<PAGE>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C.

                                   ----------

                                    FORM 10-K

[X]  Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2005.

[ ]  Transitional report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 for the transitional period from ________ to ________.

                         Commission File Number 0-20127

                                   ----------

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

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<S>                                                       <C>
          PENNSYLVANIA                                          33-0272839
(State or other jurisdiction of                               I.R.S. Employer
 Incorporation or organization)                           Identification Number)
</TABLE>

              565 EAST SWEDESFORD ROAD, SUITE 200, WAYNE, PA 19087
          (Address of principal executive offices, including zip code)

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

          Securities registered pursuant to Section 12(b) of Act: NONE

Securities registered pursuant to Section 12(g) of the Act: 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 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 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 the 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. [ ]

     Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

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

     At December 31, 2004, the aggregate market value of the shares of Common
Stock held by the Registrant's nonaffiliates was $50,784,402 (based on the last
sales price of the Registrant's Common Stock on the Nasdaq SmallCap market on
such date).

     At September 20, 2005, 5,963,477 shares of the Registrant's Common Stock
were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Registrant's proxy statement to be filed in connection with its 2005 Annual
Meeting of Shareholders incorporated by reference in Part III, Items 10, 11, 12
and 14.


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<PAGE>
                              ESCALON MEDICAL CORP.
                           ANNUAL REPORT ON FORM 10-K
                     FOR THE FISCAL YEAR ENDED JUNE 30, 2005

                                TABLE OF CONTENTS

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                                  PART I

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

                                 PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder
           Matters and Issuer Purchases of Equity Securities                 18
Item 6.    Selected Financial Data                                           19
Item 7.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                         19
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk        31
Item 8.    Financial Statements and Supplementary Data                       32
Item 9.    Changes in an Disagreements with Accountants on Accounting and
           Financial Disclosure                                              32
Item 9A.   Controls and Procedures                                           32
Item 9B.   Other Information                                                 32

                                 PART III

Item 10.   Directors and Executive Officers of the Registrant                32
Item 11.   Executive Compensation                                            33
Item 12.   Security Ownership of Certain Beneficial Owners and Management
           and Related Stockholder Matters                                   33
Item 13.   Certain Relationships and Related Transactions                    33
Item 14.   Principal Accountant Fees and Services                            33

                                 PART IV

Item 15.   Exhibits and Financial Statement Schedules                        33
</TABLE>


                                        2
<PAGE>
                                     PART I

ITEM 1. BUSINESS

COMPANY OVERVIEW

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

     In October 1997, the Company licensed its intellectual laser property to
IntraLase Corp. ("IntraLase"), in return for an equity interest and future
royalties on sales of products. IntraLase undertook the responsibility for
funding and developing the laser technology through to commercialization.
IntraLase began selling products related to the laser technology during fiscal
2002 and announced its initial public offering of its common stock in October
2004. See Note 9 to Consolidated Financial Statements for further information.
The Company is in dispute with IntraLase over royalty payments owed to the
Company. See Part I, Item 3 - Legal Proceedings, and the Notes to Consolidated
Financial Statements for further information.

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

DREW BUSINESS

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

     DIABETES

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

     HEMATOLOGY

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

SONOMED BUSINESS

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


                                        3
<PAGE>
     A-SCANS

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

     B-SCANS

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

     PACHYMETERS

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

     UBM

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

VASCULAR BUSINESS

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

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

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

MEDICAL/TREK/EMI BUSINESS

     Medical/Trek/EMI develops, manufactures and distributes ophthalmic surgical
products under the Escalon Medical Corp. and/or Trek Medical Products names.
Vitreoretinal ophthalmic surgeons primarily utilize the products. EMI markets a
CFA (Color/Fluorescein Angiography) digital imaging system, designed
specifically for ophthalmology. This diagnostic tool, ideal for use in detecting
retinal problems in diabetic and elderly patients, provides a high-resolution
image, far superior to conventional film in image quality, processing and
capture. The instant image display provides users with the necessary clinical
information that allows treatment to be performed while the patient is still in
the office.


                                        4
<PAGE>
     ADATOSIL(R) 5000 SILICONE OIL ("SILICONE OIL")

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

     ISPAN INTRAOCULAR GASES

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

     VISCOUS FLUID TRANSFER SYSTEMS

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

     FIBER OPTIC LIGHT SOURCES

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

     CFA CAMERA BACK

     The images furnished by the CFA camera system provide a very high level of
detail. The camera back is being marketed to medical institutions, educational
institutions and ophthalmologists for use in connection with the diagnosis of
retinal disorders.

PHARMACEUTICAL BUSINESS

     The Company obtained the license and distribution rights for
Povidone-Iodine 2.5% solution from Harbor-UCLA Medical Center. Povidone-Iodine
2.5% solution is a broad-spectrum anti-microbial intended to prevent ophthalmia
neonatorum in newborns. The product required further development before
achieving FDA approval. Having exhausted all partnering possibilities, during
fiscal 2003 the Company decided that further expeditures on this project were
not in the shareholders' best interest, and the project was abandoned. The
decision resulted in the Company's taking a charge of $196,000, which included
the write-off of the remaining net book value of the license and distribution
rights subject to normal amortization.

RESEARCH AND DEVELOPMENT

     Escalon conducts development of medical devices for the diagnosis and
monitoring of medical disorders in the areas of diabetes, cardiovascular
diseases and hematology at the Company's Dallas, Texas, Oxford, Connecticut and
Barrow-in-Furness, United Kingdom facilities. Escalon conducts medical device
and vascular access product development at its New Berlin, Wisconsin facility
located near Milwaukee. The development of ultrasound ophthalmic equipment is
performed at the Company's Lake Success, New York facility on Long Island.
Company-sponsored research and development expenditures for the fiscal years
ended June 30, 2005, 2004 and 2003 were $1,892,706, $776,496 and $780,333,
respectively.


                                        5
<PAGE>
MANUFACTURING AND DISTRIBUTION

     The Company leases an aggregate of 69,000 square feet of space at its
facilities in Texas, Connecticut and the United Kingdom. These sites are
currently used for engineering, product design and development and product
assembly. All of the Company's medical devices and consumables for the diagnosis
and monitoring of medical disorders in the areas of diabetes, cardiovascular
diseases and hematology are distributed from the Company's Dallas, Texas,
Oxford, Connecticut and Barrow-in-Furness, United Kingdom facilities.

     Escalon leases 13,500 square feet of space in New Berlin, Wisconsin, near
Milwaukee, for its surgical products and vascular access operations. The
facility is currently used for engineering, product design and development,
manufacturing and product assembly. The Company subcontracts component
manufacture, assembly and sterilization to various vendors. The New Berlin
manufacturing facility includes a class 10,000 clean room. A class 10,000 clean
room is a controlled environment for producing devices while avoiding any
significant contaminants. The cleanliness provided by the clean room exceeds the
requirements of the FDA. All of the Company's ophthalmic surgical products and
vascular access products are distributed from the Company's Wisconsin facility.

     The Company designs, develops and services its ultrasound ophthalmic
products at its facility in Lake Success, New York. The Company relocated its
New York operations to a new 11,000 square foot facility in September 2004. The
Company has achieved ISO9001 certification at all of its manufacturing
facilities for all medical devices, ultrasound devices and consumables the
Company produces. ISO9001 requires an implemented quality system that applies to
product design. These certifications can be obtained only after a complete audit
of a company's quality system by an independent outside auditor. These
certifications require that facilities undergo periodic reexamination. European
Community ("CE") certification has been obtained for disposable delivery
systems, fiber optic light probes, medical devices and consumables for the
diagnosis and monitoring of medical disorders in the areas of diabetes,
cardiovascular diseases and hematology, vascular access products and certain
ultrasound models.

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

GOVERNMENTAL REGULATIONS

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

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

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

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

MARKETING AND SALES


                                        6
<PAGE>
     The Drew business unit sells its products through internal sales and
marketing employees located in the United States and in the United Kingdom as
well as through a large network of distributors, both domestic and
international. The Sonomed product line is sold through internal sales employees
located in the United States as well as independent sales representatives in
Europe, to a large network of distributors and directly to medical institutions,
both domestically and abroad. Vascular business unit products are marketed
domestically through internal sales and marketing employees located in the
United States as well as through an independent sales representative in Europe
and a network of domestic and foreign distributors that are managed by the
Company's sales team. The Medical/Trek/EMI business unit sells its ophthalmic
devices and instruments directly to end users through internal sales and
marketing employees located at the Company's Wisconsin facility. Sales are
primarily made to teaching institutions, key hospitals and eye surgery centers
focusing primarily on physicians and operating room personnel performing
vitreoretinal surgery. The CFA product line is sold through independent sales
representatives.

SERVICE AND SUPPORT

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

THIRD-PARTY REIMBURSEMENT

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

PATENTS, TRADEMARKS AND LICENSES

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

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

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

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


                                        7
<PAGE>
-    The Company licensed its ultrafast laser system technology to IntraLase
     Corp. The material terms of the license of the Company's laser patents to
     IntraLase, which expires in 2013, provide that in exchange for the use of
     the Company's licensed laser patents, Escalon will receive a 2.5% royalty
     on product sales that are based on the licensed laser patents, subject to
     deductions for royalties payable to third parties up to a maximum of 50% of
     royalties otherwise due and payable to the Company and a 1.5% royalty on
     product sales that are not based on the licensed laser patents. The Company
     receives a minimum annual license fee of $15,000 per year during the term
     of the license that is offset against the royalty payments. The material
     termination provisions of the license of the laser technology are as
     follows:

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

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

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

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

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

     See the Notes to the Consolidated Financial Statements for a description of
the Company's legal proceedings with IntraLase.

COMPETITION

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

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

     Sonomed designs and manufactures ophthalmic ultrasound products: A-Scans,
pachymeters, B-Scans and UBMs. The A-Scans and pachymeters furnish internal
measurements of the eye and B-Scans provide an image of the rear of the eye. A
UBM is a high frequency / high resolution ultrasound device, designed to provide
highly detailed information of the anterior segment of the eye. Sonomed's
principal competitors are Alcon Laboratories, Inc, Quantel, Inc. and Accutome,
Inc. Management believes that the Company is in a market leadership position.
Sonomed has had a leading presence in the ophthalmic ultrasound industry for
over 30 years. Management believes that this has helped the Company build a
reputation as a long-standing operation that provides a quality product, which
has enabled the Company to establish effective distribution coverage within the
United States market. The Company seeks to preserve its position in the market
through continued product enhancement. Various competitors offering similar
products at a lower price could threaten Sonomed's market position. The
development of laser technologies for ophthalmic biometrics and imaging may also
diminish the Company's market position. This equipment can be used instead of
ultrasound equipment in most, but not all, patients. Such equipment, however, is
more expensive.


                                        8
<PAGE>
     The Medical/Trek/EMI business sells a broad range of ophthalmic surgical
and diagnostic products. The more significant products are ISPAN(R) gases and
delivery systems. Medical/Trek/EMI also manufactures various ophthalmic surgical
products for major ophthalmic companies to be sold under their names. To remain
competitive, the Company needs to maintain a low cost operation. There are
numerous other companies that can provide this manufacturing service. There are
a variety of other devices that directly compete with the camera back marketed
by Medical/Trek/EMI.

     The Vascular access product line is comprised of disposable devices, and
currently Vascular has no direct competition. However, a significantly higher
priced non-disposable device that facilitates vascular access is currently being
marketed. Vascular produces the only device that can be accommodated within a
standard needle for assisting medical practitioners in gaining access to a
vessel in the human vascular system. There are no similar devices in the market
that enable medical practitioners in gaining access using their normal
procedures. The only similar product utilizes a separate ultrasound monitor, but
no disposables are utilized. When using the competing device, medical
practitioners need to look at the monitor while advancing the needle into the
patient. The perceived disadvantage of the Company's vascular product is that
the retail price is substantially greater than the cost of a traditional needle.

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

HUMAN RESOURCES

     As of June 30, 2005, the Company employed 176 full-time employees and four
part-time employees. 87 of the Company's employees are employed in
manufacturing, 43 are employed in general and administrative positions, 36 are
employed in sales and marketing and 14 are employed in research and development.
Escalon's employees are not covered by a collective bargaining agreement, and
the Company considers its relationship with its employees to be good.

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

     Certain statements contained in, or incorporated by reference in, this
Annual Report on Form 10-K are forward-looking statements, made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995,
which provide current expectations or forecasts of future events. Such
statements can be identified by use of terminology such as "anticipate,"
believe," "could," "estimate," "expect," "forecast," "intend," "may," "plan,"
"possible," "project," "should," "will," and similar words or expressions. The
Company's forward-looking statements include certain information relating to
general business strategy, growth strategies, financial results, liquidity,
product development, the introduction of new products, the potential markets and
uses for the Company's products, the Company's regulatory filings with the FDA,
acquisitions, the development of joint venture opportunities, the loss of
revenue due to the expiration or termination of certain agreements, the effect
of competition on the structure of the markets in which the Company competes and
defending the Company in litigation matters. The reader must carefully consider
forward-looking statements and understand that such statements involve a variety
of risks and uncertainties, known and unknown, and may be affected by
assumptions that fail to materialize as anticipated. Consequently, no
forward-looking statement can be guaranteed, and actual results may vary
materially. It is not possible to foresee or identify all factors affecting the
Company's forward-looking statements, and the reader therefore should not
consider the following list of such factors to be an exhaustive statement of all
risks, uncertainties or potentially inaccurate assumptions.

     The Company cautions the reader to consider carefully the following factors
as well as the specific factors discussed with each specific forward-looking
statement in this annual report and in the Company's other filings with the
Securities and Exchange Commission ("SEC"). In some cases, these factors have
impacted, and in the future (together with other unknown factors) could impact,
the Company's ability to implement the Company's business strategy and may cause
actual results to differ materially from those


                                        9
<PAGE>
contemplated by such forward-looking statements. No assurance can be made that
any expectations, estimate or projection contained in a forward-looking
statement can be achieved.

     The Company also cautions the reader that forward-looking statements speak
only as of the date made. The Company undertakes no obligation to update any
forward-looking statement, but investors are advised to consult any further
disclosures by the Company on this subject in the Company's filings with the
SEC, especially on Forms 10-K, 10-Q and 8-K, in which the Company discusses in
more detail various important factors that could cause actual results to differ
from expected or historical results. Although it is not possible to create a
comprehensive list of all such factors that may cause actual results to differ
from the Company's forward-looking statements, the most important factors
include the following:

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

     In the normal course of business, the Company engages in discussions with
third parties regarding possible acquisitions, strategic alliances, joint
ventures and divestitures. As a result of any such transactions, the Company's
financial results may differ from the investment community's expectations in a
given quarter. In addition, acquisitions and alliances may require the Company
to integrate a different Company culture, management team, business
infrastructure, accounting systems and financial reporting systems, although
there is no assurance that any such acquisitions or alliances will occur. The
Company may have difficulty developing, manufacturing and marketing the products
of a newly acquired company in a way that enhances the performance of the
Company's combined businesses or product lines to realize the value from
expected synergies. Depending on the size and complexity of an acquisition, the
Company's successful integration of the entity depends on a variety of factors
including the retention of key employees and the management of facilities and
employees in separate geographical areas. These efforts require varying levels
of management resources, which may divert the Company's attention from other
business operations. The Company acquired Drew during the first quarter of
fiscal 2005. Drew does not have a history of producing positive operating cash
flows and, as a result, at the time of acquisition, was operating under
financial constraints and was under-capitalized. Drew is expected to negatively
impact the Company's financial results in the short-term. If the Company does
not realize the expected benefits or synergies of such transactions, the
Company's consolidated financial position, results of operations and stock price
could be negatively impacted. Also, the Company's results could be adversely
impacted because of acquisition-related costs, amortization costs for certain
intangible assets and impairment losses related to goodwill in connection with
such transactions.

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

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

     THE COMPANY NO LONGER RECEIVES REVENUE FROM THE SALE OF SILICONE OIL BY
     BAUSCH & LOMB. PAYMENTS CEASED EFFECTIVE AUGUST 12, 2005.

     The Company has received 5.52 % and 13.18% of its net revenue during the
fiscal years ended June 30, 2005 and 2004, respectively, from Bausch & Lomb's
sales of Silicone Oil. The Company was entitled to receive this revenue from
Bausch & Lomb, in varying amounts, through August 12, 2005, and is no longer
receiving any revenue related to sales of Silicone Oil from Bausch & Lomb. The
Company's agreement with Bausch & Lomb, which commenced on August 13, 2000, was
structured so that the Company received consideration from Bausch & Lomb based
on its adjusted gross profit from its sales of Silicone Oil on a quarterly
basis. The consideration was subject to a factor, which declined according to
the following schedule:


                                       10
<PAGE>
<TABLE>
<S>                       <C>
From 8/13/00 to 8/12/01   100%
From 8/13/01 to 8/12/02    82%
From 8/13/02 to 8/12/03    72%
From 8/13/03 to 8/12/04    64%
From 8/13/04 to 8/12/05    45%
</TABLE>

     The revenue associated with the sale of Silicone Oil by Bausch & Lomb had
no associated expense and consequently provided a gross margin of 100%. The
elimination of this revenue will have a negative impact on future gross margin.

     THE COMPANY'S RESULTS FLUCTUATE FROM QUARTER TO QUARTER.

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

-    Acquisitions, such as Drew, and subsequent integration of the acquired
     company, although there is no assurance that further acquisitions will
     occur;

-    The timing and expense of new product introductions by the Company or its
     competitors, although there is no assurance that any new products will be
     successfully developed or gain market acceptance;

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

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

-    Fluctuations in royalty income;

-    The gain or loss of significant customers;

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

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

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

-    Litigation expense.

     The Company sets its spending levels in advance of each quarter based, in
part, on the Company's expectations of product orders and shipments during that
quarter. A shortfall in revenue, therefore, in any particular quarter as
compared to the Company's plan could have a material adverse impact on the
Company's results of operations and cash flows. Also, the Company's quarterly
results could fluctuate due to general market conditions in the healthcare
industry or global economy generally, or market volatility unrelated to the
Company's business and operating results.

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

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

-    The price of products;

-    The receipt of regulatory approvals for multiple indications;

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

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

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

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

     The FDA and similar healthcare regulatory authorities in foreign countries
extensively regulate the Company's activity. The Company must obtain either
510(K) clearances or pre-market approvals and new


                                       11
<PAGE>
drug application approvals prior to marketing a new product in the United
States. Foreign regulation also requires that the Company obtain other approvals
from foreign government agencies prior to the sale of products in those
countries. Also, the Company may be required to obtain FDA approval before
exporting a product or device that has not received FDA marketing clearance or
approval.

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

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

     Escalon received CE approval on several of the Company's products that
allows the Company to sell the products in the countries comprising the European
community. In addition to the CE mark, however, some foreign countries may
require separate individual foreign regulatory clearances. Escalon cannot assure
that the Company will be able to obtain regulatory clearances for other products
in the United States or foreign markets.

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

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

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

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

-    Properly identify customer needs;

-    Innovate and develop new technologies, services and applications;

-    Establish adequate product distribution coverage;

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

-    Protect the Company's intellectual property;

-    Successfully commercialize new technologies in a timely manner;

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

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

-    Price the Company's products competitively;


                                       12
<PAGE>
-    Anticipate competitors' announcements of new products, services or
     technological innovations; and

-    Anticipate general market and economic conditions.

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

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

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

     If a court determines that any of the Company's products infringes,
directly or indirectly, on a patent in a particular market, the court may enjoin
the Company from making, using or selling the product. Furthermore, the Company
may be required to pay damages or obtain a royalty-bearing license, if
available, on acceptable terms.

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

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

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

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


                                       13
<PAGE>
     FUTURE LEGISLATION OR CHANGES IN GOVERNMENT PROGRAMS MAY ADVERSELY IMPACT
     THE MARKET FOR THE COMPANY'S PRODUCTS.

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

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

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

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

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

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

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

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

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

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

-    Announcements of technological innovations;


                                       14
<PAGE>
-    Changes in marketing, product pricing and sales strategies or new products
     by the Company's competitors;

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

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

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

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

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

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

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

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

ITEM 2. PROPERTIES

     The Company currently leases an aggregate of 93,300 square feet of space
for its (i) corporate offices in Wayne, Pennsylvania, (ii) administrative office
and manufacturing facility in Barrow-in-Furness, United Kingdom, (ii)
administrative office and manufacturing facility in Dallas, Texas, (iii)
manufacturing facility in Lake Success, New York, (iv) manufacturing facility in
New Berlin, Wisconsin, and (v) manufacturing facility in Oxford, Connecticut.
The corporate offices in Pennsylvania cover approximately 7,100 square feet and
expire in April 2008. The facility in the United Kingdom covers approximately
and 23,000 square feet and consists of three buildings whose leases expire in
December 2005, September 2006 and August 2007. The facility in Texas covers
approximately 34,000 square feet and consists of three buildings whose leases
expire in March 2007. The New York facility lease, covering approximately 10,900
square feet, expires in October 2011. The Wisconsin lease, covering
approximately 13,500 square feet of space expires in April 2007. The Connecticut
facility lease consists of two separate areas within the same building. The
leases cover approximately 12,000 square feet and expire in January 2007 and
2008. Annual rent under all of the Company's lease arrangements was
approximately $772,000.

ITEM 3. LEGAL PROCEEDINGS

     INTRALASE CORP. LEGAL PROCEEDINGS

     In October 1997, Escalon and IntraLase entered into a License Agreement
wherein Escalon granted IntraLase the exclusive right to use Escalon's
intellectual laser properties, including patented and non-patented technology,
in exchange for an equity interest in IntraLase as well as royalties based on a
percentage of net sales of future products. The shares of common stock were
restricted for sale until April


                                       15
<PAGE>
6, 2005. See Management's Discussion and Analysis of Financial Condition and
Results of Operations and the Notes to Consolidated Financial Statements for
discussions on the Company's sales of IntraLase common stock.

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

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

     Further, the Court agreed with Escalon in finding that royalties are
"monies" and the default in the payment of royalties must be remedied within 15
days of written notice of the default. The Court rejected IntraLase's position
concerning the effective date of the Amended and Restated License Agreement
holding that the effective date of such Agreement was dated October 17, 2000.
IntraLase has appealed the judgment to the Ninth Circuit Court of Appeals.
Currently, briefing is scheduled to occur in February/March, 2006.

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

     In May, 2005, IntraLase also filed a second suit against Escalon in the
Central District of California ("Second Action"), again for declaratory relief
as well as for reformation of the License Agreement. In this action, IntraLase
has asked the Court to, among other things, validate its interpretation of
certain other terms of the License Agreement relating to the amount of royalties
owed to Escalon and a declaration concerning Escalon's audit rights under the
License Agreement. Escalon filed a motion to dismiss the Second Action on
jurisdictional and substantive grounds. The motion has been fully briefed and is
currently under consideration by the Court for the Central District of
California.

     On May 15, 2005, Escalon, not having been served with IntraLase's Second
Action, filed a Complaint against IntraLase in the Delaware Court of Chancery
for, among other things, breach of contract, breach of fiduciary duty arising
out of IntraLase's bad faith conduct under, and multiple breaches of, the
License Agreement ("Delaware Action"). Escalon seeks declaratory relief,
specified damages, and specific performance of its rights under the License
Agreement, including its express right under the License Agreement to have
independent certified accountants audit the books and records of IntraLase to
verify and compute payments due Escalon.

     On June 3, 2005, IntraLase, after having been served with Escalon's
Complaint, filed its First Amended Complaint in the Second Action adding new
matters that had already been raised by Escalon in its Delaware Action.
IntraLase also filed a motion to dismiss Escalon's Delaware Action. The parties


                                       16
<PAGE>
agreed to postpone briefing on IntraLase's motion until after the California
Court has ruled on Escalon's motion to dismiss the Second Action.

     Separately, on April 22, 2005, Escalon, as record holder of common stock of
IntraLase, made a formal written demand to inspect certain of IntraLase's books
and records pursuant to Section 220 of the Delaware General Corporation Law.
IntraLase rejected Escalon's demand. Escalon recently filed an action in the
Delaware Court of Chancery against IntraLase seeking to enforce its shareholder
rights to inspect IntraLase's books and records.

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

     DREW LEGAL PROCEEDINGS

          CARVER LITIGATION

     On December 17, 2002, Edward Carver, David DeCava and Diane Carver, former
principal shareholders of CDC Technologies, Inc., filed a complaint in the State
of Connecticut, Superior Court, Judicial District of Waterbury at Waterbury
against CDC Acquisition, IV Diagnostics and certain other principal shareholders
of CDC Technologies seeking a total of approximately $420,000 for, among other
things, repayment of loans made to CDC Technologies, payment of past wages and
reimbursement of business expenses. The Plaintiffs' claims arose out of a
certain asset purchase for stock transaction in which CDC Acquisition, a wholly
owned subsidiary of Drew, acquired the assets of CDC Technologies and IV
Diagnostics. CDC Acquisition and IV Diagnostics, also a subsidiary of Drew,
asserted counterclaims against the plaintiffs for, among other things, breach of
fiduciary duty, unfair trade and conversion. In addition, CDC Acquisition and IV
Diagnostics asserted cross-claims against its co-defendants for indemnification
pursuant to the transaction agreements. A bench trial was held in June, 2005. In
August, 2005 the Court rendered a decision resulting in the Court's award of
only $76,000 to Plaintiffs. Judgment has not yet been entered on the award. CDC
Acquisition and IV Diagnostics have filed a motion for reconsideration of
certain issues ruled upon by the Court. Further, CDC Acquisition and IV
Diagnostics are presently negotiating with co-defendants over the companies'
indemnification claims.

     On December 30, 2002, Source One, a distributor of CDC Technologies, Inc.
filed suit in state court in Minnesota, later removed to the United States
District Court in Minnesota, against CDC Technologies, Edward Carver and CDC
Acquisition, Inc. and IV Diagnostics, as successors in interest to CDC
Technologies. CDC Acquisition and IV Diagnostics asserted cross-claims against
Carver for indemnification. The court granted summary judgment to the plaintiff
against defendants and awarded plaintiff approximately $185,000 plus interest
and costs. The Court also found Carver liable to CDC Acquisition for
indemnification. Plaintiff agreed to accept $140,000 from CDC Acquisition in
settlement of its claims. CDC Acquisition settled its indemnification claim
against Carver for $75,000.

     The $140,000 settlement, $76,000 award and $75,000 indemnification referred
to above have been recorded by the Company during fiscal 2005 (see note 9 to the
notes to the consolidated financial statements). The Company does not believe
that these matters have, had or are likely to have a material adverse impact on
the Company's business, financial condition or future results of operations.

     OTHER LEGAL PROCEEDINGS

     Escalon, from time to time is involved in various legal proceedings and
disputes that arise in the normal course of business. These matters have
included intellectual property disputes, contract disputes, employment disputes,
and other matters. The Company does not believe that the resolution of any of
these


                                       17
<PAGE>
matters has had or is likely to have a material adverse impact on the Company's
business, financial condition or results of operations.

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

     None.

                                    PART II.

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

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30, 2004     HIGH     LOW
-------------------------------    ------   -----
<S>                                <C>      <C>
Quarter ended September 30, 2003   $ 6.60   $3.00
Quarter ended December 31, 2003    $ 8.10   $5.47
Quarter ended March 31, 2004       $23.85   $6.33
Quarter ended June 30, 2004        $27.49   $8.83
</TABLE>

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

     As of September 20, 2005, there were 1,361 holders of record of the
Company's Common Stock. On September 20, 2005 the closing price of Escalon's
Common Stock as reported by the Nasdaq SmallCap Market was $8.41 per share.

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


                                       18
<PAGE>
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
"Managements Discussion and Analysis of Financial Condition and Results of
Operations" included herein in Item 7 and the financial statements and related
notes thereto included herein in Item 8.

<TABLE>
<CAPTION>
                                                                  FOR THE YEAR ENDED JUNE 30,
                                                        -----------------------------------------------
                                                          2005      2004      2003      2002      2001
                                                        -------   -------   -------   -------   -------
                                                            (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                     <C>       <C>       <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
Product revenue, net                                    $23,864   $12,348   $11,191   $10,293   $ 9,626
Other revenue                                             3,061     2,373     2,175     1,781     2,254
                                                        -------   -------   -------   -------   -------
Total revenue                                            26,925    14,721    13,366    12,074    11,880
Costs and expenses:
   Cost of goods sold                                    13,158     5,476     4,896     4,640     4,297
   Research and development                               1,893       776       780       555       492
   Marketing, general and administrative                 12,556     5,206     5,034     5,097     5,430
   Writedown of license and distribution rights                        --       196        --        --
                                                        -------   -------   -------   -------   -------
Total costs and expenses                                 27,607    11,458    10,906    10,292    10,219
                                                        -------   -------   -------   -------   -------
Income from operations                                     (682)    3,263     2,460     1,782     1,661
                                                        -------   -------   -------   -------   -------
Gain on sale of available for sale securities             3,412        --        --        --        --
Loss from termination of joint venture                       --        --        --       (23)       --
Equity in (loss)/gain of unconsolidated joint venture       (64)       --        --         8       (19)
Interest income                                              69        59         3         2         2
Interest expense                                            (55)     (407)     (638)     (791)   (1,052)
                                                        -------   -------   -------   -------   -------
Income before taxes                                       2,680     2,915     1,825       978       592
Income taxes                                                232       173       112        --        --
                                                        -------   -------   -------   -------   -------
Net income                                              $ 2,448   $ 2,742   $ 1,713   $   978   $   592
                                                        =======   =======   =======   =======   =======
Basic net income per share                              $   .42   $  0.70   $  0.51   $  0.29   $  0.18
                                                        =======   =======   =======   =======   =======
Diluted net income per share                            $   .39   $  0.64   $  0.48   $  0.29   $  0.18
                                                        =======   =======   =======   =======   =======
Weighted average shares - basic used in per share
   computation                                            5,832     3,897     3,365     3,346     3,292
                                                        =======   =======   =======   =======   =======
Weighted average shares - diluted used in per share
   computation                                            6,231     4,304     3,573     3,360     3,308
                                                        =======   =======   =======   =======   =======
</TABLE>

<TABLE>
<CAPTION>
                                                              AT JUNE 30,
                                         ----------------------------------------------------
                                           2005       2004       2003       2002       2001
                                         --------   --------   --------   --------   --------
                                                            (IN THOUSANDS)
<S>                                      <C>        <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
Cash and cash equivalents                $  5,116   $ 12,602   $    298   $    221   $     81
Working capital/(deficit)                  13,613     13,966        889       (240)    (3,004)
Total assets                               40,049     29,457     16,890     16,912     17,798
Long-term debt, net of current portion        392      2,396      4,080      5,191      4,502
Total liabilities                           5,530      5,996      7,951      9,719     11,691
Accumulated deficit                       (32,136)   (34,585)   (37,326)   (39,039)   (40,018)
Total shareholders' equity                 34,519     23,461      8,939      7,193      6,107
</TABLE>

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

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

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

     Escalon operates primarily in four reportable business segments: Drew,
Sonomed, Vascular and Medical/Trek/EMI. Drew is a diagnostics company
specializing in the design, manufacture and distribution of instruments for
blood cell counting and blood analysis. Drew is focused on providing
instrumentation and consumables for the physician office and veterinary office
laboratories. Drew also supplies the reagent and other consumable materials
needed to operate the instruments. Sonomed develops, manufactures and markets
ultrasound systems used for diagnosis or biometric applications in
ophthalmology. Vascular develops, manufactures and markets vascular access
products.


                                       19
<PAGE>
Medical/Trek/EMI develops, manufactures and distributes ophthalmic surgical
products under the Escalon Medical Corp. and/or Trek Medical Products names and
manufactures and markets a digital camera system for ophthalmic fundus
photography. For a more complete description of these businesses and their
products, see Item 1 - Business.

     EXECUTIVE OVERVIEW - FISCAL YEARS ENDED JUNE 30, 2005 AND 2004

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

-    On July 23, 2004, Escalon acquired 67% of the outstanding ordinary shares
     of Drew pursuant to the Company's exchange offer for all of the outstanding
     ordinary shares of Drew, and since that date has acquired all of the Drew
     shares. Drew's revenue during the period from July 24, 2004 through
     June 30, 2005 was $11,294,000, and its operations resulted in a net loss of
     $1,310,000. Prior to the acquisition, Drew's ability to obtain raw
     materials and components was severely restricted due to prolonged liquidity
     constraints. These constraints were pervasive throughout all of Drew's
     locations and affected all aspects of Drew's operations. Escalon's
     operational priorities with respect to Drew have been to stabilize and
     increase Drew's revenue base and to infuse Drew with working capital in the
     areas of manufacturing, sales and marketing and product development in an
     effort to remove the pre-acquisition liquidity constraints.

-    In connection with the acquisition of Drew, the Company issued 900,000
     shares of its Common Stock during the twelve-month period ended June 30,
     2005.

-    During fiscal 2005, the Company paid off all of its non-Drew related term
     debt and line of credit that existed prior to the acquisition of Drew.
     During fiscal 2005, the Company also paid off and terminated the
     outstanding line of credit Drew maintained with a domestic financial
     institution as well as the overdraft line of credit Drew maintained with a
     United Kingdom financial institution. During fiscal 2005, the Company paid
     off debt totaling approximately $6,348,000.

-    During May 2005, the Company sold 191,000 shares of IntraLase common stock
     that had originally been received by the Company in connection with the
     license of its intellectual laser properties to IntraLase in 1997 (see note
     16 in the notes to the consolidated financial statements). The stock was
     sold at $17.9134 per share and yielded net proceeds of $3,411,761 after
     payment of broker commissions and other fees. The net proceeds from the
     sale were recorded as other income in the forth quarter of fiscal 2005.

-    Approximately 98% of the increase in revenues during fiscal 2005 as
     compared to fiscal 2004 is due to the acquisition of Drew. The balance of
     the increase is due to modest increases in sales in all non-Drew business
     units, lead by the Vascular business unit which experienced a 4.1% increase
     in revenues during the period.

-    Other revenue increased $447,000 or 18.8% during fiscal 2005 as compared to
     fiscal 2004. The increase primarily related to an increase in royalty
     payments received from IntraLase. During fiscal 2005, 5.52% of the
     Company's revenue was received from Bausch & Lomb in connection with the
     Silicone Oil product line. The contract for this revenue expired in August
     2005.

-    Approximately 98% of the increase in cost of sales as a percentage of
     revenue during fiscal 2005 as compared to fiscal 2004 is due to the
     acquisition of Drew. Non-drew margins remained relatively consistent at
     44.6% of revenue in fiscal 2005 as compared to 44.4% in fiscal 2004.

-    Approximately 55.8% of the increase in operating expenses in fiscal 2005 as
     compared to fiscal 2004 is due to the acquisition of Drew. Of the remaining
     44.2%, approximately 33% of the increase is related to a one-time
     supplemental retirement benefit awarded to the Company's chairman and CEO
     in June 2005. The balance of the increase relates primarily to an unusually
     high amount of legal and accounting fees primarily related to the Company's
     first quarterly filing with the SEC subsequent to the Drew acquisition,
     Intralase litigation costs, increased auditor's fees in proportion to the
     increase in the Company's size due to the acquisition of Drew and initial
     costs incurred related to compliance with the Sarbanes-Oxley Act of 2002.
     While the Company expects these legal, accounting and compliance


                                       20
<PAGE>
     expenses to impact earnings in the near term, it does not believe that all
     of these expenses will continue in the future at such levels.

-    Interest expense decreased during fiscal 2005 as compared to fiscal 2004.
     The Company paid off several of its debt facilities to several entities in
     advance of their maturity dates. Additionally, the Company reversed accrued
     loan commitment fees as a result of satisfaction of the debt and release by
     the lender of those fees. The fees were originally accrued based on
     contractual terms.

Subsequent Event

     On July 8, 2005, the Escalon sold an additional 58,535 shares of IntraLase
     common stock (see notes 16 and 17 in the notes to the consolidated
     financial statements). The stock was sold at $19.8226 per share and yielded
     net proceeds of $1,157,336 after payment of broker commissions and other
     fees. The net proceeds from the sale will be recorded as other income in
     July 2005.

RESULTS OF OPERATIONS

     FISCAL YEAR ENDED JUNE 30, 2005 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2004

     The following table shows consolidated product revenue by business segment
as well as identifying trends in business segment product revenues for the
fiscal years ended June 30, 2005 and 2004.

<TABLE>
<CAPTION>
                    Fiscal Years Ended June 30,
                   ----------------------------
                     2005      2004    % Change
                   -------   -------   --------
<S>                <C>       <C>       <C>
Product revenue:
Drew               $11,294   $    --    100.00%
Sonomed              7,663     7,597       .87%
Vascular             3,180     3.055      4.09%
Medical/Trek/EMI     1,727     1,696      1.83%
                   -------   -------    ------
                   $23,864   $12,348     93.26%
                   =======   =======    ======
</TABLE>

     Product revenue increased $11,516,000, or 93.26%, to $23,864,000 in fiscal
2005 as compared to $12,348,000 in fiscal 2004. The increase is primarily
attributed to the acquisition of Drew on July 23, 2004. The balance of the
increase was $222,000, or .93%. In the Sonomed business unit, product revenue
increased $67,000,or 0.87% during fiscal 2005. The increase is primarily caused
by an increase in the sales of the Company's EZ AB scan ultrasound systems and
increased export sales, which offset a decrease in demand for the Company's
pachymeter product. Unit sales of the pachymeter decreased by 57% as compared to
fiscal 2004. The domestic market for pachymeters had previously expanded due to
enhanced techniques in glaucoma screening performed by optometrists.
Historically, the typical optometrist had not been a user of the pachymeter.
Domestic demand for the pachymeter returned to historic levels during the fourth
quarter of fiscal 2004 due to market saturation and increased price competition
within the marketplace. In the Vascular business unit, revenue increased
$125,000, or 4.09%, to $3,180,000 during fiscal 2005 as compared to fiscal 2004.
The increase in Vascular product revenue was primarily caused by an increase in
direct sales to end users by the Company's domestic sales team and, to a lesser
extent, increases in the European market. These increases were partially offset
by decreases in revenue from the Company's distributor network. The Company has
terminated its relationship with several of its distributors during the current
fiscal year. In the Medical/Trek/EMI business unit, product revenue increased
$31,000, or 1.83%, to $1,727,000 during 2005 as compared fiscal 2004. The
increase in Medical/Trek/EMI product revenue is primarily attributed to an
approximate $21,000 increase in OEM revenue from Bausch & Lomb.

     Other revenue increased $687,000, or 28.95%, to $3,060,000 during 2005 as
compared to fiscal 2004. The increase is primarily attributed to a $902,000
increase in royalty payments received from


                                       21
<PAGE>
Intralase related to the licensing of the Company's intellectual laser
technology. Intralase royalties increased partially due to a court order
amending Intralase's method of calculating its royalty payments to the Company
(see notes 9 and 11 to the consolidated financial statements). The Company
received $240,000 from Bio-Rad related to an OEM agreement between Bio-Rad and
Drew. While this agreement terminated as of May 15, 2005, the parties have
continued to operate under the terms of the expired agreement pending
negotiation of a potential extension and/or revision. These increases were
partially offset by an $455,000 decrease in royalties received from Bausch &
Lomb in connection with their sales of Silicone Oil. The Company's contract with
Bausch & Lomb called for annual step-downs in the calculation of Silicone Oil
revenue to be received by the Company from 64% from August 13, 2003 to August
12, 2004 to 45% from August 13, 2004 to August 12, 2005. The Company's contract
with Bausch & Lomb ended in August 2005. For fiscal 2005, the step-down under
the Company's contract with Bausch & Lomb caused a $627,000 decrease in Silicone
Oil revenue, which was partially offset by $172,000 of royalties generated from
a higher volume of product sales. The Company does not have knowledge as to what
factors have affected Bausch & Lomb's sales of Silicone Oil. See note 11 of the
notes to the consolidated financial statements for a description of the
step-down provisions under the contract with Bausch & Lomb.

     The following table presents consolidated cost of goods sold by reportable
business segment and as a percentage of related segment product revenues for the
fiscal years ended June 30, 2005 and 2004.

<TABLE>
<CAPTION>
                                Year Ended June 30,
                      ---------------------------------------
                             2005                 2004
                      ------------------   ------------------
                        Dollars      %       Dollars      %
                      ----------   -----   ----------   -----
                          (in                  (in
                      thousands)           thousands)
<S>                   <C>          <C>     <C>          <C>
Cost of goods sold:
Drew                    $ 7,554    66.89%    $   --      0.00%
Sonomed                   3,115    40.65%     3,076     40.49%
Vascular                  1,432    45.03%     1,381     45.20%
Medical/Trek/EMI          1,058    61.26%     1,019     60.04%
                        -------    -----     ------     -----
                        $13,159    55.14%    $5,476     44.35%
                        =======    =====     ======     =====
</TABLE>

     Cost of goods sold totaled $13,159,000 or 55.14% of product revenue for
fiscal 2005 as compared to $5,476,000, or 44.35% of product revenue for fiscal
2004. The increase in cost of goods sold is primarily attributed to the
acquisition of Drew on July 23, 2004. The balance of the increase was $129,000,
and cost of goods sold for entities owned by the Company for all of fiscal 2005
and 2004 increased to 44.59% of product revenue during fiscal 2005, as compared
to 44.35% of product revenue for fiscal 2004.

     Cost of goods sold in the Sonomed business unit totaled $3,115,000 or
40.65% of product revenue in fiscal 2005 as compared to $3,076,000, or 40.49% of
product revenue for fiscal 2004. The primary factor affecting the increase in
cost of goods sold as a percentage of product revenue is an increase in
international sales, where Sonomed generally experiences lower margins.
International sales at the Sonomed business unit increased to approximately 50%
of the unit's sales in fiscal 2005 from approximately 39% in fiscal 2004.
Partially offsetting the lower margins on international sales was a favorable
product mix resulting from higher sales of higher margin products in fiscal
2005. The Company generally experiences lower margins on pachymeters as compared
to EZ-Scans. Cost of goods sold in the Vascular business unit totaled $1,432,000
or 45.03% of product revenue, for fiscal 2005 as compared to $1,381,000 or
45.20% of product revenue for fiscal 2004. The primary factor affecting the
decrease in cost of goods sold as a percentage of product revenue was the
increase in direct sales to end users and corresponding decrease in sales
through the Company's distributor network. The Company traditionally has higher
margins on direct customer sales. Cost of goods sold in the Medical/Trek/EMI
business unit totaled $1,058,000, or 61.26% of product revenue, during fiscal
2005 as compared to $1,019,000 or 60.08% of product revenue, during fiscal 2004.
Fluctuations in Medical/Trek/EMI cost of goods sold primarily emanates from
product mix, which was primarily controlled by market demand. See the executive
overview for further information regarding the operating results of Drew.


                                       22
<PAGE>
     The following table presents consolidated marketing, general and
administrative expenses as well as identifying trends in business segment
marketing, general and administrative expenses for the fiscal years ended June
30, 2005 and 2004.

<TABLE>
<CAPTION>
                                      Year Ended June 30,
                              ----------------------------------
                                 2005         2004      % Change
                              ----------   ----------   --------
                                  (in          (in
                              thousands)   thousands)
<S>                           <C>          <C>          <C>
Marketing, general and
   administrative expenses:
Drew                            $ 4,104      $   --      100.00%
Sonomed                           1,608       1,196       34.45%
Vascular                          1,424       1,353        5.25%
Medical/Trek/EMI                  5,420       2,657      103.99%
                                -------      ------      ------
                                $12,556      $5,206      141.18%
                                =======      ======      ======
</TABLE>

     Marketing, general and administrative expenses increased $7,350,000, or
141.18%, to $12,556,000 during fiscal 2005 as compared $5,206,000 in fiscal
2004. Approximately $4,104,000 or 55.8% of the increase in marketing, general
and administrative expenses was attributed to incremental expenses due to the
acquisition of Drew on July 23, 2004. The balance of the increase in general and
administrative expenses was $3,246,000, or approximately 44.2%.

     Marketing, general and administrative expenses in the Sonomed business unit
increased $412,000, or 34.45%, to $1,608,000 as compared to fiscal 2004. The
increase is due primarily to increased personnel, travel and advertising and
trade show expenses of approximately $300,000 due to the Company's increased
focus on the international market. Also contributing to the increase was an
increase in rent and incidental moving costs of approximately $21,000 related to
the relocation of its corporate offices during fiscal 2005.

     Marketing, general and administrative expenses in the Vascular business
unit increased $71,000, or 5.25%, to $1,424,000 as compared to fiscal 2004. This
increase was due primarily to increased salaries and other personnel related
costs, and increased trade show and sample costs to support the Company's
emphasis on direct sales to end users. Salaries and other personnel-related
expenses increased $71,000 due to increased headcount. Also contributing to the
increase was an increase in bad debts as a result of the termination of
distributors. Partially offsetting these increases was a reduction in royalty
expense. The Company agreed to pay royalties to the seller for a period of five
years following the acquisition its Vascular access division. That five-year
period ended in December 2003.

     Marketing, general and administrative expenses in the Medical/Trek/EMI
business unit increased $2,763,000, or 103.99%, to $5,420,000 as compared to
fiscal 2004. Of the increase, $1,087,000 is due to a one-time supplemental
retirement benefit awarded to the Company's Chairman and CEO in June 2005 (see
note 10 to the consolidated financial statements). In addition, legal,
accounting and investor relations fees increased by $1,163,000 as compared to
fiscal 2004. The increase in legal fees is primarily due to litigation costs
with Intralase, which the Company expects will continue to impact earnings in
the near term (see note 9 to the consolidated financial statements.) and
incremental costs related to the Company's first quarterly filing with the SEC
subsequent to the Drew acquisition. The increase in accounting fees is due to
the Company's first quarterly filing with the SEC subsequent to the Drew
acquisition as well as increased auditor's fees in proportion to the increase in
the Company's size due to the acquisition of Drew on July 23, 2004 and initial
costs incurred related to compliance with the Sarbanes-Oxley Act of 2002. Also
contributing to the increase was an increase in personnel-related expenses
primarily due to increased headcount to support the larger organization and,
higher investor related and insurance costs due to the Drew acquisition. See the
Executive Overview for further information regarding the operations of Drew.

     Research and development expenses increased $1,116,000 or 143.94%, to
$1,893,000 during fiscal 2005 as compared to fiscal 2004. All but approximately
$10,000 of the increase in research and development expenses was attributed to
incremental expenses due to the acquisition of Drew on July 23, 2004.

     Gain on sale of available for sale securities was approximately $3,412,000
in fiscal 2005. The increase was due to the sale of 191,000 shares of IntraLase
common stock in May 2005 (see note 16 in the notes to the consolidated financial
statements).


                                       23
<PAGE>
     Escalon recognized a loss of $64,000 related to its investment in Ocular
Telehealth Management ("OTM") during the fiscal 2005. The share of OTM's loss
recognized by the Company is in direct proportion to the Company's ownership
equity in OTM. OTM began operations during the three-month period ended
September 30, 2004. (See note 14 in the notes to the consolidated financial
statements on related-party transactions for further information regarding OTM).

     Interest income was $69,000 and $59,000 for fiscal 2005 and 2004,
respectively. The increase relates to higher average cash balances in the
current fiscal year.

     Interest expense was $55,000 and $407,000 for the fiscal 2005 and 2004,
respectively. The decrease relates to lower average debt balances in the current
fiscal year as the Company repaid its non-Drew line of credit drawings and term
debt.

     FISCAL YEAR ENDED JUNE 30, 2004 COMPARED TO FISCAL YEAR ENDED JUNE 20, 2003

     The following table presents consolidated product revenues by business
segment as well as identifying trends in business segment product revenues for
the fiscal years ended June 30, 2004 and 2003.

<TABLE>
<CAPTION>
                    Fiscal Year Ended June 30,
                   ----------------------------
                     2004      2003    % Change
                   -------   -------   --------
                     (in thousands)
<S>                <C>       <C>       <C>
PRODUCT REVENUE:
Sonomed            $ 7,596   $ 6,495     16.95%
Vascular             3,055     2,761     10.65%
Medical/Trek         1,448     1,502     -3.60%
EMI                    249       433    -42.49%
                   -------   -------     -----
                   $12,348   $11,191     10.34%
                   =======   =======     =====
</TABLE>

     Product revenue increased $1,157,000, or 10.34%, to $12,348,000 in fiscal
2004 as compared to $11,191,000 in fiscal 2003. Product revenue in the Sonomed
business unit increased $1,101,000, or 16.95%, to $7,596,000. The increase was
attributed to a $336,000 increased in the domestic market, a $324,000 increase
in the Middle East, a $297,000 increase in Europe and a $261,000 increase in
Latin America offset by a $93,000 decrease in Asia and the Pacific Rim. The
increase in the domestic market related to increased demand for the Company's
pachymeter product. The domestic market for pachymeters expanded due to enhanced
techniques in glaucoma screening performed by optometrists. Historically, the
typical optometrist has not been a user of the pachymeter. Domestic demand for
the pachymeter returned to historic levels in the fourth quarter of fiscal 2004.
The increases in the Middle East and Europe were the result of additional sales
and marketing resources and management attention to developing these markets
whereas the increase in Latin America was the result of recovering economies in
South America. Product revenue in the Vascular business unit increased $294,000,
or 10.65%, to $3,055,000. The increase primarily related to increased usage in
the domestic marketplace. Product revenue in the Medical/Trek business unit
decreased $54,000, or 3.60%, to $1,448,000. The decrease primarily related to
decreased market demand for Medical/Trek's products. Product revenue in the EMI
business unit decreased $184,000, or 42.49%, to $249,000.

     Other revenue, which is included in the Medical/Trek business unit,
increased $198,000, or 9.10%, to $2,373,000 in fiscal 2004 as compared to
$2,175,000 in fiscal 2003. The increase related to both a $116,000 increase in
royalty payments received from IntraLase related to the licensing of the
Company's intellectual laser technology and an $83,000 increase in revenue
received from Bausch & Lomb in connection with its sales of Silicone Oil. The
Company's contract with Bausch & Lomb called for annual step-downs in the
calculation of Silicone Oil revenue to be received by the Company. The
step-downs occur during the first quarter of each fiscal year through the
remainder of the contract, which ended in August 2005. For the fiscal year ended
June 30, 2004, the step-down caused a $250,000 decrease in Silicone Oil revenue
that the Company would have otherwise received had the step-down not occurred.
The offsetting $333,000 increase in Silicone Oil revenue was due to market
demand for the product. The Company does not have any further knowledge as to
what factors have impacted Bausch & Lomb's sales of


                                       24
<PAGE>
Silicone Oil. See the Notes to Consolidated Financial Statements for a
description of the step-down provisions under the contract with Bausch & Lomb.

     The following table presents consolidated cost of good sold by reportable
business segment and as a percentage of related segment product revenue for the
fiscal years ended June 30, 2004 and 2003.

<TABLE>
<CAPTION>
                            FISCAL YEAR ENDED JUNE 30,
                      ---------------------------------------
                             2004                 2003
                      ------------------   ------------------
                        Dollars      %       Dollars      %
                      ----------   -----   ----------   -----
                          (in                  (in
                      thousands)           thousands)
<S>                   <C>          <C>     <C>          <C>
COST OF GOODS SOLD:
Sonomed                 $3,076     40.49%    $2,524     38.86%
Vascular                  1381     45.20%      1195     43.28%
Medical/Trek               911     62.91%       961     63.98%
EMI                        108     43.37%       216     49.88%
                        ------     -----     ------     -----
                        $5,476     44.35%    $4,896     43.75%
                        ======     =====     ======     =====
</TABLE>

     Cost of goods sold totaled $5,476,000, or 44.35%, or product revenue for
the fiscal year ended June 30, 2004 as compared to $4,896,000, or 43.75% of
product revenue for the fiscal year ended June 30, 2003. Cost of goods sold in
the Sonomed business unit was $3,076,000, or 40.49% of product revenue for the
fiscal year ended June 30, 2004 as compared to $2,524,000, or 38.86%, of product
revenue for the fiscal year ended June 30, 2003. The slight increase in cost of
goods sold as a percentage of product revenue was primarily caused by an
increase in international sales. Sonomed generally sells its products to
international customers at lower price levels. Cost of goods sold in the
Vascular business unit was $1,381,000, or 45.20%, of product revenue for the
fiscal year ended June 30, 2004 as compared to $1,195,000, or 43.28%, of product
revenue for the fiscal year ended June 30, 2003. The Company began manufacturing
its Doppler-Guided Peripheral I.V. product in the latter part of fiscal 2004.
This product had higher manufacturing costs than the remainder of the vascular
product line. Cost of goods sold in the Medical/Trek business unit totaled
$911,000, or 62.91%, of product revenue for the fiscal year ended June 30, 2004
as compared to $961,000, or 63.98% of product revenue for the fiscal year ended
June 30, 2003. Fluctuations in Medical/Trek cost of goods sold resulted from
product mix changes, which were primarily controlled by market demand. Cost of
goods sold in the EMI business unit was $108,000, or 43.37%, of product revenue
for the fiscal year ended June 300, 2004 as compared to $216,000, or 49.88% of
product revenue for the fiscal year ended June 30, 2003.

     The following table presents consolidated marketing, general and
administrative expenses as well as identifying trends in business segment
marketing, general and administrative expenses for the fiscal years ended June
30, 2004 and 2003.

<TABLE>
<CAPTION>
                                                  FISCAL YEAR ENDED JUNE 30,
                                                  ---------------------------
                                                    2004     2003    %CHANGE
                                                   ------   ------   -------
                                                    (IN THOUSANDS)
<S>                                               <C>       <C>      <C>
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES:
Sonomed                                            $1,196   $1,281    -6.64%
Vacular                                             1,353    1,205    12.28%
Medical/Trek                                        2,427    2,294     5.80%
EMI                                                   230      254    -9.45%
                                                   ------   ------    -----
                                                   $5,206   $5,034     3.42%
                                                   ======   ======    =====
</TABLE>

     Marketing, general and administrative expenses increased $172,000, or
3.42%, for the fiscal year ended June 30, 2004 as compared to the fiscal year
ended June 30, 2003. In the Sonomed business unit, marketing, general and
administrative expenses decreased $134,000, primarily the result of headcount
changes. Commission expense decreased $35,000 as a result of changes in the
commission structure with an international distributor. Offsetting these
decreases was an $84,000 increase in consulting expense, which increased as a
result of the Company's marketing efforts in the international markets. In the
Vascular business unit, marketing, general and administrative expenses increased
$148,000, or 12.28%, to $1,353,000. Salaries and other personnel-related
expenses increased $155,000, primarily the result of increases in headcount.
Consulting expenses increased $55,000 as a result of marketing efforts in the


                                       25
<PAGE>
international markets. Sales and marketing travel-related expenses also
increased $68,000. The Company agreed to pay royalties for a five-year period
following the acquisition of the vascular access division of Endologix Inc.
("Endologix"). That five-year period ended in December 2003. This resulted in a
$122,000 decrease in royalty expense. In the Medical/Trek business unit,
marketing, general and administrative expenses increased $133,000, or 5.80%, to
$2,427,000. Accrued compensation increased $108,000. Payroll taxes increased
$86,000 primarily due to the exercise of employee stock options. Depreciation
and amortization expense decreased $32,000 primarily due to the abandonment of
the Company's license and distribution rights to Povidone Iodine 2.5% in March
2003 and consulting expense decreased $14,000 as the Company incurred expense in
fiscal 2003 related to the Company's search for alternate debt financing. In the
EMI business unit, marketing, general and administrative expenses decreased
$24,000, or 9.45%, to $230,000.

     Research and development expenses decreased $4,000, or 0.51%, to $776,000
for the fiscal year ended June 30, 2004 as compared to the fiscal year ended
June 30, 2003. Increases in consulting expense incurred in connection with
product development were offset by reduced headcount.

     Several years ago, the Company began seeking a corporate partner to fund
commercialization of the Povidone Iodine 2.5% product line. The Company obtained
the license and distribution rights to the product from Harbor UCLA Medical
Center. Having exhausted all partnering possibilities, during fiscal 2003,
management decided that further expenditures on this project were not in the
shareholders' best interest, and the project was abandoned. This decision
resulted in the Company taking a charge of $195,000, which included the
write-off of remaining net book value of the license and distribution rights
subsequent to normal amortization.

     Interest income was $59,000 and $3,000 for the fiscal years ended June 30,
2004 and 2003, respectively. The increase related to increased average cash
balances in the current fiscal year.

     Interest expense was $407,000 and $638,000 for the fiscal years ended June
30, 2004 and 2003, respectively. The decrease related to reduced total debt
levels and lower interest rates.

     Income tax expense was $173,000 and $112,000 for the fiscal years ended
June 30, 2004 and 2003, respectively. The Company began incurring income tax
expense in fiscal 2003 due to the exhausting of certain state net operating loss
carryforwards.

LIQUIDITY AND CAPITAL RESOURCES

     Changes in overall liquidity and capital resources from continuing
operations during the fiscal year ended June 30, 2005 are reflected in the
following table:

<TABLE>
<CAPTION>
                                        June 30,    June 30,
                                          2005        2004
                                       ---------   ---------
                                            (dollars are
                                           in thousands)
<S>                                    <C>         <C>
Current assets                         $  17,665   $  17,566
Less: Current liabilities                  4,052       3,600
                                       ---------   ---------
Working capital                        $  13,613   $  13,966
   Current ratio                        4.4 to 1    4.9 to 1

Notes payable and current maturities   $     230   $   1,872
Long-term debt                               392       2,396
                                       ---------   ---------
Total debt                             $     622   $   4,268
Total equity                              34,519      23,461
                                       ---------   ---------
Total capital                          $  35,141   $  27,729
Total debt to total capital                 1.77%      15.39%
</TABLE>

     WORKING CAPITAL POSITION

     Working capital decreased $353,000 as of June 30, 2005 and the current
ratio decrease to 4.4 to 1 from 4.9 to 1 when compared to June 30, 2004. The
decrease in working capital was caused primarily by


                                       26
<PAGE>
the pay-off of all of the Company's pre-acquisition debt as well as
substantially all of the debt acquired from Drew. The Company paid off debt of
approximately $6,348,000 during the fiscal year ended June 30, 2005. The primary
offset to this decrease in working capital was a $3,412,000 realized gain and a
$1,207,000 increase in available for sale securities, which relates to sale and
remaining available for sale securities that the Company received from IntraLase
in connection with the license of the Company's intellectual laser properties to
IntraLase.

     CASH USED IN OPERATING ACTIVITIES

     During fiscal 2005, the Company used approximately $3,350,000 of cash for
operating activities. In fiscal 2004, the Company generated approximately
$3,163,000 from operating activities. The net decrease in cash generated from
operating activities of approximately $6,513,000 in fiscal 2005 as compared to
fiscal 2004 is due primarily to the following factors:

-    Income from operations decreased approximately $3,945,000 in fiscal 2005 as
     compared to fiscal 2004.

-    The Company, during fiscal 2005, utilized approximately $1,882,000 of cash
     to fund planned increases in inventory, primarily at its Drew and Sonomed
     business units. Prior to its acquisition by Escalon, Drew's ability to
     obtain raw materials and components was severely restricted due to
     prolonged liquidity constraints. Escalon's operating priorities included
     injecting working capital into Drew to remove the pre-acquisition liquidity
     constraints. Inventories increased at the Sonomed business unit to support
     planned introduction of new products.

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

     CASH FLOWS USED IN INVESTING AND FINANCING ACTIVITIES

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

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

     Cash flows from financing activities were $9,440,000 for the fiscal year
ended June 30, 2004. Cash flows from financing activities primarily related to
proceeds from a private placement of common stock and common stock warrants as
well as proceeds from the issuance of common stock through the exercise of stock
options. On March 17, 2004, the Company completed a private placement of common
stock resulting in net proceeds of $9,788,000 and, during the fiscal year ended
June 30, 2004, issued common stock related to the exercise of stock options
resulting in proceeds to the Company of $1,992,000.


                                       27
<PAGE>
This was offset by repayments of the Company's term debt and line of credit. The
Company paid down its line of credit by $725,000 and paid down its term debt by
$1,615,000.

     DEBT HISTORY

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

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

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

     Drew has long-term debt facilities through the Texas Mezzanine Fund and
through Symbiotics, Inc. The Texas Mezzanine Fund term debt is payable in
monthly installments of $14,200, which includes interest at a fixed rate of
8.00%. The note is due in April 2008 and is secured by certain assets of Drew.
The outstanding balance as of June 30, 2005 was $405,471. The Symbiotics, Inc.
term debt, which originated from the acquisition of a product line from
Symbiotics, Inc., is payable in monthly principal installments of $8,333 plus
interest at a fixed rate of 5.00%. The outstanding balance as of June 30, 2005
was $216,666.

     BALANCE SHEET

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

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


                                       28
<PAGE>
These amounts represents approximately a $952,000 net difference from the
amounts reported in the Company's Form 10-Q for the quarter ended September 30,
2004, which has been recorded as an increase in goodwill. The difference is the
result of additional facts obtained since the acquisition which impacted the
valuation of the assets acquired and liabilities assumed.

     OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

     Escalon was not a party to any off-balance sheet arrangements as of and for
the fiscal years ended June 30, 2005 and 2004. The following table presents the
Company's contractual obligations as of June 30, 2005 (interest is not included
in the table as it is not material):

<TABLE>
<CAPTION>
                                                                        3-5        > 5
                                 Total      < 1 Year     1-3 Years     Years      Years
                              ----------   ----------   ----------   --------   ---------
<S>                           <C>          <C>          <C>          <C>        <C>
Long-term debt                $  622,137   $  230,344   $  391,793   $     --   $     --
Operating lease obligations    2,999,000      890,000    1,132,000    578,000    399,000
                              ----------   ----------   ----------   --------   --------
                              $3,621,137   $1,120,344   $1,523,793   $578,000   $399,000
                              ==========   ==========   ==========   ========   ========
</TABLE>

     FORWARD-LOOKING STATEMENT ABOUT SIGNIFICANT ITEMS LIKELY TO IMPACT
LIQUIDITY

     On July 23, 2004, the Company acquired approximately 67% of the outstanding
ordinary shares of Drew, pursuant to the Company's exchange offer for all of the
outstanding ordinary shares of Drew. As of June 30, 2005, the Company has
acquired all of the outstanding ordinary shares of Drew. Drew does not have a
history of producing positive operating cash flows and, as a result, at the time
of acquisition, was operating under financial constraints and was
under-capitalized. As Drew is integrated into the Company, management will be
working to reverse the situation, while at the same time seeking to strengthen
Drew's market position. Escalon loaned approximately $6,368,000 to Drew. The
funds have been primarily used to procure components to build up inventory to
support the manufacturing process as well as to pay off accounts payable and
debt of Drew. Escalon anticipates that further working capital will likely be
required by Drew.

     Escalon realized 5.52% and 13.18% of its net revenue during the fiscal
years ended June 30, 2005 and 2004, respectively, from Bausch & Lomb's sales of
Silicone Oil. Silicone Oil revenue is based on the sale of the product by Bausch
& Lomb multiplied by a contractual factor that declines on an annual basis due
to a contractual step-down provision. The contract expired on August 12, 2005.
See note 11 of the notes to the consolidated financial statements for additional
information regarding the contract with Bausch & Lomb.

     ESCALON COMMON STOCK

     The Company's Common Stock is currently listed on the Nasdaq SmallCap
Market. In order to continue to be listed on the Nasdaq SmallCap market, the
following requirements must be met:

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

-    500,000 publicly held shares;

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

-    A minimum bid price of $1;

-    300 round lot shareholders;

-    Two market makers; and

-    Compliance with corporate governance standards.

     As of June 30, 2005, Escalon complied with these requirements.

CRITICAL ACCOUNTING POLICIES

     The preparation of financial statements requires management to make
estimates and assumptions that impact amounts reported therein. The most
significant of those involve the application of Statement of Accounting
Standards ("SFAS') No. 142 "Goodwill and Other Intangible Assets," discussed
further in the Notes to the Consolidated Financial Statements included in this
Form 10-K. The financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America, and,


                                       29
<PAGE>
as such, include amounts based on informed estimates and judgments of
management. For example, estimates are used in determining valuation allowances
for deferred income taxes, uncollectible receivables, obsolete inventory, sales
returns and rebates and purchased intangible assets. Actual results achieved in
the future could differ from current estimates. The Company used what it
believes are reasonable assumptions and, where applicable, established valuation
techniques in making its estimates.

     REVENUE RECOGNITION

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

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

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

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

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

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

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

     VALUATION OF INTANGIBLE ASSETS

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

     INCOME/(LOSS) PER SHARE

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

     Under the provisions of SFAS 128 and SAB 98, basic and diluted net
income/(loss) per share is computed by dividing the net income/(loss) for the
period by the weighted average number of shares of common stock outstanding
during the period. The calculation of diluted net income/(loss) per share


                                       30
<PAGE>
excludes potential common shares if the impact is anti-dilutive. Basic earnings
per share are computed by dividing net income/(loss) by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share are determined in the same manner as basic earnings per share, except
that the number of shares is increased by assuming exercise of dilutive stock
options and warrants using the treasury stock method.

     TAXES

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

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

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

     Through June 30, 2005, the Company has recorded a full valuation allowance
against the Company's net operating losses due to uncertainty of their
realization as a result of the Company's earnings history, the number of years
the Company's net operating losses and tax credits can be carried forward, the
existence of taxable temporary differences and near-term earnings expectations.
The amount of the valuation allowance could decrease if facts and circumstances
change that materially increase taxable income prior to the expiration of the
loss carryforwards. Any reduction would reduce (increase) the income tax expense
(benefit) in the period such determination is made by the Company.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     INTEREST RATE RISK

     The table below provides information about the Company's financial
instruments, consisting primarily of fixed interest rate debt obligations. For
debt obligations, the table represents principal cash flows and related interest
rates by expected maturity dates. Interest rate as of June 30, 2005 were fixed
at 8.00% on the Texas Mezzanine Fund term debt, and were fixed at 5.00% on the
Symbiotics, Inc. term debt. See the Notes to the Consolidated Financial
Statements for further information regarding the Company's debt obligations.

<TABLE>
<CAPTION>
                              2006       2007       2008     Thereafter     Total
                            --------   --------   --------   ----------   --------
<S>                         <C>        <C>        <C>        <C>          <C>
Texas Mezzanine Fund Note   $130,348   $153,706   $121,417       $--      $405,471
   Interest rate                   8%         8%         8%
Symbiotics, Inc. Note         99,996     99,996     16,674       $--       216,666
   Interest rate                   5%         5%         5%
                            --------   --------   --------       ---      --------
                            $230,344   $253,702   $138,091       $--      $622,137
                            ========   ========   ========       ===      ========
</TABLE>

     EXCHANGE RATE RISK

     During the fiscal years ended June 30, 2005 and 2004, approximately 36.4%
and 21.6%, respectively, of Escalon's consolidated net revenue was derived from
international sales. Prior to the acquisition of Drew, the price of all product
sold overseas was denominated in United States Dollars and


                                       31
<PAGE>
consequently the Company incurred no exchange rate risk on revenue. However, a
portion of Drew's product revenue is denominated in United Kingdom Pounds and
Euros. During the fiscal year ended June 30, 2005, Drew recorded approximately
$2,378,000 and $99,000 of revenue denominated in United Kingdom Pounds and
Euros, respectively.

     Drew incurs a portion of its expenses denominated in United Kingdom Pounds.
During the fiscal year ended June 30, 2005, Drew incurred approximately
$4,380,000 of expense denominated in United Kingdom Pounds. The Company's
Sonomed business unit incurs a portion of its marketing expenses in the European
market, the majority of which are transacted in Euros. For the fiscal years
ended June 30, 2005 and 2004, these expenses totaled approximately $155,000 and
$ 91,000, respectively. The Company's Vascular business unit incurs a portion of
its marketing expenses in the European market, the majority of which are
transacted in Euros. For the fiscal years ended June 30, 2005 and 2004, these
expenses totaled approximately $166,000 and $56,000, respectively.

     The Company may begin to experience fluctuations, beneficial or adverse, in
the valuation of currencies in which the Company transacts its business, namely
the United States Dollar, the United Kingdom Pound and the Euro.

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 9A. CONTROLS AND PROCEDURES

     (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

     The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, have evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rule 13a-15(e) and 15(d)-15(e) under the Exchange Act) as of the end of the
period covered by this report. Based on such evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of such period, the Company's disclosure controls and procedures are effective
in recording, processing, summarizing and recording, on a timely basis,
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act.

     (B) INTERNAL CONTROL OVER FINANCIAL REPORTING

     There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fourth fiscal quarter ended June 30, 2005
that have materially impacted, or are reasonably likely to materially impact,
the Company's internal control over financial reporting.

     A control system, no matter how well designed and operated, cannot provide
absolute assurance that the objectives of the control systems are met, and no
evaluation of internal controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been detected.

ITEM 9B. OTHER INFORMATION

     None.

                                    PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this Item 10 is incorporated by reference to
the Company's proxy statement for the Company's 2005 Annual Meeting of
Shareholders to be filed with the SEC.


                                       32
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION

     The information required by this Item 11 is incorporated by reference to
the Company's proxy statement for the Company's 2005 Annual Meeting of
Shareholders to be filed with the SEC.

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

     The information required by this Item 12 is incorporated by reference to
the Company's proxy statement for the Company's 2005 Annual Meeting of
Shareholders to be filed with the SEC.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The information required by this Item 14 is incorporated by reference to
the Company's proxy statement for the Company's 2005 Annual Meeting of
Shareholders to be filed with the SEC.

                                    PART IV.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     CONSOLIDATED FINANCIAL STATEMENTS

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

     CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

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


                                       33
<PAGE>
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. (8)

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

3.2           Bylaws of Registrant. (8)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10.16         2003 Amendment to Loan Agreement. (12)

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

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

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

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

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

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

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

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

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

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

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

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

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

21            Subsidiaries. (11)
</TABLE>


                                       34
<PAGE>
<TABLE>
<S>     <C>   <C>
31.1          Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
              2002 - Richard J. DePiano (*)

31.2          Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
              2002 - Mark H. Karsch (*)

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

32.2          Certification pursuant to Section 1350 of Title 18 of the United
              States Code - Mark H. Karsch. (*)
</TABLE>

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

**   Management contract of compensatory plan.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       35
<PAGE>
                                   SIGNATURES

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

                                        Escalon Medical Corp.
                                        (Registrant)


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

Dated: September 28, 2005

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

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


By: /s/ Richard J. DePiano       Chairman and Chief Executive    September 28, 2005
    --------------------------   Officer (Principal Executive
    Richard J. DePiano           Officer) and Director


By: /s/ Mark Karsch              Chief Financial Officer         September 28, 2005
    --------------------------   (Principal Financial Officer)
    Mark Karsch


By: /s/ Anthony Coppola          Director                        September 28, 2005
    --------------------------
    Anthony Coppola


By: /s/ Jay L. Federman          Director                        September 28, 2005
    --------------------------
    Jay L. Federman


By: /s/ William L.G. Kwan        Director                        September 28, 2005
    --------------------------
    William L.G. Kwan


By: /s/ Lisa Napolitano           Director                       September 28, 2005
    --------------------------
    Lisa Napolitano
</TABLE>


                                       36
<PAGE>
                              ESCALON MEDICAL CORP.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Report of Independent Registered Public Accounting Firm                      F-2
Report of Independent Registered Public Accounting Firm                      F-3
Consolidated Balance Sheets at June 30, 2005 and 2004                        F-4
Consolidated Statements of Income for the Years Ended June 30, 2005, 2004
   and 2003                                                                  F-5
Consolidated Statements of Shareholders' Equity for the Years Ended
   June 30, 2005, 2004 and 2003                                              F-6
Consolidated Statements of Cash Flows for the Years Ended June 30, 2005,
   2004 and 2003                                                             F-7
Notes to Consolidated Financial Statements                                   F-8
</TABLE>
<PAGE>
             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

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

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

                                        BDO Seidman, LLP

Philadelphia, Pennsylvania
September 22, 2005


                                      F-2
<PAGE>
                REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM

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

     We have audited the accompanying consolidated balance sheet of Escalon
Medical Corp. and subsidiaries (the "Company") as of June 30, 2004, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the two years in the period ended June 30, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

     We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. 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 as of June 30, 2004, and the results of their
operations and cash flows for each of the two years in the period ended June 30,
2004 in conformity with accounting principles generally accepted in the United
States of America.

                                        Parente Randolph, LLC

Philadelphia, Pennsylvania
September 10, 2004, except for
Note 13, as to which the date is
September 22, 2004


                                      F-3
<PAGE>
                     ESCALON MEDICAL CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                         JUNE 30,       JUNE 30,
                                                           2005           2004
                                                       ------------   ------------
<S>                                                    <C>            <C>
ASSETS
Current assets:
   Cash and cash equivalents                           $  5,115,772   $ 12,601,971
   Available for sale securities                          1,207,317             --
   Accounts receivable, net                               4,752,310      2,492,689
   Inventory, net                                         5,856,285      1,781,592
   Note receivable, net                                     100,000        150,000
   Other current assets                                     633,214        539,508
                                                       ------------   ------------
      Total current assets                               17,664,898     17,565,760
                                                       ------------   ------------
Property and equipment, net                                 911,700        409,187
Goodwill                                                 20,166,450     10,591,795
Trademarks and trade names, net                             616,906        616,906
Patents, net                                                402,814        172,078
Other assets                                                286,568        101,389
                                                       ------------   ------------
      Total assets                                     $ 40,049,336   $ 29,457,115
                                                       ============   ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Line of credit                                      $         --   $    250,000
   Current portion of long-term debt                        230,344      1,621,687
   Accounts payable                                       1,135,680        499,242
   Accrued expenses                                       2,685,670      1,229,498
                                                       ------------   ------------
      Total current liabilities                           4,051,694      3,600,427
                                                       ------------   ------------
Long-term debt, net of current portion                      391,793      2,396,019
Accrued post retirement benefits                          1,087,000             --
                                                       ------------   ------------
      Total liabilities                                   5,530,487      5,996,446
                                                       ------------   ------------
Shareholders' equity:
   Preferred stock, $0.001 par value; 2,000,000
      shares authorized; no shares issued                        --             --
   Common stock, $0.001 par value; 35,000,000
      shares authorized; 5,963,477 and 5,017,122
      shares issued and outstanding at June 30, 2005
      and 2004, respectively                                  5,964          5,018
   Common stock warrants                                  1,601,346      1,601,346
   Additional paid-in capital                            63,898,190     56,438,903
   Accumulated deficit                                  (32,136,487)   (34,584,598)
   Accumulated other comprehensive income                 1,149,836             --
                                                       ------------   ------------
      Total shareholders' equity                         34,518,849     23,460,669
                                                       ------------   ------------
         Total liabilities and shareholders' equity    $ 40,049,336   $ 29,457,115
                                                       ============   ============
</TABLE>

                 See notes to consolidated financial statements


                                      F-4
<PAGE>
                     ESCALON MEDICAL CORP. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
                                                                  FOR THE YEARS ENDED JUNE 30,
                                                            ---------------------------------------
                                                                2005          2004          2003
                                                            -----------   -----------   -----------
<S>                                                         <C>           <C>           <C>
Product revenue                                             $23,864,322   $12,347,922   $11,191,493
Other revenue                                                 3,060,300     2,372,845     2,174,537
                                                            -----------   -----------   -----------
Revenues, net                                                26,924,622    14,720,767    13,366,030
                                                            -----------   -----------   -----------
Costs and expenses:
   Cost of goods sold                                        13,158,061     5,475,703     4,895,574
   Marketing, general and administrative                     12,556,374     5,206,067     5,033,852
   Research and development                                   1,892,706       776,496       780,333
   Write-down of Povidone Iodine license and distribution
      rights                                                                       --       195,950
                                                            -----------   -----------   -----------
      Total costs and expenses                               27,607,141    11,458,266    10,905,709
                                                            -----------   -----------   -----------
(Loss) income from operations                                  (682,519)    3,262,501     2,460,321
                                                            -----------   -----------   -----------
Other income and expenses:
   Gain on sale of available for sale securities              3,411,761            --            --
   Equity in Ocular Telehealth Management, LLC                  (63,613)           --            --
   Interest income                                               69,262        59,072         2,813
   Interest expense                                             (55,116)     (406,543)     (638,345)
                                                            -----------   -----------   -----------
      Total other income and expenses                         3,362,294      (347,471)     (635,532)
                                                            -----------   -----------   -----------
Income before income taxes                                    2,679,775     2,915,030     1,824,789
Income taxes                                                    231,664       173,300       112,412
                                                            -----------   -----------   -----------
Net income                                                  $ 2,448,111   $ 2,741,730   $ 1,712,377
                                                            ===========   ===========   ===========
Basic net income per share                                  $     0.420   $     0.704   $     0.509
                                                            ===========   ===========   ===========
Diluted net income per share                                $     0.393   $     0.637   $     0.479
                                                            ===========   ===========   ===========
   Weighted average shares - basic                            5,831,564     3,896,951     3,365,359
                                                            ===========   ===========   ===========
   Weighted average shares - diluted                          6,231,024     4,304,375     3,573,192
                                                            ===========   ===========   ===========
</TABLE>

                 See notes to consolidated financial statements


                                      F-5
<PAGE>
                     Escalon Medical Corp. and Subsidiaries
                 Consolidated Statement of Shareholders' Equity
                For the Years Ended June 30, 2005, 2004 and 2003

<TABLE>
<CAPTION>
                                                                                                      ACCUMULATED
                                                               COMMON     ADDITIONAL                     OTHER          TOTAL
                                                               STOCK       PAID-IN      ACCUMULATED  COMPREHENSIVE  SHAREHOLDERS'
                                      SHARES      AMOUNT      WARRANTS      CAPITAL       DEFICIT       INCOME         EQUITY
                                    ---------  -----------  -----------  ------------  ------------  -------------  ------------
<S>                                 <C>        <C>          <C>          <C>           <C>           <C>            <C>
BALANCE AT JUNE 30, 2002            3,345,851     $3,346     $       --  $ 46,228,710  $(39,038,705)  $        --   $ 7,193,351
Common stock issued in
   connection with acquisition
   of trade name                       10,000         10             --        15,090            --            --        15,100
Exercise of stock options               9,508          9             --        18,611            --            --        18,620
Net income                                 --         --             --            --     1,712,377            --     1,712,377
                                    ---------     ------     ----------  ------------  ------------   -----------   -----------
BALANCE AT JUNE 30, 2003            3,365,359      3,365             --    46,262,411   (37,326,328)           --     8,939,448
Private placement offering            800,000        800      1,601,346     8,185,772            --            --     9,787,918
Exercise of stock options             856,412        857             --     2,021,075            --            --     2,021,932
Treasury stock retirement              (4,649)        (4)            --       (30,355)           --            --       (30,359)
Net income                                 --         --             --            --     2,741,730            --     2,741,730
                                    ---------     ------     ----------  ------------  ------------   -----------   -----------
BALANCE AT JUNE 30, 2004            5,017,122      5,018      1,601,346    56,438,903   (34,584,598)           --    23,460,669
Comprehensive Income:
   Net income                              --         --             --            --     2,448,111            --     2,448,111
   Unrealized gains on securities          --         --             --            --            --     1,207,317     1,207,317
   Foreign currency translation            --         --             --            --            --       (57,481)      (57,481)
                                                                                                                    -----------
   Total comprehensive income                                                                                         3,597,947
Acquisition of Drew                   900,000        900             --     7,429,538            --            --     7,430,438
Exercise of common stock
   purchase warrants                   32,855         33             --           (33)           --            --            --
Exercise of stock options              13,500         13             --        29,782            --            --        29,795
                                    ---------     ------     ----------  ------------  ------------   -----------   -----------
BALANCE AT JUNE 30, 2005            5,963,477     $5,964     $1,601,346  $ 63,898,190  $(32,136,487)  $ 1,149,836   $34,518,849
                                    =========     ======     ==========  ============  ============   ===========   ===========
</TABLE>

                 See Notes to consolidated financial statements

                                      F-6
<PAGE>
                     ESCALON MEDICAL CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                  YEARS ENDED JUNE 30,
                                                                        ---------------------------------------
                                                                            2005          2004          2003
                                                                        -----------   -----------   -----------
<S>                                                                     <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                              $ 2,448,111   $ 2,741,730   $ 1,712,377
Adjustments to reconcile net income to net cash provided by (used in)
   operating activities:
   Depreciation and amortization                                            387,651       241,453       310,315
   Post retirement benefits                                               1,087,000            --            --
   Gain on sale of available for sale securities                         (3,411,761)                         --
   Loss of Ocular Telehealth Management, LLC                                 63,613            --            --
   Reserve on notes receivable                                               50,000            --            --
   Abandonment of leasehold improvements                                     12,458            --            --
   Write-down of license and distribution rights                                 --            --       195,950
   Disposal of  property and equipment                                           --            --           927
   Change in operating assets and liabilities:
      Accounts receivable, net                                             (838,624)     (128,319)     (270,493)
      Inventory, net                                                     (1,882,149)        3,888      (213,413)
      Other current and long-term assets                                     63,750       (39,228)      242,007
      Accounts payable, accrued and other liabilities                    (1,330,009)      343,762       193,246
                                                                        -----------   -----------   -----------
         Net cash (used in) provided by operating activities             (3,349,960)    3,163,286     2,170,916
                                                                        -----------   -----------   -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Drew, net of cash acquired                                      151,459            --            --
Acquisition costs related to Drew Scientific                             (1,015,362)     (231,014)           --
Proceeds from the sale of available for sale securities                   3.411,761            --            --
Investment in Ocular Telehealth Management, LLC                            (256,000)           --            --
Purchase of fixed assets                                                   (104,396)      (68,274)      (76,040)
                                                                        -----------   -----------   -----------
         Net cash provided by (used in) investing activities              2,187,462      (299,288)      (76,040)
                                                                        -----------   -----------   -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit borrowing                                                         --       153,981       775,000
Line of credit repayment                                                 (1,905,822)     (878,981)   (1,050,000)
Principal payments on term loans                                         (4,441,761)   (1,614,908)   (1,760,932)
Issuance of common stock - private placement                                     --     9,787,918            --
Issuance of common stock - stock options                                     29,795     1,991,573        18,620
                                                                        -----------   -----------   -----------
         Net cash (used in) provided by investing activities             (6,317,788)    9,439,583    (2,017,312)
                                                                        -----------   -----------   -----------
         Effect of exchange rate changes on cash & cash equivalents          (5,913)           --            --
         Net (decrease) increase in cash and cash equivalents            (7,486,199)   12,303,581        77,564
Cash and cash equivalents, beginning of year                             12,601,971       298,390       220,826
                                                                        -----------   -----------   -----------
Cash and cash equivalents, end of year                                  $ 5,115,772   $12,601,971   $   298,390
                                                                        ===========   ===========   ===========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid                                                           $   198,647   $   338,155   $   544,155
                                                                        ===========   ===========   ===========
Income taxes paid                                                       $   327,176   $   173,300   $   112,412
                                                                        ===========   ===========   ===========
Issuance of Common Stock for EMS trade name                             $        --   $        --   $    15,100
                                                                        ===========   ===========   ===========
Restructure of line of credit to long-term debt                         $        --   $        --   $ 3,000,000
                                                                        ===========   ===========   ===========
Issuance of common stock for the Drew acquisition                       $ 7,430,438   $        --   $        --
                                                                        ===========   ===========   ===========
Increase in unrealized appreciation of available for sale securities    $ 1,207,317   $        --   $        --
                                                                        ===========   ===========   ===========
</TABLE>

                 See notes to consolidated financial statements


                                      F-7
<PAGE>
                     ESCALON MEDICAL CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  ORGANIZATION AND DESCRIPTION OF BUSINESS

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

     In October 1997, the Company licensed its intellectual laser property to
IntraLase Corp. ("IntraLase"), in return for an equity interest and future
royalties on sales of products. IntraLase undertook the responsibility for
funding and developing the laser technology through to commercialization.
IntraLase began selling products related to the laser technology during fiscal
2002 and announced its initial public offering of its common stock in October
2004. The Company is in dispute with IntraLase over royalty payments owed to the
Company (see notes 9 and 16).

     On July 23, 2004, Escalon acquired 67% of the outstanding ordinary shares
of Drew, a United Kingdom company, pursuant to the Company's exchange offer for
all of the outstanding ordinary shares of Drew, and since that date has acquired
all of the Drew shares (see note 12).

(2)  SIGNIFICANT ACCOUNTING POLICIES

     PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Sonomed, Vascular, Escalon Medical Europe
GmbH, EMI, Pharmaceutical, Escalon Medical Holdings, Inc. and Drew. All
intercompany accounts and transactions have been eliminated.

     USE OF ESTIMATES

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that impact the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.

     CASH AND CASH EQUIVALENTS

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


                                      F-8
<PAGE>
     FAIR VALUE OF FINANCIAL INSTRUMENTS

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

     MARKETABLE SECURITIES

     The Company reports debt and marketable securities in accordance with
Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting
for Certain Investments in Debt and Equity Securities." All of the equity
securities held by the Company at June 30, 2005 are classified as available for
sale securities. Accordingly, amounts are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of shareholders' equity (see note 16).

     REVENUE RECOGNITION

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

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

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


                                      F-9
<PAGE>
-    Shipping terms are ex-factory shipping point. At this point the buyer
     (distributor) takes title to the goods and is responsible for all risks and
     rewards of ownership, including insuring the goods as necessary.

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

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

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

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

     SHIPPING AND HANDLING REVENUES AND COSTS

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

     INVENTORIES

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

<TABLE>
<CAPTION>
                              JUNE 30,
                      -----------------------
                         2005         2004
                      ----------   ----------
<S>                   <C>          <C>
Raw materials         $3,476,493   $1,419,606
Work in process          473,252           --
Finished goods         2,073,208      367,111
                      ----------   ----------
                       6,022,953    1,786,717
Valuation allowance     (166,668)      (5,125)
                      ----------   ----------
  Total inventory     $5,856,285   $1,781,592
                      ==========   ==========
</TABLE>

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

<Table>
<Caption>
                                       2005      2004       2003
                                    ---------  --------   --------
<S>                                 <C>        <C>        <C>
Balance, July 1                     $  5,125   $ 64,020   $ 44,953
Provision for valuation allowance    161,543      5,907     61,934
Write-offs                                --    (64,802)   (42,867)
                                    --------   --------   --------
Balance, June 30                    $166,668   $  5,125   $ 64,020
                                    ========   ========   ========
</Table>

     ACCOUNTS RECEIVABLE

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

<Table>
<Caption>
                                       2005      2004       2003
                                    ---------  ---------   --------
<S>                                 <C>        <C>        <C>
Balance, July 1                     $121,212   $ 261,351   $183,287
Provision for bad debts              202,446         784     96,004
Write-offs                           (41,028)   (140,923)   (17,940)
Other(a)                             208,015          --         --
                                    --------   ---------   --------
Balance, June 30                    $490,645   $ 121,212   $261,351
                                    ========   =========   ========
</Table>

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

     PROPERTY AND EQUIPMENT

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


                                       F-10
<PAGE>
years for furniture and fixtures and 5 to 10 years for production and test
equipment. Depreciation expense for the years ended June 30, 2005, 2004 and 2003
was $321,142, 175,773 and $183,804, respectively.

     Property and equipment consist of the following at:

<TABLE>
<CAPTION>
                                                              JUNE 30,
                                                   ------------------------
                                                       2005         2004
                                                   -----------   ----------
<S>                                                <C>           <C>
Equipment                                          $ 1,921,731   $1,169,504
Furniture and fixtures                                 120,460       62,168
Leasehold improvements                                 121,193      113,081
                                                   -----------   ----------
                                                     2,163,384    1,344,753
Less: Accumulated depreciation and amortization     (1,251,684)    (935,566)
                                                   -----------   ----------
                                                   $   911,700   $  409,187
                                                   ===========   ==========
</TABLE>

     LONG-LIVED ASSETS

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

     INTANGIBLE ASSETS

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

     ACCRUED WARRANTIES

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

     BUSINESS COMBINATIONS

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

     STOCK-BASED COMPENSATION

     The Company reports stock-based compensation through the disclosure-only
requirements of the Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation," as amended by Statement of
Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment to FASB No. 123."
Compensation expense for options is measured using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). Under APB 25, because the exercise price
of the Company's employee stock options is generally equal to the market price
of the Company's underlying stock on the date of grant, no compensation expense
is recognized.


                                      F-11
<PAGE>
     SFAS 123 establishes an alternative method of expense recognition for
stock-based compensation awards based on fair values. The following table
illustrates the impact on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS 123.

<TABLE>
<CAPTION>
                                                         2005         2004         2003
                                                      ----------   ----------   ----------
<S>                                                   <C>          <C>          <C>
Net income, as reported                               $2,448,111   $2,741,730   $1,712,377
Deduct: Total stock-based employee compensation
   expense determined under fair value based method
   for all awards, net of related tax effects           (539,026)    (406,357)    (145,110)
                                                      ----------   ----------   ----------
Pro forma net income                                  $1,908,085   $2,335,373   $1,567,267
                                                      ==========   ==========   ==========
Earnings per share:
  Basic - as reported                                 $    0.420   $    0.704   $    0.509
                                                      ==========   ==========   ==========
  Basic - pro forma                                   $    0.327   $    0.599   $    0.466
                                                      ==========   ==========   ==========
  Diluted - as reported                               $    0.393   $    0.637   $    0.479
                                                      ==========   ==========   ==========
  Diluted - pro forma                                 $    0.306   $    0.543   $    0.439
                                                      ==========   ==========   ==========
</TABLE>

     The Company has followed the guidelines of SFAS 123 to establish the
valuation of its stock options. The fair value of these equity awards was
estimated at the date of grant using these Black-Scholes option pricing method.
For the purposes of pro forma disclosures, the estimated fair value of the
equity awards is amortized to expense over the options' vesting period. For the
purposes of applying SFAS 123, the estimated per share value of the options
granted during the fiscal years ended June 30, 2005, 2004 and 2003 was $4.93,
$6.94 and $0.84, respectively. The fair value was estimated using the following
assumptions: dividend yield of 0.0%; volatility ranging between 0.60 and 2.51;
risk free interest ranging between 3.30% and 4.25%; and expected life of 10
years. The volatility assumption is based on volatility seen in the Company's
stock over the last five years. This assumption was made according to the
guidance of SFAS 123. There is no reason to believe that future volatility will
compare to historic volatility.

     RESEARCH AND DEVELOPMENT

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

     ADVERTISING COSTS

     Advertising costs are charged to operations as incurred. Advertising
expense for the three years ended June 30, 2005, 2004 and 2003 was $190,963,
$35,439 and $25,466, respectively.

     NET INCOME PER SHARE

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

<TABLE>
<CAPTION>
                                                            2005         2004         2003
                                                         ----------   ----------   ----------
<S>                                                      <C>          <C>          <C>
Numerator:
   Numerator for basic and diluted earnings per share:
      Net income                                         $2,448,111   $2,741,730   $1,712,377
                                                         ----------   ----------   ----------
Denominator:
   Denominator for basic earnings per share - weighted
      average shares                                      5,831,564    3,896,951    3,365,359
   Effect of dilutive securities:
</TABLE>


                                      F-12
<PAGE>
<TABLE>
<S>                                                      <C>          <C>          <C>
      Stock options and warrants                            399,460      407,424      207,833
                                                         ----------   ----------   ----------
   Denominator for diluted earnings per share -
      weighted average and assumed conversion             6,231,024    4,304,375    3,573,192
                                                         ----------   ----------   ----------
Basic earnings per share                                 $    0.420   $    0.704   $    0.509
                                                         ==========   ==========   ==========
Diluted earnings per share                               $    0.393   $    0.637   $    0.479
                                                         ==========   ==========   ==========
</TABLE>

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

     INCOME TAXES

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

     COMPREHENSIVE INCOME

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

     FOREIGN CURRENCY TRANSLATION

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

     NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No.123R ("SFAS No.123R"), (revised 2004),
"Share-Based Payments". SFAS No. 123R is a revision of SFAS No. 123 and
supersedes ABP Opinion No. 25 which requires the Company to expense share-based
payments, including employee stock options. With limited exceptions, the amount
of compensation costs will be measured based on the grant date fair value of the
equity or liability instrument issued. Compensation cost will be recognized over
the period that the


                                      F-13
<PAGE>
employee provides service in exchange for the award. The Company is required to
adopt this standard in its fiscal year beginning July 1, 2005. The adoption of
this standard for the expensing of stock options is expected to reduce pretax
earnings in future periods. The impact of adoption of SFAS No. 123R can not be
predicted at this time because it will depend upon the level of share-based
payments made in the future and the model the Company elects to utilize.

(3)  INTANGIBLE ASSETS

     In connection with the Company's acquisition of assets of Escalon
Ophthalmics, Inc. ("EOI") in February 1996, a portion of the purchase price was
allocated to certain license and distribution agreements. This cost allocation
was based on an evaluation by management, and such costs were amortized over an
eight-year period (which ended in January 2004) using the straight-line method.
Accordingly, the license and distribution agreements were fully amortized at
June 30, 2005 and 2004, respectfully, and accumulated amortization was $180,182
at June 30, 2005 and 2004. Amortization expense for the years ended June 30,
2005, 2004 and 2003 was $0, $13,138 and $37,900, respectively. Additionally,
Escalon's decision to abandon Povidone Iodine caused the Company to write-off
$195,950 relating to license and distribution rights in March 2003.

     PATENTS

     It is the Company's practice to seek patent protection on processes and
products in various countries. Patent application costs are capitalized and
amortized over their estimated useful lives, not exceeding 17 years, on a
straight-line basis from the date the related patents are issued. Costs
associated with patents no longer being pursued are expensed. Accumulated patent
amortization was $188,649 and $122,139 at June 30, 2005 and 2004, respectively.
Amortization expense for the years ended June 30, 2005, 2004 and 2003 was
$66,509, $10,733 and $10,733, respectively.

     GOODWILL, TRADEMARKS AND TRADE NAMES

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

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

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


                                      F-14
<PAGE>
     The following table presents intangible assets by business unit as of June
30, 2005 and 2004:

<TABLE>
<CAPTION>
                       2005               2004
                   -----------         -----------
                       NET                NET
                     CARRYING           CARRYING
                      AMOUNT             AMOUNT
                   -----------        -----------
<S>                <C>               <C>
GOODWILL
Sonomed            $ 9,525,550        $ 9,525,550
Drew                 9,574,655                 --
Vascular               941,218            941,218
Medical/Trek/EMI       125,027            125,027
                   -----------        -----------
Total              $20,166,450        $10,591,795
                   ===========        ===========
</TABLE>

<TABLE>
<CAPTION>
                           2005           2004
                         --------       --------
                           NET            NET
                         CARRYING       CARRYING
                          AMOUNT         AMOUNT
                         --------       --------
<S>                      <C>            <C>
UNAMORTIZED INTANGIBLE
   ASSETS
Sonomed                  $616,906       $616,906
                         --------       --------
Total                    $616,906       $616,906
                         ========       ========
</TABLE>




                                      F-15
<PAGE>
     The following table presents amortized intangible assets by business unit
as of June 30, 2005:

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

     The following table presents amortized intangible assets by business unit
as of June 30, 2004:

<TABLE>
<CAPTION>
                                                   ADJUSTED
                             GROSS                   GROSS
                           CARRYING                CARRYING    ACCUMULATED   NET CARRYING
                            AMOUNT    IMPAIRMENT    AMOUNT    AMORTIZATION       VALUE
                           --------   ----------   --------   ------------   ------------
<S>                        <C>        <C>          <C>        <C>            <C>
AMORTIZED INTANGIBLE
   ASSETS
PATENTS
Vascular (pending issue)   $ 36,916       $--      $ 36,916    $      --       $ 36,916
Medical/Trek/EMI            257,301        --       257,301     (122,139)       135,162
                           --------       ---      --------    ---------       --------
                           $294,217       $--      $294,217    $(122,139)      $172,078
                           ========       ===      ========    =========       ========
</TABLE>

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

(4)  NOTE RECEIVABLE

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

(5)  ACCRUED EXPENSES

     The following table presents accrued expenses as of June 30, 2005 and 2004:

<TABLE>
<CAPTION>
                        JUNE 30,     JUNE 30,
                          2005         2004
                       ----------   ----------
<S>                    <C>          <C>
Accrued compensation   $1,276,639   $  908,568
Warranty accruals         201,413           --
Severance accruals        195,263           --
Legal accruals            251,000           --
Other accruals            761,355      320,930
                       ----------   ----------
                       $2,685,670   $1,229,498
                       ==========   ==========
</TABLE>

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


                                      F-16
<PAGE>
     In addition to normal accrual, other accruals as of June 30, 2005 and 2004
relate to the remaining lease payments on a facility that had been vacated prior
to the Drew acquisition, accruals for litigation existing prior to the Drew
acquisition, franchise and ad valorem tax accruals and other sundry operating
expenses and accruals.

(6)  LONG-TERM DEBT

     The Company has two long-term debt facilities through its Drew subsidiary:
the Texas Mezzanine Fund and Symbiotics, Inc. The Texas Mezzanine Fund term debt
is payable in monthly installments of $14,200, which includes interest at a
fixed rate of 8.00%. The note is due in April 2008 and is collateralized by
certain assets of Drew. The outstanding balance as of June 30, 2005 was
$405,471. The Symbiotics, Inc. term debt, which originated from the acquisition
of a product line from Symbiotics, Inc., is payable in monthly principal
installments of $8,333 plus interest at a fixed rate of 5.00%. The outstanding
balance as of June 30, 2005 was $216,666.

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

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

     On January 21, 1999, the Company's Vascular subsidiary and Endologix
entered into an Assets Sale and Purchase Agreement. Pursuant to this agreement,
the Company acquired for cash the assets of Endologix's vascular access business
in exchange for cash and also agreed to pay royalties to Endologix based on
future sales of the vascular access business for a period of five years
following the closing of the sale, with a guaranteed minimum royalty of $300,000
per year. On February 1, 2001, the parties amended the agreement to eliminate
any future royalty payments to Endologix. Pursuant to the amendment, the Company
paid $17,558 in cash to Endologix, delivered a short-term note in the amount of
$64,884 that was satisfied in January 2002, a note in the amount of $717,558,
payable in 11 quarterly installments that commenced on April 15, 2002 and the
Company issued 50,000 shares of its Common Stock to Endologix.

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


                                      F-17
<PAGE>
     The schedule below presents principal amortization for the next five years
under each of the Company's loan agreements as of June 30, 2005:

<TABLE>
<CAPTION>
TWELVE MONTHS
    ENDING        TEXAS
   JUNE 30,     MEZZANINE   SYMBIOTICS     TOTAL
-------------   ---------   ----------   ---------
<S>             <C>         <C>          <C>
2006             $130,348    $ 99,996    $ 230,344
2007              153,706      99,996      253,702
2008              121,417      16,674      138,091
2009                   --          --           --
2010                   --          --           --
                 --------    --------    ---------
Total            $405,471    $216,666    $ 622,137
                 ========    ========    =========
Current portion of long-term debt        $(230,344)
                                         =========
Long-term portion                        $ 391,793
                                         =========
</TABLE>

(7)  CAPITAL STOCK TRANSACTIONS

     STOCK OPTION PLANS

     As of June 30, 2005, Escalon had in effect seven employee stock option
plans which provide for incentive and non-qualified stock options. After
accounting for shares issued upon exercise of options, a total of 1,402,535
shares of the Company's common stock remain available for issuance as of June
30, 2005. Under the terms of the plans, options may not be granted for less than
the fair market value of the Common Stock at the date of grant. Vesting
generally occurs ratably over five years and the option is exercisable over a
period no longer than 10 years after the grant date. As of June 30, 2005,
options to purchase 847,210 shares of the Company's common stock were
outstanding, 581,556 were exercisable and 555,325 were reserved for future
grants.

     The following is a summary of Escalon's stock option activity and related
information for the fiscal years ended June 30, 2005, 2004 and 2003:

<TABLE>
<CAPTION>
                                             2005                        2004                         2003
                                   ------------------------   --------------------------   --------------------------
                                   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   618,706       $3.395       1,313,367       $2.301       1,153,458       $2.385
   Granted                         242,004       $6.131         166,200       $6.940         172,750       $1.450
   Exercised                       (13,500)      $2.244        (856,412)      $2.361          (9,508)      $1.958
   Forfeited                            --       $   --          (4,449)      $1.684          (3,333)      $1.601
                                   -------       ------       ---------       ------       ---------       ------
Outstanding at end of year         847,210       $4.195         618,706       $3.395       1,313,367       $2.301
                                   =======                    =========                    =========
Exercisable at end of year         581,556                      419,152                    1,125,796
                                   =======                    =========                    =========
Weighted average fair value of
   options granted during year                   $6.131                       $6.940                       $0.840
                                                 ======                       ======                       ======
</TABLE>


                                      F-18
<PAGE>
     The following table summarizes information about stock options outstanding
as of June 30, 2005:

<TABLE>
<CAPTION>
                               WEIGHTED
                               AVERAGE
                  NUMBER      REMAINING    WEIGHTED      NUMBER     WEIGHTED
  RANGE OF     OUTSTANDING   CONTRACTUAL    AVERAGE   EXERCISABLE   AVERAGE
  EXERCISE     AT JUNE 30,       LIFE      EXERCISE   AT JUNE 30,   EXERCISE
   PRICES          2005        (YEARS)       PRICE        2005        PRICE
------------   -----------   -----------   --------   -----------   --------
<S>            <C>           <C>           <C>        <C>           <C>
1.45 to 2.12     109,959         6.08        $1.68       74,437       $1.75
2.13 to 2.37     153,772         3.35        $2.22      153,772       $2.22
2.38 to 4.89     200,425         4.81        $2.82      182,869       $2.84
4.90 to 6.93     228,350         9.25        $6.04       82,172       $6.17
6.94 to 7.58     154,704         8.49        $7.00       87,306       $7.04
</TABLE>

     SALE OF COMMON STOCK AND WARRANTS

     On March 17, 2004, the Company completed a $10,400,000 private placement of
common stock and common stock purchase warrants to accredited and institutional
investors. The Company sold 800,000 shares of its common stock at $13.00 per
share. The investors also received warrants to purchase an additional 120,000
shares of common stock at an exercise price of $15.60 per share. If not
exercised, the warrants expire on September 13, 2009. The securities were sold
pursuant to the exemptions from registration of Rule 506 of Regulation D and
Section 4(2) under the Securities Act of 1933. The Company has subsequently
filed a registration statement with the Securities and Exchange Commission,
declared effective on April 20, 2004, to register for resale by the holders all
of the common stock issued in conjunction with this private placement and common
stock purchasable upon exercise of the warrants.

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

     EXERCISE OF WARRANTS TO PURCHASE COMMON STOCK

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

     EXCHANGE OFFER FOR DREW SCIENTIFIC GROUP, PLC

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

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

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


                                      F-19
<PAGE>
(8)  INCOME TAXES

     The provision for income taxes for the years ended June 30, 2005, 2004 and
2003 consist of the following:

<TABLE>
<CAPTION>
                                      2005         2004         2003
                                  -----------   ---------   -----------
<S>                               <C>           <C>         <C>
Current income tax provision
  Federal                         $   100,000   $  30,748   $        --
  State                               131,664     142,552       112,412
                                  -----------   ---------   -----------
                                      231,664     173,300       112,412
                                  -----------   ---------   -----------
Deferred income tax provision
  Federal                           1,572,610     342,915     3,070,701
  State                               370,026    (363,580)      722,518
  Change in valuation allowance    (1,942,636)     20,665    (3,793,219)
                                  -----------   ---------   -----------
                                           --          --            --
                                  -----------   ---------   -----------
Income tax expense                $   231,664   $ 173,300   $   112,412
                                  ===========   =========   ===========
</TABLE>

     Income taxes as a percentage of income for the years ended June 30, 2005,
2004 and 2003 differ from statutory federal income tax rate due to the
following:

<TABLE>
<CAPTION>
                                                        2005    2004     2003
                                                       -----   -----    -----
<S>                                                    <C>     <C>      <C>
Statutory federal income tax rate                       34.0%   34.0%    34.0%
State income taxes, net of federal income tax impact     4.9%    4.9%     6.2%
Change in valuation allowance                          -34.0%  -34.0%   -34.0%
Other                                                    3.7%    1.1%     0.0%
                                                       -----   -----    -----
Effective income tax rate                                8.6%    6.0%     6.2%
                                                       =====   =====    =====
</TABLE>

     As of June 30, 2005, the Company had deferred income tax assets of
$15,139,874. The deferred income tax assets have been reduced by a $15,139,874
valuation allowance. The valuation allowance is based on uncertainty with
respect to the ultimate realization of net operating loss carryforwards.


                                      F-20
<PAGE>
     The components of the net deferred tax income tax assets and liabilities as
of June 30, 2005 and 2004 are as follows:

<TABLE>
<CAPTION>
                                               2005           2004
                                           ------------   ------------
<S>                                        <C>            <C>
Deferred income tax assets:
   Net operating loss carryforward         $ 13,436,126   $ 11,513,579
   Stock options loss carryforward            2,032,153      1,999,931
   Executive post retirement costs              456,540             --
   General business credit                      450,199        450,199
   Allowance for doubtful accounts               76,256         50,909
   Accrued vacation                             156,040         78,626
   Inventory reserve                             51,654          2,153
   Accelerated depreciation                      46,354             --
   Warranty reserve                              84,805          8,163
                                           ------------   ------------
   Total deferred income tax assets          16,790,127     14,103,560
   Valuation allowance                      (15,139,874)   (13,197,238)
                                           ------------   ------------
                                              1,650,253        906,322
                                           ------------   ------------
Deferred income tax liabilities:
   Accelerated depreciation                          --        (43,538)
   Accelerated amortization                  (1,650,253)      (862,784)
                                           ------------   ------------
   Total deferred income tax liabilities     (1,650,253)      (906,322)
                                           ------------   ------------
                                           $         --   $         --
                                           ============   ============
</TABLE>

     As of June 30, 2005, the Company has a valuation allowance of $15,139,874,
which primarily relates to the federal net operating loss carryforwards. The
valuation allowance is a result of management evaluating its estimates of the
net operating losses available to the Company as they relate to the results of
operations of acquired businesses subsequent to their being acquired by Escalon.
The Company evaluates a variety of factors in determining the amount of the
valuation allowance, including the Company's earnings history, the number of
years the Company's operating loss and tax credits can be carried forward, the
existence of taxable temporary differences, and near term earnings expectations.
Future reversal of the valuation allowance will be recognized either when the
benefit is realized or when it has been determined that it is more likely than
not that the benefit will be realized through future earnings. Any tax benefits
related to stock options that may be recognized in the future through reduction
of the associated valuation allowance will be recorded as additional paid-in
capital. The Company has available federal and state net operating loss
carryforwards of approximately $45,079,000 and $1,546,000, respectively, of
which $25,500,000 and $1,420,000, respectively, will expire over the next ten
years, and $19,579,000 and $126,000, respectively, will expire in years eleven
through nineteen. Of the approximately $45,000,000 federal net operating loss.
Approximately $8.2 million of the federal NOL carryforward at June 30, 2005
represents amounts that were transferred to the Company as a result of the
acquisition of Drew. Use of this transferred NOL is also limited under Section
382. Any tax benefit realized from such use would first reduce acquired
goodwill.

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


                                      F-21
<PAGE>
(9)  COMMITMENTS AND CONTINGENCIES

     COMMITMENTS

     The Company leases its manufacturing, research and corporate office
facilities and certain equipment under non-cancelable operating lease
arrangements. The future amounts to be paid under these arrangements as of June
30, 2005 are as follows:

<TABLE>
<CAPTION>
                           LEASE
YEAR ENDING JUNE 30,   OBLIGATIONS
--------------------   -----------
<S>                    <C>
2006                    $  890,000
2007                       721,000
2008                       411,000
2009                       285,000
2010                       293,000
Thereafter                 399,000
                        ----------
Total                   $2,999,000
                        ==========
</TABLE>

     Rent expense charged to operations during the years ended June 30, 2005,
2004 and 2003 was approximately $772,000, $386,000 and $360,000, respectively.

     CONTINGENCIES

     ROYALTY AGREEMENT: CLINICAL DIAGNOSTICS SOLUTIONS

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

          INTRALASE CORP. LEGAL PROCEEDINGS

     In October 1997, Escalon and IntraLase entered into a License Agreement
wherein Escalon granted IntraLase the exclusive right to use Escalon's
intellectual laser properties, including patented and non-patented technology,
in exchange for an equity interest in IntraLase as well as royalties based on a
percentage of net sales of future products. The shares of common stock were
restricted for sale until April 6, 2005 (see note 16).

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

     The Court, in ruling on the parties' cross-motions for summary judgment,
did not agree with IntraLase's interpretation of certain terms and declared
that, under the terms of the License Agreement, IntraLase must pay Escalon
royalties on revenue from maintenance contracts and one-year warranties.
Further, the Court rejected IntraLase's argument that it is entitled to deduct
the value of non-patented components of its ophthalmic products, which it sells
as an integrated unit, from the royalties due Escalon.


                                      F-22
<PAGE>
Non-patented components of the products include computer monitors, joysticks,
keyboards, universal power supplies, microscope assemblies, installation kits
and syringes. In addition, the Court rejected IntraLase's assertion that
accounts receivable are not "consideration received" under the License Agreement
and expressly ruled that IntraLase must pay Escalon royalties on IntraLase's
accounts receivable. The Court agreed with IntraLase, however, holding that
IntraLase is not required to pay royalties on research grants. The Court also
held that IntraLase must give Escalon an accounting of third-party royalties.

     Further, the Court agreed with Escalon in finding that royalties are
"monies" and the default in the payment of royalties must be remedied within 15
days of written notice of the default. The Court rejected IntraLase's position
concerning the effective date of the Amended and Restated License Agreement
holding that the effective date of such Agreement was October 17, 2000.
IntraLase has appealed the judgment to the Ninth Circuit Court of Appeals.
Currently, briefing is scheduled to occur in February/March, 2006.

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

     In May, 2005, IntraLase also filed a second suit against Escalon in the
Central District of California ("Second Action"), again for declaratory relief
as well as for reformation of the License Agreement. In this action, IntraLase
has asked the Court to, among other things, validate its interpretation of
certain other terms of the License Agreement relating to the amount of royalties
owed to Escalon and a declaration concerning Escalon's audit rights under the
License Agreement. Escalon filed a motion to dismiss the Second Action on
jurisdictional and substantive grounds. The motion has been fully briefed and is
currently under consideration by the Court for the Central District of
California.

     On May 15, 2005, Escalon, not having been served with IntraLase's Second
Action, filed a Complaint against IntraLase in the Delaware Court of Chancery
for, among other things, breach of contract, breach of fiduciary duty arising
out of IntraLase's bad faith conduct under, and multiple breaches of, the
License Agreement ("Delaware Action"). Escalon seeks declaratory relief,
specified damages, and specific performance of its rights under the License
Agreement, including its express right under the License Agreement to have
independent certified accountants audit the books and records of IntraLase to
verify and compute payments due Escalon.

     On June 3, 2005, IntraLase, after having been served with Escalon's
Complaint, filed its First Amended Complaint in the Second Action adding new
matters that had already been raised by Escalon in its Delaware Action.
IntraLase also filed a motion to dismiss Escalon's Delaware Action. The parties
agreed to postpone briefing on IntraLase's motion until after the California
Court has ruled on Escalon's motion to dismiss the Second Action.

     Separately, on April 22, 2005, Escalon, as record holder of common stock of
IntraLase, made a formal written demand to inspect certain of IntraLase's books
and records pursuant to Section 220 of the Delaware General Corporation Law.
IntraLase rejected Escalon's demand. Escalon recently filed an action in the
Delaware Court of Chancery against IntraLase seeking to enforce its shareholder
rights to inspect IntraLase's books and records.

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


                                       F-23
<PAGE>

     DREW LEGAL PROCEEDINGS

          CARVER LITIGATION

     On December 17, 2002, Edward Carver, David DeCava and Diane Carver, former
principal shareholders of CDC Technologies, Inc., filed a complaint in the State
of Connecticut, Superior Court, Judicial District of Waterbury at Waterbury
against CDC Acquisition, IV Diagnostics and certain other principal shareholders
of CDC Technologies seeking a total of approximately $420,000 for, among other
things, repayment of loans made to CDC Technologies, payment of past wages and
reimbursement of business expenses. The Plaintiffs' claims arose out of a
certain asset purchase for stock transaction in which CDC Acquisition, a wholly
owned subsidiary of Drew, acquired the assets of CDC Technologies and IV
Diagnostics. CDC Acquisition and IV Diagnostics, also a subsidiary of Drew,
asserted counterclaims against the plaintiffs for, among other things, breach of
fiduciary duty, unfair trade and conversion. In addition, CDC Acquisition and IV
Diagnostics asserted cross-claims against its co-defendants for indemnification
pursuant to the transaction agreements. A bench trial was held in June, 2005. In
August, 2005 the Court rendered a decision resulting in the Court's award of
only $76,000 to Plaintiffs. Judgment has not yet been entered on the award. CDC
Acquisition and IV Diagnostics have filed a motion for reconsideration of
certain issues ruled upon by the Court. Further, CDC Acquisition and IV
Diagnostics are presently negotiating with co-defendants over the companies'
indemnification claims.

     On December 30, 2002, Source One, a distributor of CDC Technologies, Inc.
filed suit in state court in Minnesota, later removed to the United States
District Court in Minnesota, against CDC Technologies, Edward Carver and CDC
Acquisition, Inc. and IV Diagnostics, as successors in interest to CDC
Technologies. CDC Acquisition and IV Diagnostics asserted cross-claims against
Carver for indemnification. The court granted summary judgment to the plaintiff
against defendants and awarded plaintiff approximately $185,000 plus interest
and costs. The Court also found Carver liable to CDC Acquisition for
indemnification. Plaintiff agreed to accept $140,000 from CDC Acquisition in
settlement of its claims. CDC Acquisition settled its indemnification claim
against Carver for $75,000.

     The $140,000 settlement, $76,000 award and $75,000 indemnification referred
to above have been recorded by the Company during the year ended June 30, 2005.
The Company does not believe that these matters have, had or are likely to have
a material adverse impact on the Company's business, financial condition or
future results of operations.

     OTHER LEGAL PROCEEDINGS

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

(10) RETIREMENT AND POST-RETIREMENT PLANS

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


                                      F-24
<PAGE>
     On January 14, 2000, Escalon acquired Sonomed. Sonomed adopted a 401(k)
retirement plan effective on January 1, 1993. This plan has continued subsequent
to the acquisition and is available only to Sonomed employees. Escalon's
contribution for the fiscal years ended June 30, 2005, 2004 and 2003 was
$24,928, $27,703 and $37,287, respectively.

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

     On June 23, 2005, the Company entered into a Supplemental Executive
Retirement Benefit Agreement with its Chairman and Chief Executive Officer. The
agreement provides for the payment of supplemental retirement benefits to the
covered executive in the event of his termination of services with the Company
under the following circumstances.

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

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

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

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

During the fourth quarter of fiscal 2005, the Company recorded as expense in the
accompanying Consolidated Statement of Income, $1,087,000, which represents the
present value of the supplemental retirement benefits awarded.

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

     SALE OF SILICONE OIL PRODUCT LINE

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


                                      F-25
<PAGE>
     The agreement with Bausch & Lomb, which commenced on August 13, 2000, was
structured so that the Company received consideration from Bausch & Lomb based
on its adjusted gross profit from its sales of Silicone Oil on a quarterly
basis. The consideration was subject to a factor, which stepped down according
to the following schedule:

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

     INTRALASE: LICENSING OF LASER TECHNOLOGY

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

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

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

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

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

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

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

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

     BIO-RAD LABORATORIES, INC. ROYALTY

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

     The material terms of the OEM Agreement, provided:

-    Drew receives an agreed royalty per test;

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


                                      F-26
<PAGE>
While the agreement, as amended by the Eighth Amendment, expired on May 15,
2005, the parties have continued to operate under the terms of the expired
agreement pending negotiation of a potential extension and/or revision.

     OTHER REVENUE

     Other revenue includes quarterly payments received from:

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

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

     (3)  Royalty payments received from Bio-Rad Laboratories, Inc. ("Bio-Rad").

     The following table presents other revenue received by the Company for the
years ended June 30, 2005, 2004 and 2003:

<TABLE>
<CAPTION>
                       2005         2004         2003
                    ----------   ----------   ----------
<S>                 <C>          <C>          <C>
Silicone Oil        $1,486,000   $1,941,000   $1,858,000
IntraLase royalty    1,334,000      432,000      316,000
Bio-Rad royalty        240,000           --           --
                    ----------   ----------   ----------
                    $3,060,000   $2,373,000   $2,174,000
                    ==========   ==========   ==========
</TABLE>

(12) ACQUISITION OF DREW AND PRO FORMA RESULTS OF OPERATIONS

     On July 23, 2004, Escalon acquired 67% of the outstanding ordinary shares
of Drew, a United Kingdom company, pursuant to the Company's exchange offer for
all of the outstanding ordinary shares of Drew, and since that date has acquired
all of the Drew shares. Drew is a diagnostics company specializing in the
design, manufacture and distribution of instruments for blood cell counting and
blood analysis. Drew is focused on providing instrumentation and consumables for
the physician office and veterinary office laboratories. Drew also supplies the
reagent and other consumable materials needed to operate the instruments. The
results of Drew's operations have been included in the consolidated financial
statements since July 23, 2004. Escalon has been operating Drew as an additional
business segment since July 23, 2004.

     The aggregate purchase price of Drew was $8,525,966, net of acquired cash
of $151,459, consisting of direct acquisition costs of $1,246,376, primarily for
investment banking, legal and accounting fees that were directly related to the
acquisition of Drew, and 900,000 shares of Escalon Common Stock valued at
$7,430,439. The value of the 900,000 shares issued was based on a five day
average of the market price of the stock (two days before through two days
after) the shares were exchanged.


                                      F-27
<PAGE>
     The following table summarizes the purchase price allocation of estimated
fair values of assets acquired and liabilities assumed as of the date of
acquisition of Drew of July 23, 2004.

<TABLE>
<S>                         <C>
Current assets              $ 3,859,771
Furniture and equipment         868,839
Patents                         297,246
Other long-term assets            7,406
Goodwill                      9,574,655
                            -----------
Total assets acquired       $14,607,917
                            -----------
Line of credit              $ 1,617,208
Current liabilities           3,392,286
Long-term debt                1,072,457
                            -----------
Total liabilities assumed   $ 6,081,951
                            -----------
Net assets acquired         $ 8,525,966
                            ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                          Fiscal year ended,
                                      -------------------------
                                          2005          2004
                                      -----------   -----------
<S>                                   <C>           <C>
Revenues                              $26,924,622   $29,691,225
Cost of goods sold                     13,158,061    17,155,481
                                      -----------   -----------
Gross profit                           13,766,561    12,535,744
Operating expenses                     14,449,080    14,634,421
Other (income) expense                 (3,362,294)      574,319
                                      -----------   -----------
Net income (loss) before taxes          2,679,775    (2,672,996)
Provision for income taxes                231,664       138,635
                                      -----------   -----------
Net income (loss)                     $ 2,448,111   $(2,811,631)
                                                    ===========
Basic net income (loss) per share     $     0.420   $    (0.586)
                                      ===========   ===========
Diluted net income (loss) per share   $     0.393   $    (0.586)
                                      ===========   ===========
Weighted average shares - basic         5,831,564     4,796,951
                                      ===========   ===========
Weighted average shares - diluted       6,231,024     4,796,951
                                      ===========   ===========
</TABLE>



                                      F-28
<PAGE>
(13) SEGMENTAL REPORTING

     During the fiscal years ended June 30, 2005 and 2004, Escalon's operations
were classified into four principal reportable segments that provide different
products or services. This represents a change from fiscal 2004. The Company
acquired Drew on July 23, 2004, and subsequently, Drew has been added as an
additional business segment. During the first quarter of fiscal 2005, management
also changed the internal structure of its organization causing Medical Trek and
EMI to be reported as one reportable segment. The corresponding periods have
been restated to present comparative information. Separate management of each
segment is required because each business unit is subject to different
marketing, production and technology strategies.

<TABLE>
<CAPTION>
                                      Drew                     Sonomed                     Vascular
                             ---------------------   ---------------------------   ------------------------
                               2005    2004   2003     2005      2004      2003     2005     2004     2003
                             -------   ----   ----   -------   -------   -------   ------   ------   ------
<S>                          <C>       <C>    <C>    <C>       <C>       <C>       <C>      <C>      <C>
Product revenue              $11,294    $--    $--   $ 7,663   $ 7,597   $ 6,495   $3,180   $3,055   $2,761
Other revenue                    240     --     --        --        --        --       --       --       --
                             -------    ---    ---   -------   -------   -------   ------   ------   ------
Total revenue                 11,534     --     --     7,663     7,597     6,495    3,180    3,055    2,761
                             -------    ---    ---   -------   -------   -------   ------   ------   ------
Costs and expenses:
Cost of goods sold             7,554     --     --     3,115     3,076     2,524    1,432    1,381    1,195
Operating expenses             5,211     --     --     3,593     3,255     3,004    1,747    1,662    1,539
Write down of license and
   distribution tights            --            --        --        --        --       --       --       --
                             -------    ---    ---   -------   -------   -------   ------   ------   ------
Total costs and expenses      12,765     --      0     6,708     6,331     5,528    3,179    3,043    2,734
                             -------    ---    ---   -------   -------   -------   ------   ------   ------
Income from operations        (1,231)    --     --       955     1,266       967        1       12       27
Other income and expenses:
Equity in OTM                     --     --     --        --        --        --       --       --       --
   Gain on Sale of
      IntraLace                   --     --     --        --        --        --       --       --       --
Interest income                    4     --     --        --        --        --       --       --       --
Interest expense                 (83)           --        --      (395)     (611)      (1)     (12)     (27)
                             -------    ---    ---   -------   -------   -------   ------   ------   ------
Total other income and
   expenses                      (79)    --     --        --      (395)     (611)      (1)     (12)     (27)
                             -------    ---    ---   -------   -------   -------   ------   ------   ------
Income before taxes           (1,310)    --     --       955       871       356       --       --       --
Income taxes                       0     --     --        21        --        --       --       --       --
                             -------    ---    ---   -------   -------   -------   ------   ------   ------
Net income (loss)            $(1,310)   $--    $--   $   934   $   871   $   356   $   --   $   --   $   --
                             =======    ===    ===   =======   =======   =======   ======   ======   ======
Depreciation and
   amortization              $   213    $--    $--   $    24   $    24   $    19   $   45   $   44   $   41
Assets                       $ 7,977    $--    $--   $13,472   $12,562   $12,198   $2,174   $2,142   $2,256
Expenditures for
   long-lived assets         $    26    $--    $--        23   $     5   $    34   $   11   $   14   $   16

<CAPTION>
                                  Medical/Trek/EMI                   Total
                             --------------------------   ---------------------------
                               2005      2004     2003      2005      2004      2003
                             -------   -------   ------   -------   -------   -------
<S>                          <C>       <C>       <C>      <C>       <C>       <C>
Product revenue              $ 1,727   $ 1,696   $1,935   $23,864   $12,348   $11,191
Other revenue                  2,820     2,373    2,175     3,060     2,373     2,175
                             -------   -------   ------   -------   -------   -------
Total revenue                  4,547     4,069    4,110    26,924    14,721    13,366
                             -------   -------   ------   -------   -------   -------
Costs and expenses:
Cost of goods sold             1,058     1,019    1,177    13,159     5,476     4,896
Operating expenses             3,897     1,065    1,272    14,448     5,982     5,814
Write down of license and
   distribution tights            --        --      196        --        --       196
                             -------   -------   ------   -------   -------   -------
Total costs and expenses       4,955     2,084    2,645    27,607    11,458    10,906
                             -------   -------   ------   -------   -------   -------
Income from operations          (408)    1,985    1,465      (683)    3,263     2,460
Other income and expenses:
Equity in OTM                    (64)       --       --       (64)       --        --
   Gain on Sale of
      IntraLace                3,412        --       --     3,412        --        --
Interest income                   66        59        3        70        59         3
Interest expense                  29        --       --       (55)     (407)     (638)
                             -------   -------   ------   -------   -------   -------
Total other income and
   expenses                    3,443        59        3     3,363      (348)     (635)
                             -------   -------   ------   -------   -------   -------
Income before taxes            3,035     2,044    1,468     2,680     2,915     1,825
Income taxes                     211       173      112       232       173        --
                             -------   -------   ------   -------   -------   -------
Net income (loss)            $ 2,824   $ 1,871   $1,356   $ 2,448   $ 2,742   $ 1,825
                             =======   =======   ======   =======   =======   =======
Depreciation and
   amortization              $   106   $   173   $  250   $   388   $   241   $   310
Assets                       $16,426   $14,753   $2,436   $40,949   $29,457   $16,890
Expenditures for                                 $   26
   long-lived assets         $    44   $    50   $   26   $   104   $    69   $    76
</TABLE>

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

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



                                      F-29
<PAGE>
August 12, 2005) and from royalty revenue related to IntraLase's licensing of
the Company's intellectual laser technology.

     During the fiscal year ended June 30, 2004, there was one entity, Bausch &
Lomb, from whom Escalon derived greater than 10% of consolidated net revenue.
Revenue from Bausch & Lomb was $2,622,000, or 17.81% of consolidated net revenue
during the year ended June 30, 2004. This revenue is recorded in the
Medical/Trek/EMI business unit. No customer represented more than 10% of
consolidated revenue during the year ended June 30, 2005. Of the external
revenue reported above, the following amounts were derived internationally
during the years ended June 30:

<TABLE>
<CAPTION>
                      2005         2004
                   ----------   ----------
<S>                <C>          <C>
Drew               $5,616,000   $       --
Sonomed             3,818,000    2,941,000
Vascular              323,000      194,000
Medical/Trek/EMI       48,000       42,000
                   ----------   ----------
                   $9,806,000   $3,177,000
                   ==========   ==========
</TABLE>

(14) RELATED-PARTY TRANSACTIONS

     Escalon and a member of the Company's Board of Directors are founding and
equal members of Ocular Telehealth Management, LLC ("OTM"). OTM is a diagnostic
telemedicine company providing remote examination, diagnosis and management of
disorders affecting the human eye. OTM's initial solution focuses on the
diagnosis of diabetic retinopathy by creating access and providing annual
dilated retinal examinations for the diabetic population. OTM was founded to
harness the latest advances in telecommunications, software and digital imaging
in order to create greater access and a more successful disease management for
populations that are susceptible to ocular disease. Through June 30, 2005,
Escalon had invested $256,000 in OTM and owned 45% of OTM. The members of OTM
have agreed to review the operations of OTM after 24 months, at which time the
members each have the right to sell their membership back to OTM at fair market
value. The Company will provide administrative support functions to OTM. Through
June 30, 2005, OTM had revenue of $3,291 and incurred expenses of $131,228. This
investment is accounted for under the equity method of accounting and is
included in other assets.

     Commencing in July 2004, a relative of a senior executive officer of
Escalon began providing legal services to the Company in connection with various
legal proceedings. Expenditures related to this individual during the fiscal
year ended June 30, 2005 were $118,140. Commencing in August 2005, this
individual was retained as an employee of the Company.



                                      F-30
<PAGE>
(15) QUARTERLY DATA

<TABLE>
<CAPTION>
                                       First     Second    Third     Fourth     Full
                                      Quarter   Quarter   Quarter   Quarter     Year
                                      -------   -------   -------   -------   -------
<S>                                   <C>       <C>       <C>       <C>       <C>
Year ended June 30, 2005
   Total revenue                       $5,292   $ 6,362    $7,229    $8,042   $26,925
   Gross profit                         2,621     3,012     4,230     3,904    13,767
   Net income                             116      (428)      744     2,016     2,448
   Basic net income per share (a)      $0.021   $(0.072)   $0.125    $0.338   $ 0.420
   Diluted net income per share (a)    $0.019   $(0.072)   $0.119    $0.323   $ 0.393

Year ended June 30, 2004
   Total revenue                       $3,412   $ 3,757    $3,613    $3,939   $14,721
   Gross profit                         2,199     2,507     2,248     2,291     9,245
   Net income                             623       821       739       559     2,742
   Basic net income per share (a)      $0.185   $ 0.243    $0.192    $0.111   $ 0.704
   Diluted net income per share (a)    $0.154   $ 0.196    $0.172    $0.103   $ 0.637
</TABLE>

(a)  Each quarterly amount is based on separate calculations of weighted average
     shares outstanding.

(16) INTRALASE INITIAL PUBLIC OFFERING AND SALE OF INTRALASE COMMON STOCK

     In October 1997, Escalon licensed its intellectual laser properties to
IntraLase in exchange for an equity interest of 252,535 shares of Common Stock
(as adjusted for splits), as well as royalties on future product sales. The
Company has historically accounted for these shares a $0 basis because a readily
determinable market value was previously not available. On October 7, 2004,
IntraLase announced the initial public offering of shares of its common stock at
a price of $13.00 per share. The shares of common stock were restricted for a
period of less than one year and were permitted to be sold after April 6, 2005
pursuant to a certain Fourth Amended Registration Rights Agreement between the
Company and IntraLase. The Company sold 191,000 shares of IntraLase common stock
in May 2005 at $17.9134 per share resulting in gross proceeds of $3,421,459.
After paying broker commissions and other fees of $9,698, the Company received
net proceeds of $3,411,761. The net proceeds from the sale were recorded in
other income and expense. As of June 30, 2005, the Company's remaining 61,535
shares of IntraLase were classified as available-for-sale securities and had a
market value of $1,207,317.

(17) SUBSEQUENT EVENT - SALE OF INTRALASE COMMON STOCK

     The Company sold 58,535 shares of IntraLase common stock on July 8, 2005 at
$19.8226 per share resulting in gross proceeds of $1,160,316. After paying
broker commissions and other fees of $2,980, the Company received net proceeds
of $1,157,336. The net proceeds from the sale were recorded in other income and
expense. The Company's remaining 3,000 shares of IntraLase are classified as
available-for-sale securities.


                                      F-31