year ended June 30,
      1997.

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

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

(10)  Filed as an exhibit to the Company's Form 10-Q, dated November 15, 1999.

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

(12)  Filed as an exhibit to the Company's Registration Statement on Form S-8,
      dated February 25, 2000. (Registration No. 333-31138)



                                       18
<PAGE>   21
                                   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)

Dated:  September 25, 2000

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

        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>
<CAPTION>
        Signature                                   Title                                     Date
        ---------                                   -----                                     ----
<S>                                  <C>                                                <C>
By:/s/ Richard J. DePiano            Chairman and Chief Executive Officer               September 25, 2000
   -------------------------
       Richard J. DePiano            (Principal Executive Officer) and Director

By:/s/ Ronald L. Hueneke             President and Chief Operating Officer              September 25, 2000
   -------------------------
       Ronald L. Hueneke

By:/s/ Harry M. Rimmer               Vice-President - Finance and Corporate             September 25, 2000
   -------------------------
       Harry M. Rimmer               Development (Principal Accounting Officer)

By:/s/ Jay L. Federman, M.D.         Director                                           September 25, 2000
   -------------------------
       Jay L. Federman, M.D.

By:/s/ Fred G. Choate                Director                                           September 25, 2000
   -------------------------
       Fred G. Choate

By:/s/ Jeffrey F. O'Donnell          Director                                           September 25, 2000
   -------------------------
       Jeffrey F. O'Donnell

By:/s/ William Kwan                  Director                                           September 25, 2000
   -------------------------
       William Kwan
</TABLE>






                                       19
<PAGE>   22
                              ESCALON MEDICAL CORP.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                     PAGE
                                                                                                     ----
<S>                                                                                                  <C>
Independent Auditors' Report                                                                         F-2

Consolidated Balance Sheets at June 30, 1999 and 2000                                                F-3

Consolidated Statements of Operations for the years ended June 30, 1998, 1999 and 2000               F-4

Consolidated Statements of Shareholders' Equity for the years ended June 30, 1998, 1999 and 2000     F-5

Consolidated Statements of Cash Flows for the years ended June 30, 1998, 1999 and 2000               F-6

Notes to Consolidated Financial Statements                                                           F-8
</TABLE>







<PAGE>   23
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Shareholders
Escalon Medical Corp.:


        We have audited the accompanying consolidated balance sheets of Escalon
Medical Corp. and subsidiaries at June 30, 1999 and 2000, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended June 30, 2000. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

        In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Escalon
Medical Corp. and subsidiaries at June 30, 1999 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2000 in conformity with generally accepted accounting principles.

                                                          PARENTE RANDOLPH, LLC
Philadelphia, Pennsylvania
August 18, 2000



                                      F-2
<PAGE>   24
                     ESCALON MEDICAL CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                    JUNE 30,
                                                                                    --------
                                                                             1999                2000
                                                                             ----                ----
<S>                                                                      <C>                 <C>
ASSETS
Current Assets:
  Cash and cash equivalents                                              $  3,854,240        $    177,106
  Cash and cash equivalents - restricted                                    1,000,000                  --
  Accounts receivable, net of allowance for doubtful accounts
    of $40,000 and $53,000 at June 30, 1999 and 2000, respectively          1,063,829           1,331,783
  Inventory, net                                                            1,117,208           1,574,678
  Prepaid insurance                                                           111,100             166,667
  Other current assets                                                         46,135              69,063
                                                                         ------------        ------------
    Total current assets                                                    7,192,512           3,319,297

Long-term receivables                                                         150,000             150,000
Furniture and equipment, net                                                  449,555             479,018
License and distribution rights, net                                          537,138             266,843
Patents, net                                                                  495,923             215,006
Trademarks and trade names, net                                                    --           2,229,722
Customer lists, net                                                                --           7,464,722
Goodwill, net                                                               1,510,207           2,278,576
Other assets                                                                   67,438             442,106
                                                                         ------------        ------------

    Total assets                                                         $ 10,402,773        $ 16,845,290
                                                                         ============        ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
  Line of credit                                                         $  1,000,000        $  4,032,105
  Current portion of long-term debt                                           200,000           1,400,000
  Accounts payable                                                            434,308             462,086
  Accrued compensation                                                        325,204             355,074
  Other current liabilities                                                 1,432,228             280,976
                                                                         ------------        ------------
     Total current liabilities                                              3,391,740           6,530,241

Long-term debt, net of current portion                                        733,332           4,900,000
                                                                         ------------        ------------
    Total liabilities                                                       4,125,072          11,430,241
                                                                         ------------        ------------

Shareholders' equity:
   Preferred stock, no par value; 2,000,000 shares authorized;
     no shares issued                                                              --                  --
  Common stock, no par and $0.001 par value; 35,000,000 shares
    authorized, 3,377,164 and 3,242,184 shares issued at June 30,
    1999 and 2000, respectively                                            46,024,811               3,242
  Additional paid-in capital                                                       --          46,021,569
  Accumulated deficit                                                     (39,629,002)        (40,609,762)
  Treasury stock, 134,980 shares in 1999 at cost                             (118,108)                 --
                                                                         ------------        ------------
    Total shareholders' equity                                              6,277,701           5,415,049
                                                                         ------------        ------------
    Total liabilities and shareholders' equity                           $ 10,402,773        $ 16,845,290
                                                                         ============        ============
</TABLE>


                 See notes to consolidated financial statements




                                      F-3
<PAGE>   25
                     ESCALON MEDICAL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                   FOR THE YEARS ENDED JUNE 30,
                                                            1998               1999               2000
                                                            ----               ----               ----
<S>                                                     <C>                <C>                <C>
Sales revenues, net                                     $ 5,942,004        $ 7,559,011        $ 6,670,214
                                                        -----------        -----------        -----------
Costs and expenses:
  Cost of goods sold                                      2,588,500          3,282,177          2,874,194
  Research and development                                  494,895            738,124            983,853
  Marketing, general and administrative                   2,805,454          3,331,562          4,660,824
  Write-down of patent costs and goodwill, Ocufit                --                 --            417,849
                                                        -----------        -----------        -----------

          Total costs and expenses                        5,888,849          7,351,863          8,936,720
                                                        -----------        -----------        -----------

Income (loss) from operations                                53,155            207,148         (2,266,506)
                                                        -----------        -----------        -----------

Other income and (expenses):
  Gain on Sale of Silicone Oil product line                      --                 --          1,863,915
  Gain on Sale of Betadine product line                          --            879,159                 --
  Equity in loss of unconsolidated  joint venture                --                 --            (33,382)
  Interest income                                           118,471            144,877            149,086
  Interest expense                                             (154)           (37,397)          (575,765)
                                                        -----------        -----------        -----------
          Total other income and expenses                   118,317            986,639          1,403,854
                                                        -----------        -----------        -----------

Net income (loss)                                       $   171,472        $ 1,193,787        $  (862,652)
                                                        ===========        ===========        ===========

Basic net income (loss) per share                       $     (0.04)       $      0.10        $     (0.27)
                                                        ===========        ===========        ===========

Diluted net income (loss) per share                     $     (0.04)       $      0.10        $     (0.27)
                                                        ===========        ===========        ===========

    Weighted average shares - basic                       2,673,093          3,114,823          3,242,184
                                                        ===========        ===========        ===========

    Weighted average shares - diluted                     2,673,093          3,150,721          3,242,184
                                                        ===========        ===========        ===========
</TABLE>





                           See notes to consolidated financial statements



                                      F-4
<PAGE>   26
                     ESCALON MEDICAL CORP. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000


<TABLE>
<CAPTION>

                                                            Preferred Stock                         Common Stock
                                                        Shares           Amount              Shares              Amount
                                                        ------           ------              ------              ------
<S>                                                    <C>           <C>                 <C>                 <C>
Balance at June 30, 1997                                   --          $       --           2,629,375        $ 44,645,440
  Preferred stock offering, net of
    offering costs                                      1,350           1,112,478                  --                  --
  Warrants issued in connection with
    preferred Stock offering                               --            (234,500)                 --             234,500
  Deemed dividend from incremental yield
    In conversion terms of preferred stock                 --             243,000                  --                  --
  Preferred stock conversions                            (450)           (373,657)            391,652             373,657
  Preferred stock dividends                                --                  --                  --                  --
  Net income                                               --                  --                  --                  --
                                                        -----          ----------        ------------        ------------
Balance at June 30, 1998                                  900             747,321           3,021,027          45,253,597
  Preferred stock conversions                             (82)            (68,090)            131,137              68,090
  Preferred stock retirement                             (818)           (679,231)                 --                  --
  Common stock issued in connection with
    Preferred stock retirement                             --                  --             225,000             703,124
  Purchase of treasury stock                               --                  --                  --                  --
  Preferred stock dividends                                --                  --                  --                  --
  Net income                                               --                  --                  --                  --
                                                        -----          ----------        ------------        ------------
Balance at June 30, 1999                                   --                  --           3,377,164          46,024,811
  Treasury stock retirement                                --                  --            (134,980)                 --
  Common stock conversion from no par to
  $.001 par value                                          --                  --                  --         (46,021,569)
  Net loss
                                                        -----          ----------        ------------        ------------
Balance at June 30, 2000                                   --          $       --           3,242,184        $      3,242
                                                        =====          ==========        ============        ============


                                                                                 Additional                             Total
                                                        Treasury Stock            Paid-in          Accumulated       Shareholders'
                                                   Shares        Amount           Capital            Deficit           Equity
                                                   ------        ------           -------            -------           ------
<S>                                             <C>             <C>             <C>               <C>
Balance at June 30, 1997                                  --      $      --      $        --      ($39,846,988)     $4,798,452
  Preferred stock offering, net of
    offering costs                                        --             --               --                --       1,112,478
  Warrants issued in connection with
    preferred Stock offering                              --             --               --                --              --
  Deemed dividend from incremental yield
    In conversion terms of preferred stock                --             --               --          (243,000)             --
  Preferred stock conversions                             --             --               --                --              --
  Preferred stock dividends                               --             --               --           (33,750)        (33,750)
  Net income                                              --             --               --           171,472         171,472
                                                ------------      ---------      -----------      ------------      ----------
Balance at June 30, 1998                                  --             --               --       (39,952,266)      6,048,652
  Preferred stock conversions                             --             --               --                --              --
  Preferred stock retirement                              --             --               --          (138,769)       (818,000)
  Common stock issued in connection with
    Preferred stock retirement                            --             --               --          (703,124)             --
  Purchase of treasury stock                         134,980       (118,108)              --                --        (118,108)
  Preferred stock dividends                               --             --               --           (28,630)        (28,630)
  Net income                                              --             --               --         1,193,787       1,193,787
                                                ------------      ---------      -----------      ------------      ----------
Balance at June 30, 1999                             134,980       (118,108)              --       (39,629,002)      6,277,701
  Treasury stock retirement                         (134,980)       118,108               --          (118,108)             --
  Common stock conversion from no par to
  $.001 par value                                         --             --       46,021,569                --              --
  Net loss                                                                                            (862,652)       (862,652)
                                                ------------      ---------      -----------      ------------      ----------
Balance at June 30, 2000                                  --      $      --      $46,021,569      $(40,609,762)     $5,415,049
                                                ============      =========      ===========      ============      ==========
</TABLE>




                           See notes to consolidated financial statements





                                      F-5
<PAGE>   27
                     ESCALON MEDICAL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                    FOR THE YEARS ENDED JUNE 30,
                                                                            1998                1999                2000
                                                                            ----                ----                ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                     <C>                 <C>                 <C>
  Net income (loss)                                                     $    171,472        $  1,193,787        $   (862,652)
  Adjustments to reconcile net income (loss) to net cash
    Provided from (used in) operating activities:
      Depreciation and amortization                                          331,987             363,687             666,770
      Equity in net loss of unconsolidated joint venture                          --                  --              33,382
      Income from license of intellectual laser property                     (75,000)                 --                  --
      Write-down of intangible assets                                             --              24,805                  --
      Net gain on sale of Betadine product line                                   --            (879,159)                 --
      Net gain on sale of Silicone Oil product line                               --                  --          (1,863,915)
     Write-down of patent costs and goodwill, Ocufit, net                         --                  --             417,849
      Change in operating assets and liabilities:
          Accounts receivable                                               (353,113)            (48,451)            586,424
          Inventory                                                          115,740            (410,476)            162,862
          Other current and long-term assets                                 (16,862)           (116,491)           (164,960)
          Accounts payable and accrued expenses                             (360,396)            519,764            (416,506)
                                                                        ------------        ------------        ------------

            Net cash provided from (used in) operating activities           (186,172)            647,466          (1,440,746)
                                                                        ------------        ------------        ------------

CASH FLOWS FROM INVESTING ACTIVITIES:

  Purchase of investments                                                   (470,180)           (259,000)         (7,043,061)
  Proceeds from maturities of investments                                    375,164             589,016           7,043,061
  Net change in cash and cash equivalents - restricted                            --          (1,000,000)          1,000,000
  Proceeds from the sale of Betadine product line                                 --           2,059,835                  --
  Proceeds from the sales of Silicone Oil product line                            --                  --           2,117,180
  Purchase of vascular access business                                            --          (1,165,329)         (1,000,000)
  Purchase of Sonomed, Inc., net of cash acquired                                 --                  --         (12,250,540)
  Purchase of furniture and equipment                                        (89,792)            (74,106)           (104,064)
  Payment for license and distribution rights                               (126,894)            (45,036)            (41,228)
  Investment in and advances to unconsolidated joint venture                      --                  --             (80,961)
  Payment for patent costs                                                   (30,411)            (65,167)            (52,748)
  Payment of deferred finance and interest rate cap fees                          --                  --            (222,800)
  Disbursements under Short and long-term note receivable                    (50,000)            (52,500)                 --
                                                                        ------------        ------------        ------------

            Net cash used in investing activities                           (392,113)            (12,287)        (10,635,161)
                                                                        ------------        ------------        ------------
</TABLE>





                           See notes to consolidated financial statements




                                      F-6
<PAGE>   28
                     ESCALON MEDICAL CORP. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)


<TABLE>
<CAPTION>
                                                                                 FOR THE YEARS ENDED JUNE 30,
                                                                          1998               1999               2000
                                                                          ----               ----               ----
<S>                                                                   <C>                <C>                <C>
CASH FLOWS FROM FINANCING ACTIVITIES:

  Line of credit borrowing, net                                                --          1,000,000          3,032,105
  Proceeds from term loan                                                      --          1,000,000          7,000,000
  Principal payments on term loans                                         (2,624)           (66,668)        (1,633,332)
  Proceeds from preferred stock offering, net of offering costs         1,112,478                 --                 --
  Retirement of preferred stock                                                --           (818,000)                --
  Payment of preferred stock dividend                                     (20,250)           (42,130)                --
  Purchase of treasury stock                                                   --           (118,108)                --
                                                                      -----------        -----------        -----------
     Net cash provided from financing activities                        1,089,604            955,094          8,398,773
                                                                      -----------        -----------        -----------

       Net increase (decrease) in cash and cash equivalents               511,319          1,590,273         (3,677,134)

Cash and cash equivalents, beginning of year                            1,752,648          2,263,967          3,854,240
                                                                      -----------        -----------        -----------

Cash and cash equivalents, end of year                                $ 2,263,967        $ 3,854,240        $   177,106
                                                                      ===========        ===========        ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:

  Interest paid during the year                                       $       154        $    32,041        $   575,765
                                                                      ===========        ===========        ===========
NON-CASH OPERATING AND INVESTING ACTIVITY:

  Common stock issued in connection with preferred
    stock retirement                                                  $        --        $   703,124        $        --
                                                                      ===========        ===========        ===========
  Accrual of liability for portion of vascular access
    business assets acquired                                          $        --        $ 1,000,000        $        --
                                                                      ===========        ===========        ===========
</TABLE>




                 See notes to consolidated financial statements



                                      F-7

<PAGE>   29
                     ESCALON MEDICAL CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)  ORGANIZATION AND DESCRIPTION OF BUSINESS

        Escalon Medical Corp. (formerly known as Intelligent Surgical Lasers,
Inc.) and its subsidiaries, Escalon Pharmaceutical Inc., Escalon Vascular Access
Inc., Sonomed, Inc. and Escalon Digital Vision, Inc. (jointly referred to as
"Escalon" or the "Company") operate in the healthcare market specializing in the
development, manufacturing, marketing and distribution of ophthalmic diagnostic,
surgical and pharmaceutical products, as well as, vascular access devices.

        From the Company's inception until 1996, it engaged in research and
development into laser technology to be used in ophthalmic surgery. With the
February 1996 acquisition of the assets of Escalon Ophthalmics, Inc. ("EOI") the
Company's market focus changed and laser development ceased. Upon completion of
the acquisition of EOI, the Company became engaged in developing, marketing and
distributing ophthalmic medical devices, pharmaceuticals and niche medical
products. EOI's acquisition brought the Company a catalog of ophthalmic
products, a profitable customer base and an opportunity to become a manufacturer
of niche medical products. Sales of these new products are directed primarily at
hospitals and physicians throughout the United States.

        In January 1999, the Company acquired the vascular access product line
from Radiance Medical Systems, Inc. ("Radiance") (Note 12). These products use
doppler technology to aid medical personnel in locating difficult arteries and
veins. Presently, the marketing of this product line concentrates on pediatric
and critical care.

        In January 2000, the Company purchased Sonomed, Inc. (Note 15), a
privately held manufacturer and marketer of ophthalmic ultrasound diagnostic
devices. These products are sold domestically and internationally either
directly to the customer or through a series of independent distributors.

        The Company, through its wholly-owned subsidiary, Escalon Digital
Vision, Inc., entered into a joint venture with MegaVision, Inc. in April 2000.
The joint venture has been named Escalon Medical Imaging, LLC ("Imaging"). The
purpose of Imaging is to develop, manufacture and market hardware and software
to be connected to cameras, effectively enabling the end-users to capture
remarkably high-quality digital images for application in the ophthalmic market.
The Company and MegaVision, Inc. each own 50% of Imaging. At June 30, 2000,
Imaging was still in the development stage.

        Escalon's strategy is to locate and acquire profitable niche medical
products that it can own and control the rights to. To finance this program, the
Company sold its license and distribution rights to Betadine (R) 5% Sterile
Ophthalmic Prep Solution ("Betadine") and Adatosil (R) 5000 Silicone Oil
("Silicone Oil"), in the third quarter of fiscal 1999 and the first quarter of
fiscal 2000, respectively.

        In October 1997, the Company licensed its intellectual laser properties
to a newly formed company, IntraLase Corp. ("IntraLase") (Note 11). IntraLase
will have the responsibility of funding and developing the laser technology
through to commercialization. Escalon retains an equity position in the new
company, along with future royalty rights on product sales.

(2)  SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

        The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Escalon Pharmaceutical, Inc., Escalon
Vascular Access, Inc., Sonomed, Inc. and Escalon Digital Vision, Inc. All
intercompany transactions and balances have been eliminated.




                                      F-8
<PAGE>   30
Use of Estimates

        The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions management may undertake in the future, actual
results may ultimately differ from those estimates.

Cash and Cash Equivalents

        The Company considers all highly liquid investments with maturity of
three months or less at the time of purchase to be cash equivalents.

        The Company invests its excess cash in money market accounts with
financial institutions having strong credit ratings. The Company has established
practices relative to diversification and maturities for safety and liquidity
purposes. These practices are periodically reviewed and modified to take
advantage of trends in yields and interest rates. The Company has not
experienced any losses on its cash equivalents.

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 of their short-term maturity. The carrying amounts of
long-term debt approximate fair value since the Company's interest rates
approximate current interest rates.

Inventories

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


<TABLE>
<CAPTION>
                                                           JUNE 30,
                                                   1999                 2000
                                                   ----                 ----
<S>                                            <C>                  <C>
Raw Materials / work in process                $   526,553          $ 1,336,755
Finished goods                                     623,655              365,092
                                               -----------          -----------
                                                 1,150,208            1,701,847
Valuation allowance                                (33,000)            (127,168)
                                               -----------          -----------
                                               $ 1,117,208          $ 1,574,678
                                               ===========          ===========
</TABLE>


        In fiscal 2000, the Company's valuation allowance was increased to
$127,128 as a result of additional charges to expense of $70,000 and $23,432 in
June and March, respectively, for raw materials related to the Company's
vascular business. The Company believes it may not be able to utilize all small
gauge vascular product components it acquired in its acquisition of the Radiance
product line.

Accounts Receivable

        The Company performs ongoing credit evaluations of its customers'
financial condition and does not require collateral for accounts receivable
arising from the normal course of business. The Company maintains allowances for
potential credit losses which, when realized have been within the range of
management's expectations.

Furniture and Equipment

        Furniture and equipment is recorded at cost. Depreciation is computed
using the straight-line method over the economic useful life of the related
assets, which are estimated to be eighteen months to ten years. Depreciation
expense for the years ended June 30, 1998, 1999 and 2000 was $43,433, $73,174
and $103,925, respectively.




                                      F-9
<PAGE>   31
        Furniture and equipment consist of the following at:

<TABLE>
<CAPTION>
                                                              JUNE 30,
                                                        1999             2000
                                                        ----             ----
<S>                                                  <C>              <C>
Equipment                                            $ 521,870        $ 597,670
Furniture and fixtures                                  35,351           51,356
Leasehold improvements                                  54,521           93,136
                                                     ---------        ---------
                                                       611,742          742,162
Less accumulated depreciation and amortization        (162,187)        (263,143)
                                                     ---------        ---------
                                                     $ 449,555        $ 479,018
                                                     =========        =========
</TABLE>


Acquired License and Distribution Rights

        In connection with the acquisition of the EOI assets a portion of the
purchase price was allocated to certain product license and distribution
agreements. This cost allocation was based on an independent evaluation, with
such costs being amortized over an eight-year period using the straight-line
method. The values of these assets are reevaluated periodically to determine if
the estimated lives continue to be appropriate. The sale of the Betadine product
line in the third quarter of fiscal 1999 reduced the cost and accumulated
amortization by $422,000 and $163,000, respectively. Sale of the Silicone Oil
product line caused the Company to write off $483,000 in cost and $214,000 in
accumulated amortization in fiscal 2000. Accumulated amortization of license and
distribution rights was $297,602 and $126,498 at June 30, 1999 and 2000,
respectively. Amortization expense for the years ended June 30, 1998, 1999 and
2000 was $140,584, $127,517 and $42,558, respectively.

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 seventeen years, on a
straight-line basis from the date the related patents are issued. Costs
associated with patents no longer being pursued are expensed. In fiscal 1999,
two ophthalmic patents were abandoned; this resulted in the write-off of $27,182
in cost and $2,376 in accumulated amortization. In fiscal 2000, the Company
discontinued its Ocufit project resulting in the write-off of $353,000 in cost
and $34,000 in accumulated amortization. Accumulated patent amortization was
$98,061 and $79,209 at June 30, 1999 and 2000, respectively. Amortization
expense for the years ended June 30, 1998, 1999 and 2000 was $20,282, $19,614
and $15,062, respectively.

Goodwill, Trademarks, Trade Names and Customer Lists

        Goodwill represents the excess of the purchase price over the fair
market value of the net assets acquired. For the preexisting EOI assets, these
costs are being amortized over a ten-year period using the straight-line method.
Intangible assets from Radiance Medical Systems are being amortized using the
straight-line method, primarily over fifteen years.

        Intangible assets, consisting of goodwill, trademarks, trade names and
customer lists, resulting from the Sonomed acquisition are being amortized over
fifteen years using the straight-line method.

        The Company periodically reviews the value of goodwill and other
intangible assets to determine if impairment has occurred. No impairment was
indicated in fiscal 2000 or 1999.

        Sale of the Betadine product line caused the Company to write-off
$668,000 of goodwill and $206,000 in associated accumulated amortization in
fiscal 1999.

        Accumulated amortization of goodwill at June 30, 1999 and 2000 was
$246,138 and $285,849, respectively. Amortization expense for the years ended
June 30, 1998, 1999 and 2000 was $127,687, $143,381 and $168,718, respectively.

        Amortization of trademarks, trade names and customer lists resulting
from the Sonomed purchase was $305,558 at June 30, 2000.



                                      F-10
<PAGE>   32
Revenue Recognition

        The Company recognizes revenue from the sales of its products at the
time of shipment.

Stock-Based Compensation

        As permitted by Financial Accounting Standards Board Statement No. 123,
"Accounting for Stock-Based Compensation," the Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB 25") and related interpretations in accounting for its
employee stock option plans. Under APB 25, no compensation expense is recognized
at the time of the option grant because the exercise price of the Company's
employee stock option equals the fair market value of the underlying common
stock on the date of the grant.

Research and Development

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

Deferred Interest Rate Cap Fees

        Premiums paid for purchased interest rate cap arrangements are amortized
using the effective interest method over the terms of the caps. Unamortized
premiums are included in other assets in the balance sheet. Amounts receivable
under cap agreements are recorded as a reduction of interest expense.

Advertising Costs

        Advertising costs are charged to expense when incurred. Advertising
expense for the years ended June 30, 1998, 1999 and 2000 was $58,495, $41,824
and $47,439, respectively.

Net Income (Loss) Per Share

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

<TABLE>
<CAPTION>
                                                                                1998               1999               2000
                                                                                ----               ----               ----
<S>                                                                         <C>                <C>                <C>
        Numerator:
          Numerator for basic and diluted earnings per share:
            Net income (loss)                                               $   171,472        $ 1,193,787        $  (863,652)
            Preferred stock dividends and accretion                            (276,750)          (870,523)                --
                                                                            -----------        -----------        -----------
            Income (loss) available to common shareholders                  $  (105,278)       $   323,264        $  (863,652)
                                                                            ===========        ===========        ===========
        Denominator:
          Denominator for basic earnings per share-
            Weighted-average shares                                           2,673,093          3,114,823          3,242,184
          Effect of dilutive securities:
            Employee stock options                                                   --             35,898                 --
                                                                            -----------        -----------        -----------
        Denominator for diluted earnings per share-adjusted
          Weighted-average shares and assumed conversions                     2,673,093          3,150,721          3,242,184
                                                                            ===========        ===========        ===========

        Basic earnings income (loss) per share                              $     (0.04)       $      0.10        $     (0.27)
                                                                            ===========        ===========        ===========

        Diluted earnings income (loss) per share                            $     (0.04)       $      0.10        $     (0.27)
                                                                            ===========        ===========        ===========
</TABLE>





                                      F-11
<PAGE>   33
Income Taxes

        The Company accounts for income taxes under the liability method. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted rates and laws that will be in effect when
the differences are expected to reverse.

Reclassifications

        Certain amounts in the 1999 and 1998 financial statements have been
reclassified to conform to the 2000 presentation.

(3)  INVESTMENTS

        The Company maintained a $1,015,609 certificate of deposit at June 30,
1999. This investment matured within 30 days and $1,000,000 was pledged as
collateral against the five-year term loan at PNC Bank, NA. and was reported as
cash and cash equivalents - restricted. This collateral requirement was released
with the credit facility obtained in January 2000 (Note 5).

(4)  LONG-TERM RECEIVABLE

        The Company entered into a loan agreement with an individual who was
involved in the development of its Ocufit SR drug delivery system. The note for
$150,000, with principal and accrued interest at 3%, is due in May 2005.

(5)  LINE OF CREDIT AND LONG-TERM DEBT

        On January 14, 2000, the Company replaced the $2,000,000 credit facility
obtained in January 1999. PNC Bank, NA (the "Bank") granted a new $12,000,000
credit facility to assist with the Sonomed acquisition. This facility includes a
$7,000,000 five-year term loan, a $5,000,000 reducing line of credit and release
of the requirement to maintain a $1,000,000 certificate of deposit with the
Bank. The interest rate on the term loan is the Bank's prime rate plus 1% and
the rate on the line of credit is the Bank's prime rate plus .75%.

        Interest rate cap agreements are used to reduce the potential impact of
increases in interest rates on the floating-rate term loan and line of credit.
At June 30, 2000, the Company was party to interest rate cap agreements covering
the $7,000,000 term loan through January 1, 2003 and $3,000,000 of the reducing
line of credit through January 1, 2002. The agreements entitle the Company to
receive from the Bank, the counterparty to both agreements, on a monthly basis
the amounts, if any, by which the Company's interest payments on the $3,000,000
protected portion of the line of credit exceed 9%. Payments are also due monthly
from the Bank if the interest rate on the $7,000,000 term loan exceeds 9%
through January 1, 2001, 9.5% for the period January 1, 2001 through January 1,
2002 and 10% for the period January 1, 2002 through January 1, 2003. The Bank's
prime rate at June 30, 2000 was 9.5% and the net rate at that date for the term
loan and the line of credit was 9%.

        Escalon paid $122,800 for the interest rate cap protection and $100,000
in deferred finance fees that are recorded in other assets. The fees are being
amortized over the respective periods of the loans using the effective interest
rate method. Amortization of these fees was $30,951 in fiscal 2000.

        All of the Company's assets, including those acquired in the Sonomed
acquisition, collateralize these agreements.

        The term loan and the line of credit agreements contain various
covenants relating to required levels of earnings before interest, taxes,
amortization and depreciation ("EBITDA"), as defined, certain debt ratios, and
the maintenance of net worth levels, among others. The Company did not achieve
substantially all of the financial covenant levels and also violated certain
other covenants regarding investments and advances, which are breaches of the
loan agreements. The Bank has waived these requirements of the agreements as of
June 30, 2000 and for the period ended July 1, 2001.



                                      F-12
<PAGE>   34
        Following are maturities of the long-term debt for each of the next five
years:

<TABLE>
<CAPTION>
          Year ending June 30,                Amount
          --------------------                ------
<S>                                         <C>
               2001                         $1,400,000
               2002                          1,400,000
               2003                          1,400,000
               2004                          1,400,000
               2005                            700,000
               ---------------------------------------
                                            $6,300,000
                                            ==========
</TABLE>


        Balances available under the reducing line of credit for each period in
the term of the agreement are as follows:

<TABLE>
<CAPTION>
                             Period                                 Amount
                             ------                                 ------
<S>                                                               <C>
               January 14, 2000 through June 29, 2001             $5,000,000
               June 30, 2001 through June 29, 2002                 4,000,000
               June 30, 2002 through June 29, 2003                 3,000,000
               Thereafter                                          1,500,000
</TABLE>


(6)  CAPITAL STOCK TRANSACTIONS

Reverse Stock Split

        On November 20, 1997, the Company held its annual meeting of
shareholders, at which time the shareholders approved a one-for-four reverse
stock split (the "Reverse Split") of the Company's Common Stock (the "Common
Stock").

        As a result of the Reverse Split, each shareholder now has one share of
Common Stock for every four shares owned before the Reverse Split. As a result
of the Reverse Split, there were adjustments made to the Company's Class A
Redeemable Common Stock Purchase Warrant and Class B Redeemable Common Stock
Purchase Warrant such that the number of Warrants that must be delivered to the
Company in order to purchase a share of Common Stock has been increased by a
factor of four.

        All references in these consolidated financial statements with regard to
shares, per share amounts, units and share prices have been adjusted for the
Reverse Split. Fractional shares were paid out on conversion.

Capitalization

        On November 17, 1999, Escalon Medical Corp., a California corporation
("Escalon California"), merged with and into one of its wholly owned
subsidiaries, Escalon Medical Corp. (formerly Escalon Delaware, Inc.), a
Delaware Corporation for the purpose of reincorporating Escalon California in
the state of Delaware. Pursuant to the merger, the separate corporate existence
of Escalon California ceased and the Company is the surviving corporation.

        The Company succeeded to all of the assets, rights and properties of
Escalon California and assumed all of the debts, liabilities and obligations of
Escalon California. Each share of Common Stock of Escalon California, no par
value, issued and outstanding immediately prior to the effective date of the
merger was automatically converted into one fully paid and nonassessable share
of Common Stock, par value $.001 per share, of the Company certificate
representing issued and outstanding shares of Common Stock of Escalon California
immediately prior to the effective date of the merger is deemed to represent the
number of shares of common stock of the Company into which shares of Escalon
California Common Stock were converted in the merger.




                                      F-13
<PAGE>   35
Preferred Stock Offering and Redemption

        On December 31, 1997, the Company issued $1,350,000 of Series A 6%
Convertible Preferred Stock ("Preferred Stock") in a private placement. This
stock issue was retired on February 1, 1999 with the payment of $818,000 plus
accrued interest and the issuance of 225,000 shares of the Company's Common
Stock.

        At the time of issuance the net proceeds of $1,194,750 from this
offering were received on January 2, 1998. After March 1, 1998, the Preferred
Stock was capable of being converted at the option of the holder into shares of
the Company's Common Stock at a rate determined by dividing the liquidation
value of the Preferred Stock being converted by the conversion price then in
effect. The conversion price will be the lesser of (i) $8.6125 (which is the
average of the closing bid price of the Common Stock for each of the five
trading days immediately prior to December 31, 1997) or, (ii) up to 82% of the
five-day average closing price prior to the conversion date. The Preferred Stock
paid cumulative dividends of 6% per annum payable quarterly in cash. The
Preferred Stock was accompanied by an immediately exercisable five-year warrant
to purchase 40,000 shares of Common Stock at exercise prices ranging from
$8.6125 to $11.626875. The Company also issued to the private placement agent
and its designees a similar warrant to purchase an aggregate of 50,000 shares of
Common Stock at an exercise price of $10.335 per share. The warrants were valued
at $234,500 using the Black-Scholes option pricing method with the following
assumptions: risk-free interest rate of 5.5%; expected volatility of .0879;
expected warrant life of one-half year from vesting; and an expected dividend
rate of 0.0%. The value of the warrants was accounted for as part of the
offering related expenses.

        The incremental yield imbedded in the conversion terms of the Preferred
Stock was accounted for as a dividend of approximately $243,000 and was
amortized over the period from the date of issuance to March 1, 1998, the first
date at which the conversion could occur.

        During fiscal 1998, the preferred shareholder converted blocks of 197,
143 and 110 shares at conversion prices of $1.5016, $1.0967 and $0.8457 per
share, respectively. These conversions increased the Common Stock outstanding by
391,652 shares. In July 1998, the holder of Preferred Stock converted 82
additional shares into 131,137 shares of the Company's Common Stock at a
conversion price of $0.6253 per share.

        In February 1999, the Company simultaneously converted shares of
Preferred Stock into 225,000 shares of its Common Stock and redeemed all of the
remaining shares of its Preferred Stock for $818,000. In connection with the
redemption and issuance, the Company recognized an $841,893 imputed dividend.

Redeemable Common Stock Purchase Warrants

        During November 1993, the Company successfully completed an underwritten
public offering of 862,500 units (the "Units"), each unit consisting of one
share of Common Stock, one Class A Redeemable Common Stock Purchase Warrant and
one Class B Redeemable Common Stock Purchase Warrant (the "Public Offering").
Four Class A Warrants entitle the holder thereof to purchase one share of Common
Stock at a price of $25, four Class B Warrants entitle the holder thereof to
purchase one share of Common Stock at a price of $30. The Warrants are currently
exercisable and expire in November 2000. The net proceeds to the Company from
that Public Offering, after deducting underwriting discounts, commissions and
related expenses was approximately $14,800,000.

Stock Option Plans

        The Company has adopted five employee stock option plans, which provide
for incentive and non-qualified stock options to purchase 981,242 shares of the
Company's common stock. One of the plans, for 330,000 options was an element of
the purchase agreement for Sonomed (see note 15). Under the terms of the plans,
options may be granted at not less than fair market value of the Common Stock at
the date of the grant. Vesting generally occurs ratably over five years and is
exercisable over a period no longer than ten years after the grant date.

        As of June 30, 2000, options to purchase 870,500 shares of the Company's
Common Stock were granted, 468,743 were exercisable and 110,742 are reserved for
future grants.



                                      F-14
<PAGE>   36
        Financial Accounting Standards Board Statement No. 123 ("SFAS No. 123")
requires pro forma information regarding net income and earnings per share as if
the Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of SFAS No. 123. The fair value of
these equity awards was estimated at the date of grant using the Black-Scholes
option pricing method. For all years presented, the expected option life of one
year from vesting and an expected dividend rate of 0.0% were used. The weighted
average assumptions used in fiscal 2000 were a risk-free interest rate of 5.94%
and an expected volatility of 1.502. Fiscal 1999's assumptions were risk-free
interest rates of 5.08% and 5.31%, and an expected volatility of 1.427. The
assumptions used in fiscal 1998 were a risk-free interest rate of 5.11% and an
expected volatility of 1.359.

        For the purposes of pro forma disclosures, the estimated fair value of
the equity awards is amortized to expense over the options' vesting period. The
pro forma net loss for fiscal 2000 would have been $1,022,768, and the basic and
diluted earnings per share of Common Stock would be $ (0.32). For the fiscal
year ended June 30, 1999, the pro forma net income and basic and diluted
earnings per share were $1,031,037 and $0.05, respectively. Fiscal 1998's pro
forma net loss and basic and diluted net loss per share were $(162,993) and
$(0.06), respectively.

        The following is a summary of the Company's stock option activity and
related information for the fiscal years ended June 30, 1998, 1999 and 2000:

<TABLE>
<CAPTION>
                                                1998                             1999                            2000
                                                ----                             ----                            ----
                                        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 beginning of year        112,500         $2.252          172,000          $2.120          314,500          $2.122

  Granted                                59,500         $1.875          152,500          $2.108          546,000           $2.51

  Forfeited                                  --             --          (10,000)         $1.875          (22,500)         $1.931
                                        -------         ------          -------          ------          -------          ------
Outstanding at end of year              172,000         $2.120          314,500          $2.122          838,000           $2.38

Exercisable at end of year               31,967                         100,633                          468,743
                                         ======                         =======                          =======

Weighted average fair value of
  options granted during year                           $0.970                           $1.131                           $0.733
</TABLE>


        Options granted during fiscal 1998, have an exercise price of $1.875 and
a remaining contractual life of 7.7 years. Those issued in fiscal 1999 have a
weighted average exercise price of $2.108 and a remaining contractual life of
8.8 years. Fiscal 2000 options have a weighted average exercise price of $2.506
and a remaining contractual life of 9.96 years.

        Non-plan options to purchase 1,367 and 1,367 shares of Common Stock, at
price of $1.460 and $7.380, respectively, were outstanding and exercisable at
June 30, 2000. These options generally have vesting and exercise provisions
consistent with options granted under the plans.

(7)  TREASURY STOCK

        In July 1998, the Company entered into an agreement with a stockholder
to repurchase 114,285 shares of the Company's Common Stock for $100,000 and
accept an additional 20,695 shares in satisfaction of a $18,108 receivable. The
treasury stock was retired on November 17, 1999 in connection with the Company's
recapitalization and reincorporation in the State of Delaware.

(8)  INCOME TAXES

    Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets, which are primarily considered to be
noncurrent, consisted of the following at:




                                      F-15

<PAGE>   37
<TABLE>
<CAPTION>
                                                            JUNE 30,
                                                            --------
                                                     1999              2000
                                                     ----              ----
<S>                                              <C>               <C>
Deferred tax assets:
       Reserves and allowances                   $     28,000      $     73,000
       Net operating loss carryforwards            14,308,000         3,563,000
       Tax credit carryforwards                       680,000           562,000
                                                 ------------      ------------
              Total deferred tax assets            15,016,000         4,198,000
Valuation allowance                               (15,016,000)       (4,198,000)
                                                 ------------      ------------
   Net deferred taxes                            $          -      $          -
                                                 ------------      ------------
</TABLE>


        At June 30, 2000, the Company had federal income tax and state income
tax net operating loss carryforwards of approximately $10,332,000 and $639,000,
respectively. The difference between the federal and state carryforward amounts
is primarily attributable to the Company's discontinuing its operations in
California. The net operating loss carryforwards arising in California will not
be offset against future taxable income and were written off. Federal and state
operating loss carryforwards and tax credits will expire at various dates
between 2001 and 2013

        The timing and manner in which the Company will utilize net operating
loss carryforwards to reduce federal taxable income in any year, or in total,
will be limited by provisions of the Internal Revenue Code, Section 382, and
related sections, which addresses changes in stock ownership. The annual
limitation is $723,000, of which $2,380,000 is cumulatively available to reduce
2001 federal taxable income. Such limitations may have an impact on the ultimate
realization of these federal income tax carryforwards. The decrease in the
deferred tax asset arising from net operating loss carryforwards and the related
valuation allowance from 1999 to 2000 is primarily attributable to the impact of
Section 382

        For the years ended June 30, 1999 and 2000, the Company recorded
valuation allowances of $15,016,000 and $4,198,000, respectively, based on the
uncertainty with respect to the ultimate realization of the net deferred tax
assets.

        In 2000, the Company recognized a tax benefit of approximately $300,000,
which was offset by a related valuation allowance. In 1999 and 1998, no
provision was required because of net operating loss carryforwards.

        Approximately $8.2 million of the federal net operating loss
carryforward at June 30, 2000 represents amounts that were transferred to the
Company as a result of the acquisition of EOI (Note 1). Use of this transferred
NOL is also limited under Section 382. Any tax benefit realized from such use
would first reduce acquired goodwill. Although the Company believes that the
acquisition of EOI qualified as a tax-free reorganization, there is no certainty
that the Internal Revenue Service will agree. If the acquisition were not to
qualify as a tax-free reorganization, the net operating loss carryforward of EOI
would be treated as a purchase of assets and the tax basis of the acquired
assets would be increased.

(9)  OPERATING LEASES

        The Company leases its research, manufacturing and corporate office
facilities and certain equipment under non-cancelable operating lease
arrangements. The future minimum rentals to be paid under these leasing
arrangements as of June 30, 2000 are as follows:


<TABLE>
<CAPTION>
        YEAR ENDING JUNE 30,                                AMOUNT
        --------------------                                ------
<S>                                                       <C>
               2001                                       $  313,609
               2002                                          281,743
               2003                                          276,323
               2004                                          271,371
               2005                                          144,696
                                                          ----------
                                                          $1,287,742
                                                          ==========
</TABLE>




                                      F-16
<PAGE>   38
               Rent expense charged to operations during the years ended June
30, 1998, 1999 and 2000 was $123,408, $111,835 and $210,118, respectively.

        Through June 30, 2000, the Company leased its Pennsylvania office from
an entity that is 100% owned by the Chief Executive Officer and Chairman of the
Board of the Company. The lease was classified as an operating lease. In August
2000, the facility was sold to a party unrelated to Escalon. Rent expense was
approximately $24,000 in fiscal 2000.

(10)  RETIREMENT PLAN

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

        On January 14, 2000, the Company acquired Sonomed, Inc. Sonomed adopted
a 401(k) profit sharing plan which became effective on January 1, 1993. This
plan has continued subsequent to the acquisition and is available only to
Sonomed employees. Under the terms of the plan, which covers all employees who
qualify under certain age and length of service requirements, the Company makes
non-elective contributions on behalf of each participant eligible to share in
matching contributions for the plan year. The Company's matching contribution is
equal to 50% of such participant's voluntary employee contributions, up to a
maximum of 10% of each employee's compensation. The Company's contribution for
the year ended June 30, 2000 was $10,008.

(11)  LICENSE OF INTELLECTUAL LASER PROPERTIES

        In October 1997, the Company licensed its intellectual laser properties
to IntraLase in exchange for an initial 25% equity interest in IntraLase. As a
result of raising money from outside investors, as of June 30, 2000, the
Company's interest has been diluted to 2.45%. Escalon is entitled to a 2.5%
royalty on future product sales which are based on the Company's patented
technology; a 1.5% royalty on product sales not dependent on the Company's
technology; and an annual license fee of $5,000 and $10,000 in 1999 and 2000,
respectively, and $15,000 in 2001 and each year thereafter during the term of
the license. The license fee may be credited in full against all royalties
otherwise due to be paid to the Company. Also contributed to the venture were
the Company's laser inventory, equipment and related furniture having a net book
value of $0. In December 1999, IntraLase received its first 510(k) approval from
the FDA

(12)  ACQUISITION OF RADIANCE BUSINESS UNIT

        On January 21, 1999, the Company acquired substantially all of the
assets used exclusively in Radiance's Vascular Access Business Unit, which uses
doppler technology to aid medical personnel in locating difficult arteries and
veins. This business combination was accounted for as a purchase. The results of
operations for this business unit are included in the accompanying financial
statements since the date of the acquisition. The total cost of the acquisition
was $2,104,442, which exceeded the fair value of the net assets of Radiance by
$1,086,110. The excess is being amortized on a straight-line basis over a
fifteen-year period.

        In addition, the Company is obligated to pay Radiance minimum royalties,
based upon product sales, of $300,000 per year for a five-year period.

(13)  SALE OF BETADINE PRODUCT LINE

        In the third quarter of fiscal 1999, the Company sold its license and
distribution rights along with the remaining inventory of Betadine. The sale
resulted in a $879,000 gain after writing off the remaining net book value of
license and distribution rights, goodwill, and inventory associated with that
product line. Betadine had historically accounted for approximately 15% of
Escalon's sales revenues.




                                      F-17
<PAGE>   39
(14)  SALE OF ADATOSIL PRODUCT LINE

        In the first quarter of fiscal 2000, the Company received $2,117,000
from the sale 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 will also continue to receive additional consideration
based on future sales of AdatoSil (R) Silicone Oil over the next four years.

(15)  ACQUISITION OF SONOMED, INC.

        On January 14, 2000, the Company purchased all of the outstanding
capital stock of Sonomed, Inc. ("Sonomed"), a privately held manufacturer and
marketer of Ophthalmic ultrasound diagnostic devices. This business combination
was accounted for as a purchase. The total cost of the acquisition (net of cash
acquired) was $12,250,540, $11,148,826 was allocated to proprietary rights and
intangible assets, including: $7,700,000 to customer lists, $2,300,000 to
trademarks and trade names and $1,148,826 to goodwill. The intangible assets are
being amortized on a straight-line basis over a fifteen-year period.

        In addition, the Company entered into a three-year employment agreement
with the president of Sonomed, which provides for a $175,000 annual salary (plus
cost of living adjustments). The Company also issued key employees of Sonomed
incentive stock options exercisable for the purchase of 330,000 shares of the
Company's Common Stock and agreed to make available to key employees of Sonomed,
a bonus program of at least three percent of Sonomed's net quarterly sales for a
period of three years.

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


                         PRO FORMA RESULTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                   FOR THE YEARS ENDED JUNE 30,
                                                     1999               2000
                                                     ----               ----
<S>                                               <C>                <C>
Revenues                                          $14,728,368        $10,553,616
Net Income                                          2,956,833            136,164

Basic net income per share                        $      0.67        $      0.04
Diluted net income per share                      $      0.66        $      0.04

Weighted average shares - basic                     3,114,823          3,242,184
Weighted average shares - diluted                   3,150,721          3,254,250
</TABLE>



(16)  SEGMENTAL REPORTING

        In 2000 the Company's operations are classified into three principal
reportable segments that provide different products or services. Separate
management of each segment is required because each business unit is subject to
different marketing, production, and technology strategies.




                                      F-18
<PAGE>   40
                               Reportable Segments
                                (in $ thousands)


<TABLE>
<CAPTION>
                                    Medical      Vascular     Sonomed         Other     Total
                                    -------      --------     -------         -----     -----
<S>                                  <C>          <C>         <C>             <C>      <C>
Net sales revenue                    1,789        2,345        2,536            0       6,670
Interest income                                                                           149
Interest expense                                                                         (576)
Gain on sale of
 of Silicone oil                                                                        1,864
Equity in loss of                                                                         (33)
  unconsolidated joint venture
Income (loss) before taxes             (66)        (619)        (178)           0        (863)
Depreciation and
  amortization                         192          120          355            0         667
Assets                               1,746        2,472       12,394          233      16,845
Expenditure for long
  lived assets                          61           26           18            0         105
</TABLE>


        In fiscal 2000, Medical derived the majority of its revenues from the
sales of Silicone Oil, ISPAN(TM) gas products and disposable products. The
rights to Silicone Oil were sold during fiscal 2000 to help finance the
acquisition of Sonomed. Vascular derives the majority of its revenues from the
sales of Smartneedles and PD Access needles, both of which are used by personnel
in the medical field to aid in locating difficult arteries and veins. Sonomed
derives the majority of its revenues from the sales of A-Scans, B-Scans and
pachymeters, which are ultrasound systems used for diagnostic or biometric
applications in ophthalmology.

        In fiscal 2000, the Company did not have any customers from which
greater than 10% of consolidated net revenues were derived. Of the external
revenues reported above, $100,274, $161,750 and $1,258,668 were derived
internationally in Medical, Vascular and Sonomed, respectively.

        The company operated only in the medical segment in 1998. The vascular
product segment was begun in 1999 but did not contribute significantly to
operations.


(17)  LITIGATION

        As previously disclosed in reports filed with the Securities and
Exchange Commission, on or about June 8, 1995, a purported class action
complaint captioned George Kozloski v. Intelligent Surgical Lasers, Inc., et
al., 95 Civ. 4299, was filed in the U.S. District Court for the Southern
District of New York as a "related action" to In Re Blech Securities Litigation
(a litigation matter which the Company is no longer party to). The plaintiff
purports to represent a class of all purchasers of the Company's stock from
November 17, 1993, to and including September 21, 1994. The complaint alleges
that the Company, together with certain of its officers and directors, David
Blech and David D. Blech & Co., Inc., issued a false and misleading prospectus
in November 1993 in violation of Sections 11, 12 and 15 of the Securities Act of
1933. The complaint also asserts claims under Section 10(b) of the Securities
Exchange Act of 1934 and common law. Actual and punitive damages in an
unspecified amount are sought, as well as a constructive trust over the proceeds
from the sale of stock pursuant to the offering.

        On June 6, 1996, the court denied a motion by the Company and the named
officers and directors to dismiss the Kozloski complaint and, on July 22, 1996,
the Company Defendants filed an answer to the complaint denying all allegations
of wrongdoing and asserting various affirmative defenses.

In an effort to curtail its legal expenses related to this litigation, while
continuing to deny any wrongdoing, the Company has reached an agreement, subject
to final court approval, to settle this action on its behalf and on behalf of
its former and present officers and directors, for $500,000. The Company's
directors and officers insurance carrier has agreed to fund a significant
portion of the settlement amount. Both the Company and their insurance carrier
have deposited such funds in an escrow account.




                                      F-19