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

                                    FORM 10-K
(Mark One)

[X]      Annual report pursuant to section 13 or 15(d) of the Securities
         Exchange Act of 1934

                     For the fiscal year ended JUNE 30, 1998

                                       or

[ ]      Transition report pursuant to section 13 or 15(d) of the Securities
         Exchange Act of 1934

           For the transition period from ____________ to ___________

                         COMMISSION FILE NUMBER 0-20127

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

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

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

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

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

Title of each class:               Name of each exchange on which registered:
     None                                           None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                         Common Stock, without par value
 Class A Redeemable Common Stock Purchase Warrants, exercisable for the purchase
                 of one share of Common Stock, without par value
 Class B Redeemable Common Stock Purchase Warrants, exercisable for the purchase
                of one share of Common Stock, without par value

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $1,797,122. Such aggregate market value was computed
by reference to the bid and asked price of the Common Stock in the when-issued
trading market on September 16, 1998. For purposes of making this calculation
only, the registrant has defined affiliates as including all directors and
beneficial owners of more than ten percent of the Common Stock of the Company.

The number of shares of the registrant's Common Stock outstanding as of
September 16, 1998 was 3,017,185.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's definitive Proxy Statement relating to the 1998 Annual
Meeting of Shareholders are incorporated by reference into Part III hereof.
<PAGE>   2
                              ESCALON MEDICAL CORP.

                             FORM 10-K ANNUAL REPORT
                       For Fiscal Year Ended June 30, 1998

                                TABLE OF CONTENTS

PART I
<TABLE>
<CAPTION>
                                                                                                               Page
<S>                                                                                                            <C>
Item 1.     Business.......................................................................................       1
                                                                                                                 
Item 2.     Properties.....................................................................................       5
                                                                                                                 
Item 3.     Legal proceedings..............................................................................       5
                                                                                                                 
Item 4.     Submission of Matters to a Vote of Security Holders............................................       6
                                                                                                                 
                                                                                                                 
PART II                                                                                                          
                                                                                                                 
Item 5.     Market for registrant's common equity and related stockholder matters..........................       6
                                                                                                                 
Item 6.     Selected financial data........................................................................       7
                                                                                                                 
Item 7.     Management's discussion and analysis of financial condition and results of operations..........       8
                                                                                                                 
Item 7A.    Quantitative and Qualitative Disclosure About Market Risk......................................      11
                                                                                                                 
Item 8.     Financial statements and supplementary data....................................................      11
                                                                                                                 
Item 9.     Changes in and disagreements with accountants on accounting and financial disclosure...........      11
                                                                                                                 
                                                                                                                 
PART III                                                                                                         
                                                                                                                 
Item 10.    Directors and executive officers of the registrant.............................................      11
                                                                                                                 
Item 11.    Executive compensation.........................................................................      11
                                                                                                                 
Item 12.    Security ownership of certain beneficial owners and management.................................      11
                                                                                                                 
Item 13.    Certain relationships and related transactions.................................................      12
                                                                                                                 
                                                                                                                 
PART IV                                                                                                          
                                                                                                                 
Item 14.    Exhibits, financial statement schedules, and reports on form 8-K..............................       12
</TABLE>
<PAGE>   3
This document contains certain forward-looking statements that are subject to
risks and uncertainties. Forward-looking statements include certain information
relating to general business strategy, the introduction of new products, the
potential market and uses for the Company's products, expansion plans, the
Company's plans to file applications with the Food and Drug Administration (the
"FDA"), the development of joint venture opportunities, the effects of
competition on the structure of the markets in which the Company competes,
defending itself in litigation matters, operating performance and liquidity, as
well as information contained elsewhere in this Report where statements are
preceded by, followed by or include the words "believes," "expects,"
"anticipates" or similar expressions. For such statements the Company claims the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. The forward-looking statements
in this document are subject to risks and uncertainties that could cause the
assumptions underlying such forward-looking statements and the actual results to
differ materially from those expressed in or implied by the statements. The most
important factors that could prevent the Company from achieving its goals -- and
cause the assumptions underlying the forward-looking statements and the actual
results of the Company to differ materially from those expressed in or implied
by those forward-looking statements --include, without limitation and in
addition to those discussed in the documents incorporated herein by reference,
the following: (i) The competitive nature of the industries in which the Company
competes and the ability of the Company to (a) successfully maintain existing
strategic relationships and (b) negotiate and enter into new strategic
relationships and otherwise distinguish its products from those of other
companies on the basis of quality, value and reliability; (ii) Economic and
regulatory conditions which could adversely affect sales of the Company's
products, including the uncertainty of FDA approval for any new applications;
(iii) The ability of the Company to successfully develop and market new
products; (iv) Future capital needs and the uncertainty of additional funding
(whether through the financial markets, collaborative or other arrangements with
strategic partners, or from other sources); (v) Uncertain protection of
important proprietary technology; (vi) The outcome of litigation matters; (vii)
Limitation on third-party reimbursement and the possible adverse impact of
health care reform on the payment of health care services; (viii) Dependence on
key personnel; and (ix) The ability of the Company to maintain its listing on
NASDAQ.


                                     PART I


ITEM 1.  BUSINESS

COMPANY OVERVIEW

         Escalon Medical Corp. (formerly known as Intelligent Surgical Lasers,
Inc.) and its subsidiary Escalon Pharmaceutical Inc. (jointly referred to as
"Escalon" or the "Company") operates in the healthcare market specializing in
the development, marketing and distribution of ophthalmic medical devices and
pharmaceutical products. The Company is also developing its ophthalmic drug
delivery system to complement its other businesses. In February 1996, the
Company acquired substantially all of the assets and certain liabilities of
Escalon Ophthalmics, Inc. ("EOI"), a developer and distributor of ophthalmic
surgical products. Prior to the acquisition, the Company devoted substantially
all of its resources to the research and development of its ultrafast laser
systems designed for treatment of ophthalmic disorders. As a result of the EOI
acquisition, Escalon changed its market focus and is now engaged in developing,
marketing and distributing ophthalmic medical devices and pharmaceuticals. In
order to further develop and commercialize its laser technology, the Company, in
October 1997, licensed its intellectual laser properties to a newly formed
company, IntraLase Corporation ("IntraLase"), in return for an equity interest
and future royalties on product sales. IntraLase will have the responsibility of
funding and developing the laser technology through to commercialization

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

         In January 1998, the Company moved its corporate headquarters from
Skillman, New Jersey. The executive functions relocated to Wayne, Pennsylvania
and its day-to-day finance functions moved to a new production facility in New
Berlin, Wisconsin.


                                      -1-
<PAGE>   4
SURGICAL PRODUCTS BUSINESS

         The Company develops, manufactures and distributes over 40 ophthalmic
surgical products which are utilized primarily by the vitreoretinal ophthalmic
surgeon. In addition, the Company contract manufactures certain of its products
for other third-party companies. The following is a summary of the Company's key
surgical product lines:

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

         AdatoSil 5000, which the Company distributes under a license and
distribution agreement with Adatomed/Chiron Vision, is a specialty product used
in "worst case" detached retina surgery as a mechanical aid in the reattachment
procedure. The use of highly purified silicone oil, like AdatoSil 5000, as a
tamponade has become a standard of care in AIDS patients suffering from retinal
detachment secondary to CMV retinitis infection. During fiscal 1998, sales of
AdatoSil 5000 accounted for approximately 58% of the Company's revenues.

ISPAN Intraocular Gases

         The Company distributes two intraocular gas products, C(3)F(8) and 
SF(6), which are used by vitreoretinal surgeons as a temporary tamponade in
detached retina surgery. Under a non-exclusive distribution agreement from Scott
Medical Products ("Scott"), Escalon distributes packages of Scott gases in
canisters containing 25 grams or less of gas. Along with the intraocular gases,
the Company manufactures and distributes a patented disposable universal gas
kit, which delivers the gas from the canister to the patient.

Viscous Fluid Transfer Systems

         To complement the use of AdatoSil 5000, Escalon markets several viscous
fluid transfer systems and related disposable syringe products which aid the
surgeon in the process of injecting and extracting the oil. Adjustable pressures
and vacuums provided by the equipment allow the surgeon to manipulate the flow
of oil during surgery.

Fiber Optic Light Source Products

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

PHARMACEUTICAL PRODUCTS BUSINESS

Betadine(R) 5% Sterile Ophthalmic Prep Solution ("Betadine 5%")

           Currently, Escalon distributes one pharmaceutical product, Betadine
5%, a prescription pre-operative povidone-iodine preparation used to sterilize
the cornea, conjunctiva, and periocular (surfaces around the eye) regions of the
eye prior to ophthalmic surgery. Betadine 5% is distributed by Escalon under a
license and distribution agreement with The Purdue Frederick Company. Escalon's
objective is to have this product used in most of the two million ophthalmic
surgeries, which take place in the United States each year. Sales of this
product accounted for approximately 16% of the Company's revenues in fiscal
1998.

Povidone-Iodine 2.5% Solution -- Ophthalmia Neonatorum

In an effort to prevent ophthalmia neonatorum, newborns in the United States are
treated with erythromycin or silver nitrate. However, bacterial resistance to
erythromycin can occur and chemical toxicity is common with the use of silver
nitrate. Povidone-iodine, a broad-spectrum antimicrobial, active against
bacteria, viruses and fungi, has often been suggested as a viable alternative
for the prevention of this disease. Recently, a clinical study completed outside
the United States by Drs. Isenberg, Apt and Wood of UCLA has provided support
for this hypothesis. A patent claiming


                                      -2-
<PAGE>   5
this use was issued to UCLA and Escalon has acquired an exclusive license from
UCLA to develop and market the 2.5% solution. The Company's intent is to seek
joint venture or strategic partnership arrangements to fund the development and
potential commercialization of this product.

Ocufit SR(R)

         One of the Company's major development projects relates to its Ocufit
SR (sustained release) drug delivery system. Ocufit SR is designed to make the
treatment of eye disease easier and more effective for people requiring topical
eye drop therapy.

         The patented Ocufit SR ocular insert, a flexible rod-shaped formulation
made of medical grade silicone rubber, can be loaded with a variety of drugs.
This insert, which can be retained comfortably in the upper or lower fornix, is
not affected by eye or lid movement. Drug release can be controlled so that
targeted amounts of drug are delivered for defined time periods, lasting weeks
to months.

         The first Ocufit SR product, which is being developed jointly by
Escalon and The West Company ("West"), which has expertise in injection molded
elastomers and drug delivery systems development, is Ocufit diclofenac.
Diclofenac, a non-steroidal anti-inflammatory drug ("NSAID"), is prescribed
post-operatively to reduce inflammation of the ocular tissue. Current U.S. sales
of diclofenac in a topical drop form approximates $30 million per year. It is
anticipated that this market will grow as NSAID compounds are becoming more
widely prescribed.

         Escalon anticipates filing an Investigational New Drug application with
the Food and Drug Administration by the end of calendar year 1998 and begin the
Phase I clinical trial by June 1999. The Company's overall strategy is to seek
strategic partnership arrangements for the further development and
commercialization of Ocufit diclofenac and other Ocufit applications.

ULTRAFAST LASER PRODUCTS BUSINESS

         The Company for the past several years has devoted substantially all of
its resources to the development of its proprietary ultrafast laser systems for
the treatment of a broad range of eye disorders. Escalon's solid-state pico-
second (one trillionth of a second) Nd: YLF (Neodymium:Yitrium-Lithium-Fluoride)
laser systems are designed to be more precise than lasers systems utilizing
currently available technologies.

         With the acquisition of EOI, the Company chose to change its focus to
its surgical products and pharmaceutical business and as such, is no longer
manufacturing its laser systems. In order to further develop and commercialize
its laser technology, the Company licensed it intellectual laser properties to
IntraLase in exchange for an initial 25% equity interest in IntraLase. In
addition, the Company is entitled to a 2.5% royalty on future products sales
which are based on the Company's patented technology, a 1.5% royalty on product
sales not dependent on the Company's technology and an annual license fee.

RESEARCH AND DEVELOPMENT

         The Company conducts its medical device product development at its New
Berlin, Wisconsin facility. The Ocufit SR research and development is being
conducted at The West Company laboratories pursuant to a collaborative
arrangement. Given the change in market focus, research and development
activities at its laser laboratory in Irvine, California was discontinued in
fiscal 1997. Research and development expenditures for fiscal years 1998, 1997
and 1996 amounted to $.5 million, $1.6 million and $1.7 million, respectively.

MANUFACTURING AND DISTRIBUTION

         Escalon leases 8,500 square feet of space in New Berlin, Wisconsin for
its surgical products operations. The facility is currently used for
engineering, product design and development, manufacturing and product
assembly. Various vendors are used for subcontract component manufacture,
assembly and sterilization. Manufacturing facilities include a class 10,000
clean room. All of the Company's surgical products are distributed from its
Wisconsin facility. 


                                      -3-
<PAGE>   6
Livingston Healthcare Services Inc., New Castle, Delaware, currently serves as a
warehousing and distribution facility for Betadine 5%. For each new product
Escalon develops, the manufacture, testing and marketing of such product entails
risk of product liability. Product liability insurance is carried by Escalon to
cover the primary risk.

         The Company has aggressively pursued ISO9001 and CE certification to
demonstrate the high quality of its products and expand its marketing horizons.
Subsequent to year-end, CE certification for its disposable delivery systems was
received. Escalon has also received draft ISO9001 certification for the design,
manufacture and distribution of its viscous fluid system.

MARKETING AND SALES

         Escalon's independent sales force carries out direct promotion and
sales of its products. Currently, Escalon sells most of its ophthalmic device
and instrument products directly to the end user. However, Betadine 5% is
primarily sold through traditional drug wholesale channels.

         The Company's nine independent sales representatives are based in
Pennsylvania, New York, Wisconsin, Massachusetts, Missouri, Michigan, Minnesota,
Florida and California. These independent sales representatives market to
teaching institutions, key hospitals and eye surgery centers, focusing primarily
on physicians and operating room personnel performing vitreoretinal surgery.
Notwithstanding Escalon's vitreoretinal interest, these sales representatives
pursue leads for Betadine 5% in all institutions and promote other products as
required.

SERVICE AND SUPPORT

         Escalon maintains a full service program for all products sold.
Warranties exist on all products against defects and performance. Surgical
product repairs are made at the Wisconsin facility and customer service
personnel handle returns.

THIRD PARTY REIMBURSEMENT

          It is expected that the Company's products will be purchased primarily
by ophthalmologists and hospitals, which will then bill various third party
payors for the health care services provided to their patients. These payors
include Medicare, Medicaid and private insurers. Government agencies generally
reimburse at a fixed rate based on the procedure performed. In addition,
third-party-payors may deny reimbursement if they determine that any procedure
performed using any one of the Company's products was unnecessary,
inappropriate, not cost-effective, experimental or used for a non-approved
indication.

PATENTS AND ROYALTIES

         The pharmaceutical and medical device communities place considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes. Escalon's policy is to protect its technology by
aggressively obtaining patent protection for all of its developments and
products, both in the United States and in selected countries outside the United
States. The Company's surgical products and pharmaceutical technology are
covered by thirteen United States issued patents and one issued Taiwanese
patent. In addition, one United States patent is currently pending. With respect
to the Company's ultrafast laser systems (licensed to IntraLase), fourteen
patents have been issued or allowed and two additional patent applications have
been filed in the United States. It is the Company's policy to file for patent
protection in those foreign countries in which the Company believes that
protection is necessary to protect its economic interests. The Company intends
to vigorously defend its patents if the need arises.

COMPETITION


                                      -4-
<PAGE>   7
         There are numerous direct and indirect competitors of Escalon in the
United States and abroad. These companies include: ophthalmic-oriented companies
that market a broad portfolio of products, including prescription ophthalmic
pharmaceuticals, ophthalmic devices, consumer products (such as contact lens
cleaning solution) and other eye care products; large integrated pharmaceutical
companies that market a limited number of ophthalmic pharmaceuticals in addition
to many other pharmaceuticals; and smaller specialty pharmaceutical and
biotechnology companies that are engaged in the development and
commercialization of prescription ophthalmic pharmaceuticals and products, and
possibly drug delivery systems.

         The ophthalmic market is highly fragmented with several large companies
dominating the industry. The Company believes that these large companies capture
approximately 50% of the overall ophthalmic market. The balance of the market is
composed of smaller companies ranging from start-up entities to established
niche market players. The ophthalmic market in general is intensely competitive
with each company eager to expand its market share. As a result of the intense
competition, the Company believes that many of the industry's smaller companies
will either consolidate or fail. Escalon's strategy is to compete primarily on
the basis of technological innovation to which it has proprietary rights.
Escalon believes, therefore, that its success will depend in large part upon
obtaining and maintaining exclusive marketing rights covering its current and
future products through licenses, the issuance of patents and certain other
government actions. At the same time, Escalon recognizes that there are other
young and innovative companies, which may develop competitive technologies.

         Although the Company has numerous competitors in the vitreoretinal
market, Escalon believes that it is in a niche market with regards to its Ocufit
SR business. Specifically, the Company is unaware of any competitors which have
sustained drug release technology similar to Ocufit SR. There is, however, at
least one company that Escalon is aware of that has developed technology based
on "once-a-day" drug release. The Company can make no assurance that additional
competition will not develop in the vitreoretinal market.

HUMAN RESOURCES

         As of June 30, 1998, Escalon employed 16 full-time employees and three
part-time employees. Eight of Escalon's full-time employees are in general
administrative and marketing positions, four are in surgical products
manufacturing, three are in surgical products engineering and one is in quality
assurance. In addition, the Company utilizes one consultant to handle the
Company's regulatory and clinical affairs. Escalon also has nine independent
sales representatives who market primarily Escalon products. Escalon's employees
are not covered by a collective bargaining agreement and Escalon considers its
relations with employees to be good.


ITEM 2.  PROPERTIES

         The Company leases an aggregate of approximately 12,000 square feet of
space for its (a) executive offices in Wayne, Pennsylvania, (b)
manufacturing/warehouse facility in New Berlin, Wisconsin, (c) consultant's
office/storage facility in Turnersville, New Jersey and (d) laser research and
development facility in Irvine, California. The Wisconsin facility lease
covering approximately 8,500 square feet of space expires in April 2003. The
Company's 3,000 square feet of space in California is subleased to IntraLase,
with that lease expiring in September 1999. Both the executive office and
consultant's office space leases expire in December 1998; these amount to 500
square feet of space. The property leased in Wayne, Pennsylvania is 100% owned
by the Chief Executive Officer and Chairman of the Board of the Company. Ocufit
drug delivery research and development is conducted principally at The West
Company in Lionville, Pennsylvania. Annual rent under all of the Company's lease
arrangements approximates $108,000.


ITEM 3.  LEGAL PROCEEDINGS

           As previously reported in reports filed with the Securities and
Exchange Commission, on or about June 8, 1995, a purported class action
complaint captioned George Kozloski v. Intelligent Surgical Lasers, Inc., et
al., 95 Civ. 4299, was filed in the U.S. District Court for the Southern
District of New York as a "related action" to In Re Blech Securities Litigation
(a litigation matter which the Company is no longer a party to). The plaintiff
purports to represent 


                                      -5-
<PAGE>   8
a class of all purchasers of the Company's stock from November 17, 1993, to and
including September 21, 1994. The complaint alleges that the Company, together
with certain of its officers and directors, David Blech and D. Blech & Co.,
Inc., issued a false and misleading prospectus in November 1993 in violation of
Sections 11, 12 and 15 of the Securities Act of 1933. The complaint also asserts
claims under Section 10(b) of the Securities Exchange Act of 1934 and common
law. Actual and punitive damages in an unspecified amount are sought, as well as
a constructive trust over the proceeds from the sale of stock pursuant to the
offering. On June 6, 1996, the court denied a motion by the Company and the
named officers and directors to dismiss the Kozloski complaint and, on July 22,
1996, the Company Defendants filed an answer to the complaint denying all
allegations of wrongdoing and asserting various affirmative defenses. On March
31, 1997, the court issued Pretrial Order No. 2, which set discovery cut off and
ready trial dates, as well as providing for certain coordination of discovery in
the Kozloski case, and certain related cases involving other issuers and D.
Blech & Co. Discovery in the related actions is ongoing. It currently is
scheduled to be completed by March 15, 1999 and the cases ready for trial by May
20, 1999. Class certification motions have been dismissed for failure to
prosecute, with leave to renew.

         In an effort to curtail its legal expenses related to this litigation,
while continuing to deny any wrongdoing, the Company has reached an agreement in
principle to settle this action on its behalf and on behalf of its former and
present officers and directors, for $500,000. This settlement is subject to
agreement upon final documentation and court approval. The Company's directors
and officers insurance carrier has agreed to fund a significant portion of the
settlement amount. In view of the anticipated settlement, no discovery or motion
practice is proceeding in the Kozlowki case.


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

         The Company's Common Stock trades on the National Market segment of the
NASDAQ Stock Market under the symbol "ESMC." The following table sets forth, for
the periods indicated the high and low sales prices as quoted on the NASDAQ
Stock Market.

<TABLE>
<CAPTION>
         Period                                               High          Low
         ------                                               ----          ---
<S>                                                           <C>          <C>  
         Fiscal 1997:
            First Quarter                                     $9.38        $4.00
            Second Quarter                                     6.13         3.63
            Third Quarter                                      5.63         2.50
            Fourth Quarter                                     3.00         1.75

         Fiscal 1998:
            First Quarter                                     $2.50         $1.38
            Second Quarter                                    10.44          1.38
            Third Quarter                                     10.25          1.56
            Fourth Quarter                                     2.38          0.77
</TABLE>

         As of September 16, 1998, there were 60 holders of record of the
Company's Common Stock. On September 16, 1998, the closing sale price of the
Common Stock as reported by the NASDAQ Stock Market was $0.8125.


                                      -6-
<PAGE>   9
         The Common stock is currently listed on the NASDAQ National Market. In
order to continue to be listed on the NASDAQ National Market, however, the
Company must maintain $4,000,000 in net tangible assets, a $5,000,000 market
value of the public float, two market-makers and a minimum bid price of $1.00
per share. If the Company's securities are delisted, an investor could find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of the Company's securities.

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

ITEM 6.  SELECTED FINANCIAL DATA

         The following selected financial data are derived from the financial
statements of the Company. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes thereto included
herein in Item 8.


<TABLE>
<CAPTION>
                                                                         FOR THE YEARS ENDED JUNE 30,
                                                   -------------------------------------------------------------------
                                                    1994           1995           1996           1997           1998
                                                   -------        -------        -------        -------        -------
                                                                 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                <C>            <C>            <C>            <C>            <C>    
STATEMENT OF OPERATIONS DATA:
Net sales                                          $   100        $   170        $ 2,341        $ 5,431        $ 5,942
Costs and expenses:
  Cost of sales                                         64             99          1,229          2,650          2,589
  Research and development                           3,419          2,776          1,723          1,571            495
  Marketing, general and administrative              2,916          1,905          2,723          3,716          2,805
  Write down of goodwill and license
    and distribution rights                             --             --             --          3,319             --
  Acquired research and development                     --             --          1,000             --             --             
                                                   -------        -------        -------        -------        -------
    Total costs and expenses                         6,399          4,780          6,675         11,256          5,889
                                                   -------        -------        -------        -------        -------
Income (loss) from operations                       (6,299)        (4,610)        (4,334)        (5,825)            53
Interest income                                        232            342            257            141            119
Interest expense                                       (30)            --             (5)            (1)            (1)
                                                   -------        -------        -------        -------        -------
Net income (loss)                                  $(6,097)       $(4,268)       $(4,082)       $(5,685)       $   171
                                                   =======        =======        =======        =======        =======

Basic and diluted net loss per share               $ (5.64)       $ (2.97)       $ (2.16)       $ (2.16)       $ (0.04)
                                                   =======        =======        =======        =======        =======
Weighted average shares - basic and diluted
   Used in per share computation                     1,082          1,436          1,893          2,630          2,673
                                                   =======        =======        =======        =======        =======
</TABLE>



<TABLE>
<CAPTION>
                                                                            AS OF JUNE 30,
                                             ------------------------------------------------------------------------
                                              1994            1995            1996            1997            1998
                                             --------        --------        --------        --------        --------
                                                                            (IN THOUSANDS)
<S>                                          <C>             <C>             <C>             <C>             <C>     
BALANCE SHEET DATA:
Cash and cash equivalents                    $  2,933        $  3,518        $  2,585        $  1,753        $  2,264
Working capital                                 7,937           6,764           3,754           2,170           3,465
Total assets                                   12,461           7,847          11,600           5,834           6,734
Accumulated deficit                           (25,811)        (30,079)        (34,162)        (39,847)        (39,952)
Total shareholders' equity                     11,650           7,470          10,483           4,798           6,049
</TABLE>


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

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

OVERVIEW

         On February 12, 1996, the Company acquired all of the assets and
certain liabilities of Escalon Ophthalmics, Inc. ("EOI"). Prior to the
acquisition, the Company was in the development stage and devoting substantially
all of its resources to the research and development of laser systems designed
for the treatment of ophthalmic disorders. Upon completion of the acquisition,
the Company changed its market focus and is now engaged in developing, marketing
and distributing ophthalmic medical devices and pharmaceuticals. The Company is
also developing its ophthalmic drug delivery system to complement its other
businesses. In order to further develop and commercialize its laser technology,
the Company, in October 1997, licensed its intellectual laser properties to a
newly formed company, IntraLase, in return for an equity interest in IntraLase
and future royalties on product sales. IntraLase will have the responsibility of
funding and developing the laser technology through to commercialization. Sales
of products acquired from EOI are made primarily to hospitals and physicians
throughout the United States

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

RESULTS OF OPERATIONS

Years Ended June 30, 1997 and 1998

         Product revenues increased to $5,942,004 in fiscal year 1998 from
$5,431,282 in fiscal year 1997. This increase of $510,722, or 9%, is due to the
increase in unit sales of Adatosil(R)5000 Silicone Oil, Betadine(R)5% Sterile
Ophthalmic Prep Solution and ISPAN(TM)Intraocular Gases. These increases were
partially offset by a decrease in unit sales of the Company's capital equipment,
related disposable product lines and contract manufacturing product lines.
Contract manufacturing revenues vary from quarter to quarter depending on when
orders are received and the lead times to produce such products.

         Cost of goods sold totaled $2,588,500, or 44% of revenues, for fiscal
year 1998 as compared to $2,650,360, or 49% of revenues, for the year ended June
30, 1997. The 5% decrease in cost of goods sold as a percentage of revenues is
due primarily to (i) the strengthening of the U.S. dollar against the German
mark which has lowered the cost associated with the purchases of Adatosil(R)5000
Silicone Oil, the Company's primary product; and (ii) a change in the product
sales mix during the respective periods.

         Research and development expenses decreased from $1,570,674 in fiscal
year 1997 to $494,895 in fiscal year 1998, a decrease of $1,075,779 or 68%. This
decrease relates to the elimination of expenditures associated with the
Company's laser development program, as a result of the Company's change in
market focus, and a decrease in expenditures associated with the Company's drug
delivery technology.

         Marketing and general and administrative expenses decreased $910,273,
or 24%, to $2,805,454 for the year ended June 30, 1998 as compared to $3,715,727
in fiscal year 1997. This decrease is due principally to (i) the reduction in
the amortization expense of goodwill and license and distribution rights
resulting from the write down of such assets during the fourth quarter of fiscal
1997; and (ii) the decrease in commission expense as a result of a change in the
Company's commission structure. These decreases were offset partially by costs
associated with the closing of the Company's New Jersey office and relocation of
the Company's Wisconsin production facility.


                                      -8-
<PAGE>   11
         Included in the results of operations for the year ended June 30, 1997
was a non-cash charge to operations of $3,318,888 in connection with the write
down of goodwill and license and distribution rights acquired from EOI. This
write down was due to the impairment of value resulting from changes in the
estimates of future sales associated with the license and distribution
agreements. No similar charges were incurred in fiscal 1998.

         During fiscal year 1998, the Company accrued $100,000 representing its
anticipated contribution to settle the claims related to outstanding litigation
(George Kozlowski v. Intelligent Surgical Lasers, Inc., et al.). See Note 11 of
the Notes to Consolidated Financial Statements for further details surrounding
this litigation.

         Pursuant to the licensing agreement with IntraLase described in Note 9
of the Notes to Consolidated Financial Statements, the Company is to be
reimbursed $75,000 by IntraLase for previously expensed patent costs. In October
1997, the Company recorded this receivable and credited marketing, general and
administrative expense for this future reimbursement.

         Interest income decreased to $118,471 in fiscal year 1998 from $140,705
in fiscal year 1997. The decrease is due to a reduction in the levels of cash
and cash equivalents available for investment prior to the completion of the
preferred stock offering in January 1998.

Years Ended June 30, 1996 and 1997

         Product revenues increased to $5,431,282 in fiscal year 1997 from
$2,341,073 in fiscal year 1996. This increase of $3,090,209, or 132%, relates
primarily to having twelve months of sales in fiscal 1997 from product lines
acquired from EOI as compared to only five months of like-kind sales during
fiscal year 1996.

         Cost of goods sold totaled $2,650,360, or 49% of revenues, for the year
ended June 30, 1997 as compared to $1,228,907, or 52% of revenues, for fiscal
year 1996. The overall dollar increase in cost of goods sold for fiscal 1997 is
due to the increase in sales noted above. The decrease in cost of goods sold as
a percentage of product revenues has resulted primarily from a 3% increase in
the selling price of AdatoSil 5000 Silicone Oil, the Company's primary product,
coupled with the strengthening of the U.S. dollar against the German mark which
has lowered the costs associated with AdatoSil 5000 Silicone Oil purchases.

         Research and development expenses decreased from $1,722,998 in fiscal
year 1996 to $1,570,674 in fiscal year 1997, a decrease of $152,324 or 9%. The
decrease in research and development expenses relates to a decrease in the
expenditures associated with the Company's laser development program offset by
expenditures associated with the Company's surgical products and ophthalmic drug
delivery programs acquired from EOI. The reduction in the laser development
program is a direct result of a reduction in workforce and other cost reduction
programs implemented during the fiscal year 1996 in connection with the change
in the Company's market focus. The Company's research and development expenses
consist primarily of direct expenses associated with compensation and benefits,
consulting and research and development arrangements with third parties and
indirect expenses such as materials, equipment and supplies.

         Marketing and general and administrative expenses increased $992,121 or
36% to $3,715,727 for the year ended June 30, 1997 as compared to $2,723,606 in
fiscal year 1996. This increase relates primarily to (i) the inclusion of the
marketing and general and administrative operations acquired from EOI for twelve
months in fiscal 1997 as compared to only five months in fiscal year 1996; (ii)
legal fees associated with the Company's ongoing litigation; and (iii) offset by
a decrease in marketing and general and administrative expenses associated with
the Company's laser development projects resulting from the aforementioned cost
reduction programs.

         Included in the results of operations for the year ended June 30, 1996
is a $1.0 million non-cash charge for the in-process technology acquired from
EOI. At June 30, 1997, the Company took a non-cash charge to operations of
$3,318,888 in connection with the write down of goodwill and license and
distribution rights acquired from EOI. This write down is due to the impairment
of value resulting from changes in the estimates of future sales associated with
the license and distribution agreements.


                                      -9-
<PAGE>   12
         Interest income decreased to $140,705 in fiscal year 1997 from $257,093
in fiscal year 1996. The decrease is due to a reduction in the levels of cash
and cash equivalents available for investment.

LIQUIDITY AND CAPITAL RESOURCES

         At June 30, 1998, the Company had cash and cash equivalents of
$2,263,967 as compared to $1,752,648 at June 30, 1997. The Company's short-term
investments at June 30, 1998 and 1997 were $330,016 and $235,000, respectively.
The net increase in cash and cash equivalents relates primarily to the
completion of the preferred stock offering described in Note 6 of the Notes to
Consolidated Financial Statements, offset by cash used in operations, the
purchase of short term investments, furniture and equipment and the acquisition
of certain license and distribution rights.

         The Company anticipates that the cash and cash equivalents and the
interest earned thereon, together with funds generated from future product
sales, should be adequate to satisfy its capital requirements, based on current
levels of operations, through the end of fiscal 1999. In the longer term,
however, the Company will seek corporate partnering, licensing and other fund
raising opportunities necessary to satisfy the significant expenditures
anticipated in connection with the development of its surgical products and
ophthalmic drug delivery operations.

         The Company's ability to raise additional funds, however, may be
affected by the Company's listing status.

         Pursuant to various collaborative research and development, technology
license and consulting arrangements relating to the Company's drug delivery
technology, the Company has financial commitments of $125,000 to be paid during
fiscal years 1999 and 2000; $175,000 in fiscal year 2001; and $200,000 in fiscal
years 2002 and 2003.

         Due to a change in supplier process for Betadine 5% and the protracted
lead-time necessary to validate processing on new equipment, the Company
committed $840,000 to purchase adequate inventory to cover anticipated sales
needs for approximately 20 months. This inventory expenditure should occur late
in the first quarter of fiscal 1999.

         The Board of Directors, subsequent to year-end, authorized the
repurchase of up to 500,000 shares of the Company's common stock. The price,
timing and manner of these purchases will be at the discretion of management.
The Company also committed $100,000 to purchased treasury stock from EOI. This
transaction was completed in the first quarter of fiscal 1999.

         As described in Note 11 of the Notes to Consolidated Financial
Statements, the Company has reached an agreement in principle to settle the
litigation for $500,000 on its behalf and on behalf of its former and present
officers and directors. This settlement is subject to agreement upon final
documentation and court approval. The Company's insurance carrier has agreed to
fund a significant portion of the settlement amount. Thus, the Company does not
believe that the proposed settlement will have a material effect on future
operations of the Company.

         The Company anticipates additional expenditures may be incurred in
connection with the legal proceedings as discussed in "Item 3. Legal
Proceedings."

         As of June 30, 1998, the Company had federal income tax and state
income tax net operating loss carryforwards of approximately $41.4 million and
$17.1 million, respectively. Under the provision of Section 382 of the Internal
Revenue Code, use of the Company's net operating loss carryforwards is subject
to an annual limitation as a change in ownership of more than 50% occurred
within a three year specified testing period. Such annual limitation could range
from approximately $128,000 to $2.2 million. Federal and state net operating
loss carryforwards will begin to expire in 2001. The Company also had federal
and state research credit carryforwards of $562,000 and $118,000, respectively,
as of June 30, 1998.


                                      -10-
<PAGE>   13
YEAR 2000 ISSUES

         The Company is working to resolve the potential impact of the year 2000
on the ability of the Company's computerized information systems to accurately
process information that may be date-sensitive. Any of the Company's programs
that recognize a date using "00" as the year 1900 rather than the year 2000
could result in errors or system failures. The Company does not utilize any
custom developed programs, but rather commercially available off-the-shelf
software packages with support contracts that specifically address this issue.
None of the Company's products use date-sensitive software, therefore no
customer service or support concerns need to be addressed.

         A year 2000 software upgrade for all financial packages is currently
on-site and being tested. The cost of further remediation will not have a
material adverse impact on the Company's financial position.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         None.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

         On June 26, 1998, the Company and Ernst & Young LLP, the Company's
independent auditors, mutually agreed to terminate their relationship. In
connection with its audits for each of the two years in the period ended June
30, 1997 and in the subsequent interim periods, there were no disagreements with
Ernst & Young LLP on any matters of accounting principles or practices,
financial statement disclosure or auditing scope procedures which, if not
resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst &
Young LLP to make reference to the matter in their report. Ernst & Young LLP's
report on the Company's financial statements for each of the two years in the
period ended June 30, 1997 contained no adverse opinion or disclaimer of opinion
and was not modified or qualified as to uncertainty, audit scope or accounting
principles.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information with respect to this item will be contained in the
Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders (the
"Proxy Statement"), which is hereby incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

         Information with respect to this item will be contained in the Proxy
Statement, which is hereby incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information with respect to this item will be contained in the Proxy
Statement, which is hereby incorporated herein by reference.


                                      -11-
<PAGE>   14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information with respect to this item will be contained in the Proxy
Statement, which is hereby incorporated herein by reference.

                                     PART IV

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

Consolidated Financial Statements

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

Consolidated Financial Statement Schedules

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

Reports on Form 8-K

         A report on Form 8-K was filed on June 29, 1998, announcing that the
Registrant and Ernst & Young LLP, the Registrant's independent auditors mutually
agreed to terminate their relationship.

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>                                                                                                   
2.1         Assets Sale and Purchase Agreement between Registrant and Escalon Ophthalmics, Inc., dated
            October 9, 1995. (7)
3.1    (a)  Restated Articles of Incorporation of Registrant. (8)
       (b)  Certificate of Amendment of Restated Articles of Incorporation of Registrant dated November
            8, 1993.(8)
       (c)  Certificate of Amendment of Restated Articles of
            Incorporation of Registrant dated February 12, 1996.(8)
       (d)  Certificate of Determination of Series A 6% Convertible Preferred Stock. (10)
3.2         Amended and Restated Bylaws of Registrant. (1)
4.1         Form of Class A Redeemable Common Stock Purchase Warrants. (3)
4.2         Form of Class B Redeemable Common Stock Purchase Warrants. (3)
4.3         Form of Class C Common Stock Purchase Warrants. (3)
4.4         Form of Underwriters Class A Common Stock Purchase Warrants. (3)
4.5         Form of Underwriters Class B Common Stock Purchase Warrants. (3)
4.6    (a)  Warrant Agreement between the Registrant and U.S. Stock Transfer Corporation. (3)
       (b)  Amendment to Warrant Agreement between Registrant and U.S. Stock Transfer Corporation. (5)
       (c)  Amendment to Warrant Agreement between Registrant and American Stock Transfer Company. (6)
4.7         Securities Purchase Agreement, dated as of December 31, 1997 by and among the Company and Combination. (10)
</TABLE>


                                      -12-
<PAGE>   15
<TABLE>
<S>         <C>                                                                                                   
4.8         Registration Rights Agreement, dated as of December 31, 1997 by and among the Company and Combination.
            (10)
4.9         Warrrant to Purchase Common Stock issued December 31, 1997 to David Stefansky. (10)
4.10        Warrant to Purchase Common Stock issued December 31, 1997 to Combination. (10)
4.11        Warrant to Purchase Common Stock issued December 31, 1997 to Richard Rosenblum. (10)
4.12        Warrant to Purchase Common Stock issued December 31, 1997 to Trautman Kramer & Company. (10)
10.1   (a)  1993 Stock Option Plan of Registrant. (4)
       (b)  Form of Nonqualified Stock Option Agreement of Registrant under the 1993 Stock Option Plan.
            (4)
       (c)  Form of Incentive Stock Option Agreement of Registrant under the 1993 Stock Option Plan. (4)
10.2        Form of Indemnification Agreement between the Registrant and each of its directors and
            executive officers. (2)
10.3        Underwriting Agreement between the Registrant and the Underwriter. (3)
10.34       Registration Rights Agreement between the Company and EOI Corp. dated as of February 12,
            1996. (8)
10.4        Unit Purchase Option between the Registrant and the Underwriter. (3)
10.5        Registration Rights Agreement between Registrant and EOI Corp. dated as of February 12,
            1996.(8)
10.6        Employment Agreement between Registrant and John T. Rich dated January 15, 1990, as amended
            as of January 15, 1995 and as further amended on September 12, 1995. (8)
10.7        Employment Agreement between Registrant and Ronald Hueneke dated October 4, 1991. (8)
10.8        Employment Agreement between Registrant and Richard J. DePiano dated March 1, 1997. (9)
10.9        Distribution and License Agreement between Registrant and The Purdue Frederick Company
            dated August 31, 1995. (8)
10.10       Distribution and Development Agreement between Registrant and Adatomed Pharmazeutische Und
            Medizintechnische Gesellschaft Mbh dated January 1, 1990, as amended January 26, 1993 and
            as further amended May 17, 1993. (8)
10.11       Distributorship Agreement between Registrant and Scott Medical Products dated as of
            September 8, 1992, as amended September 8, 1995. (8)
10.12       Research and Development Agreement between Registrant and The West Company, Incorporated
            dated April 3, 1995. (8)
10.13       Supply and Distribution Agreement between Registrant and Storz Instrument Company dated as of July 7, 1995. (8)
21          Subsidiaries. *
23.1        Consent of Ernst & Young LLP, independent auditors. *
23.2        Consent of Parente, Randolph, Orlando, Carey & Associates, LLC, independent auditors. *
27.1        Financial Data Schedule. *
</TABLE>

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

         *        Filed herewith

         (1)      Filed as an exhibit to the Company's Registration Statement on
                  Form S-1 dated April 24, 1992 (Registration No. 33-47439).

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

         (3)      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).

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

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

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


                                      -13-
<PAGE>   16
         (7)      Filed as an appendix to the Registration Statement on Form S-4
                  dated December 5, 1995 (Registration Statement No. 33-80037).

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

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

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


                                      -14-
<PAGE>   17
                                   SIGNATURES


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

                                   ESCALON MEDICAL CORP.
                                   (Registrant)

Dated:  September 25, 1998

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

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

<TABLE>
<CAPTION>
         Signature                                      Title                                          Date
         ---------                                      -----                                          ----
<S>                                         <C>                                               <C>  
By:/s/ Richard J. DePiano                   Chairman and Chief Executive Officer              September 25, 1998 
   -----------------------------------
       Richard J. DePiano                   (Principal Executive Officer) and Director


By:/s/ Douglas R. McGonegal                 Vice President of Finance and Chief Financial     September 25, 1998
   -----------------------------------
         Douglas R. McGonegal               Officer  (Principal Financial Officer and
                                            Principal Accounting Officer) and Secretary

By:/s/ Jay L. Federman, M.D.                Director                                          September 25, 1998
   -----------------------------------
         Jay L. Federman, M.D.


By:/s/ Jack M. Dodick, M.D.                 Director                                          September 25, 1998
   -----------------------------------
         Jack M. Dodick, M.D.
</TABLE>


                                      -15-
<PAGE>   18
                              ESCALON MEDICAL CORP.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                                                      Page
                                                                                                                       
                                                                                                                       
<S>                                                                                                                   <C>
Independent Auditors' Reports...................................................................................       F-2
                                                                                                                       
Consolidated Balance Sheets at June 30, 1997 and 1998...........................................................       F-4
                                                                                                                       
Consolidated Statements of Operations for the years ended June 30, 1996, 1997 and 1998..........................       F-5
                                                                                                                       
Consolidated Statements of Shareholders' Equity for the years ended June 30, 1996, 1997 and 1998................       F-6
                                                                                                                       
Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1997 and 1998..........................       F-7
                                                                                                                       
Notes to Consolidated Financial Statements......................................................................       F-8
</TABLE>


                                      F-1
<PAGE>   19
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Shareholders
Escalon Medical Corp.:

         We have audited the accompanying consolidated balance sheet of Escalon
Medical Corp. and Subsidiary as of June 30, 1998, and the related consolidated
statements of operations, 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free 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 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 Subsidiary as of June 30, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.


                                                     PARENTE, RANDOLPH, ORLANDO,
                                                         CAREY & ASSOCIATES, LLC


Philadelphia, Pennsylvania
August 21, 1998


                                      F-2
<PAGE>   20
                         REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Shareholders
Escalon Medical Corp.


We have audited the accompanying balance sheet of Escalon Medical Corp. as of
June 30, 1997 and the related statements of operations, shareholders' equity and
cash flows for the years ended June 30, 1996 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free 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 financial statements referred to above present fairly, in
all material respects, the financial position of Escalon Medical Corp. as of
June 30, 1997 and the results of its operations and its cash flows for the years
ended June 30, 1996 and 1997 in conformity with generally accepted accounting
principles.



                                                               Ernst & Young LLP


Princeton, New Jersey
August 14, 1997, except for Note 6 - Reverse Stock Split, 
  as to which the date is November 20, 1997


                                      F-3
<PAGE>   21
                     ESCALON MEDICAL CORP. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                            JUNE 30,
                                                                                  --------------------------------
                                    ASSETS                                            1997                1998
                                                                                  ------------        ------------
Current Assets:
<S>                                                                               <C>                 <C>         
     Cash and cash equivalents                                                    $  1,752,648        $  2,263,967
     Investments                                                                       235,000             330,016
     Accounts receivable, net of allowance for doubtful accounts
        of $4,519 at June 30, 1997 and 1998, respectively                              587,265             940,378
     Other receivables                                                                      --              75,000
     Inventory, net                                                                    577,782             462,042
     Other current assets                                                               52,850              79,088
                                                                                  ------------        ------------
                     Total current assets                                            3,205,545           4,150,491

Furniture and equipment, at cost, net                                                   97,977             134,734
Long-term receivables                                                                   62,500             112,500
License and distribution rights, net                                                   892,528             878,838
Patents, net                                                                           465,046             475,175
Goodwill, net                                                                        1,095,982             968,295
Other assets                                                                            14,156              14,095
                                                                                  ------------        ------------

                                                                                  $  5,833,734        $  6,734,128
                                                                                  ============        ============

                     LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
     Current portion of capital lease obligations                                 $      2,910        $         --
     Accounts payable                                                                  553,197             287,192
     Accrued compensation                                                              259,378             110,125
     Accrued professional expenses                                                      44,649              72,670
     Accrued dividends payable                                                              --              13,500
     Accrued litigation settlement                                                          --             100,000
     Other accrued expenses                                                            131,668             101,989
     Customer deposits                                                                  43,480                  --
                                                                                  ------------        ------------
                     Total current liabilities                                       1,035,282             685,476
                                                                                  ------------        ------------

Shareholders' Equity:
      Preferred stock, no par value; 2,000,000 shares authorized; 0 and 900
       shares issued and outstanding at June 30, 1997
       and 1998, respectively (aggregate liquidation value of $900,000)                     --             747,321
     Common stock, no par value; 35,000,000 shares authorized;
       2,629,375 and 3,021,027 shares issued and outstanding
       at June 30, 1997 and 1998, respectively                                      44,645,440          45,253,597
     Accumulated deficit                                                           (39,846,988)        (39,952,266)
                                                                                  ------------        ------------
                     Total shareholders' equity                                      4,798,452           6,048,652
                                                                                  ------------        ------------

                                                                                  $  5,833,734        $  6,734,128
                                                                                  ============        ============
</TABLE>

                 See notes to consolidated financial statements


                                      F-4
<PAGE>   22
                      ESCALON MEDICAL CORP. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                    FOR THE YEARS ENDED JUNE 30,
                                                                      ----------------------------------------------------
                                                                           1996                1997                1998
                                                                      ------------        ------------        ------------

<S>                                                                   <C>                 <C>                 <C>         
Sales revenues                                                        $  2,341,073        $  5,431,282        $  5,942,004
                                                                      ------------        ------------        ------------

Costs and expenses:
     Cost of goods sold                                                  1,228,907           2,650,360           2,588,500
     Research and development                                            1,722,998           1,570,674             494,895
     Marketing, general and administrative                               2,723,606           3,715,727           2,805,454
     Write down of goodwill and license and distribution rights                 --           3,318,888                  --
     Acquired research and development                                   1,000,000                  --                  --
                                                                      ------------        ------------        ------------

              Total costs and expenses                                   6,675,511          11,255,649           5,888,849
                                                                      ------------        ------------        ------------

Income (loss) from operations                                           (4,334,438)         (5,824,367)             53,155
                                                                      ------------        ------------        ------------

Other income and expenses:
     Interest income                                                       257,093             140,705             118,471
     Interest expense                                                       (4,950)             (1,308)               (154)
                                                                      ------------        ------------        ------------

              Total other income and expenses                              252,143             139,397             118,317
                                                                      ------------        ------------        ------------

Net income (loss)                                                     $ (4,082,295)       $ (5,684,970)       $    171,472
                                                                      ============        ============        ============

Basic net loss per share                                              $      (2.16)       $      (2.16)       $      (0.04)
                                                                      ============        ============        ============

Diluted net loss per share                                            $      (2.16)       $      (2.16)       $      (0.04)
                                                                      ============        ============        ============

     Weighted average shares - basic                                     1,892,728           2,629,624           2,673,093
                                                                      ============        ============        ============

     Weighted average shares - diluted                                   1,892,728           2,629,624           2,673,093
                                                                      ============        ============        ============
</TABLE>

                 See notes to consolidated financial statements


                                      F-5
<PAGE>   23
                      ESCALON MEDICAL CORP. AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                FOR THE YEARS ENDED JUNE 30, 1996, 1997 AND 1998

<TABLE>
<CAPTION>
                                                                                                                          
                                                                                                                          
                                                           PREFERRED STOCK                      COMMON STOCK              
                                                        -------------------------        -----------------------------
                                                        SHARES          AMOUNT             SHARES            AMOUNT       
                                                        ------        -----------        ----------        -----------    
<S>                                                    <C>            <C>                <C>               <C>            
Balance at June 30, 1995                                    --        $        --         1,436,519        $37,514,481    
   Amortization of deferred compensation                    --                 --                --                 --    
   Issuance of common stock pursuant to
       acquisition agreement                                --                 --         1,180,193          6,996,184    
   Exercise of stock options                                --                 --            12,865             82,463    
   Exercise/expiration of warrants to purchase
        common stock                                        --                 --               127             52,312    
   Net loss                                                 --                 --                --                 --    
                                                        ------        -----------        ----------        -----------    
Balance at June 30, 1996                                    --                 --         2,629,704         44,645,440    
   Cancellation of previously issued shares                 --                 --              (329)                --    
   Net loss                                                 --                 --                --                 --    
                                                        ------        -----------        ----------        -----------    
Balance at June 30, 1997                                    --                 --         2,629,375         44,645,440    
  Preferred stock offering, net of offering costs        1,350          1,112,478                --                 --    
  Warrants issued in connection with preferred
        stock offering                                      --           (234,500)               --            234,500    
  Deemed dividend from incremental yield
        in conversion terms of preferred stock              --            243,000                --                 --    
  Preferred stock conversions                             (450)          (373,657)          391,652            373,657    
  Preferred stock dividends                                 --                 --                --                 --    
  Net income                                                --                 --                --                 --    
                                                        ======        ===========        ==========        ===========    
Balance at June 30, 1998                                   900        $   747,321         3,021,027        $45,253,597    
                                                        ======        ===========        ==========        ===========    
</TABLE>

<TABLE>
<CAPTION>
                                                          WARRANTS TO
                                                            PURCHASE                                                TOTAL
                                                             COMMON          ACCUMULATED        DEFERRED        SHAREHOLDERS'
                                                              STOCK            DEFICIT        COMPENSATION         EQUITY
                                                          ------------      ------------      ------------      -------------
<S>                                                         <C>             <C>               <C>               <C>
Balance at June 30, 1995                                    $ 51,957        $(30,079,723)       $(16,344)       $  7,470,371
   Amortization of deferred compensation                          --                  --          16,344              16,344
   Issuance of common stock pursuant to
       acquisition agreement                                      --                  --              --           6,996,184
   Exercise of stock options                                      --                  --              --              82,463
   Exercise/expiration of warrants to purchase
        common stock                                         (51,957)                 --              --                 355
   Net loss                                                       --          (4,082,295)             --          (4,082,295)
                                                            --------        ------------        --------        ------------
Balance at June 30, 1996                                          --         (34,162,018)             --          10,483,422
   Cancellation of previously issued shares                       --                  --              --                  --
   Net loss                                                       --          (5,684,970)             --          (5,684,970)
                                                            --------        ------------        --------        ------------
Balance at June 30, 1997                                          --         (39,846,988)             --           4,798,452
  Preferred stock offering, net of offering costs                 --                  --              --           1,112,478
  Warrants issued in connection with preferred
        stock offering                                            --                  --              --                  --
  Deemed dividend from incremental yield
        in conversion terms of preferred stock                    --            (243,000)             --                  --
  Preferred stock conversions                                     --                  --              --                  --
  Preferred stock dividends                                       --             (33,750)             --             (33,750)
  Net income                                                      --             171,472              --             171,472
                                                            ========        ============        ========        ============
Balance at June 30, 1998                                    $     --        $(39,952,266)       $     --        $  6,048,652
                                                            ========        ============        ========        ============
</TABLE>

                 See notes to consolidated financial statements


                                      F-6
<PAGE>   24
               ESCALON MEDICAL CORP. AND SUBSIDIARY

              CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                       FOR THE YEARS ENDED JUNE 30,
                                                                                 1996               1997               1998
                                                                             -----------        -----------        -----------
<S>                                                                          <C>                <C>                <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                                         $(4,082,295)       $(5,684,970)       $   171,472
   Adjustments to reconcile net income (loss) to net cash
     used in operating activities:
       Depreciation and amortization                                             757,951            854,402            331,987
       Amortization of deferred compensation                                      16,344                 --                 --
       Income from license of intellectual laser property                             --                 --            (75,000)
       Write off of goodwill and license and distribution rights                      --          3,318,888                 --
       Write off of patents                                                       61,044             10,980                 --
       Acquired research and development                                       1,000,000                 --                 --
       Net loss (gain) on disposition of assets                                   58,769             (2,450)             9,315
       Change in operating assets and liabilities:
          Accounts receivable                                                    (33,326)           148,645           (353,113)
          Inventory                                                              165,122             92,214            115,740
          Other current assets                                                   (17,119)            28,041            (26,238)
          Accounts payable, accrued compensation, professional
             and customer expenses, and other accrued expenses                (1,201,530)           (73,357)          (360,396)
                                                                             -----------        -----------        -----------
                Net cash used in operating activities                         (3,275,040)        (1,307,607)          (186,233)
                                                                             -----------        -----------        -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of short-term investments                                           (890,970)          (235,000)          (470,180)
   Proceeds from maturities of short-term investments                          3,208,396            795,970            375,164
   Purchase of  furniture and equipment                                          (52,963)           (37,022)           (90,792)
   Proceeds from sale of furniture and equipment                                      --              5,900              1,000
   License and distribution rights                                                    --                 --           (126,894)
   Other assets                                                                   61,146             65,338                 61
   Patent costs                                                                  (66,050)           (49,099)           (30,411)
   Long term note receivable                                                          --            (62,500)           (50,000)
   Cash acquired in acquisition                                                    1,756                 --                 --
                                                                             -----------        -----------        -----------
                Net cash provided from (used in)  investing activities         2,261,315            483,587           (392,052)
                                                                             -----------        -----------        -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from preferred stock offering, net of offering costs                      --                 --          1,112,478
   Proceeds from common stock offering                                            82,818                 --                 --
   Payment of preferred stock dividend                                                --                 --            (20,250)
   Principal payments under capital lease obligations                             (3,000)            (7,835)            (2,624)
                                                                             -----------        -----------        -----------
                 Net cash provided from (used in) financing activities            79,818             (7,835)         1,089,604
                                                                             -----------        -----------        -----------

                Net increase (decrease) in cash and cash equivalents            (933,907)          (831,855)           511,319
Cash and cash equivalents, beginning of year                                   3,518,410          2,584,503          1,752,648
                                                                             -----------        -----------        -----------

Cash and cash equivalents, end of year                                       $ 2,584,503        $ 1,752,648        $ 2,263,967
                                                                             ===========        ===========        ===========

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
   Interest paid during the year                                             $     4,950        $     1,308        $       154
                                                                             ===========        ===========        ===========
</TABLE>


                 See notes to consolidated financial statements


                                      F-7
<PAGE>   25
                      ESCALON MEDICAL CORP. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  ORGANIZATION AND DESCRIPTION OF BUSINESS

         Escalon Medical Corp. (formerly known as Intelligent Surgical Lasers,
Inc.) and its subsidiary Escalon Pharmaceutical Inc. (jointly referred to as
"Escalon" or the "Company"), was incorporated on December 24, 1987 in the State
of California. The Company develops, markets and distributes ophthalmic medical
devices and pharmaceutical products and is developing its ophthalmic drug
delivery system. Activities from inception have included development and testing
of laser technology and the sales of a minimal number of laser systems. Such
laser sales have been to physicians, clinics and university hospitals in
connection with their participation in the Company's clinical trials and for
investigation of additional applications for the Company's laser systems. As
described more fully in Note 4, the Company acquired substantially all of the
assets and certain of the liabilities of Escalon Ophthalmics, Inc. ("EOI"), a
Pennsylvania corporation, on February 12, 1996 pursuant to the Assets Sale and
Purchase Agreement dated October 9, 1995 and as amended December 19, 1995. The
results of operations for the year ended June 30, 1996 include the results of
operations of EOI subsequent to the acquisition. Sales of the products acquired
from EOI are made primarily to hospitals and physicians throughout the United
States. As a result of this acquisition, the Company is no longer in the
development stage for financial reporting purposes. Included in the accumulated
deficit is approximately $31.9 million, which was accumulated during the
development stage.

(2)  SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

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

         The Company invests its excess cash in money market accounts with
financial institutions having strong credit ratings. Investments with maturities
of one year or less are considered current assets.

         The Company has established practices relative to diversification and
maturities for safety and liquidity purposes. These practices are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
The Company has not experienced any losses on its cash equivalents and
investments.

Use of Estimates

         The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

Stock-Based Compensation

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

Revenue Recognition

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


                                      F-8
<PAGE>   26
                      ESCALON MEDICAL CORP. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(2)  SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

Inventories

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

<TABLE>
<CAPTION>
                                               JUNE 30,
                                    ----------------------------
                                       1997               1998
                                    -----------        ---------
<S>                                 <C>                <C>      
Raw materials/work in process       $   628,687        $ 170,370
Finished goods                          610,093          472,672
                                    -----------        ---------
                                      1,238,780          643,042
Valuation allowance                    (660,998)        (181,000)
                                    -----------        ---------
                                    $   577,782        $ 462,042
                                    ===========        =========
</TABLE>

         In fiscal 1996 the Company's inventory valuation allowance totaled
$597,379. The increase in the valuation allowance during fiscal 1997 resulted
from a $63,619 charge to expenses. There was a net decrease in the inventory
valuation allowance of $479,998 in fiscal 1998. This reduction consisted of (i)
$470,998 relating to the transfer of laser inventory to IntraLase Corporation
described in Note 9 and (ii) $9,000 credited against expenses.

Furniture and Equipment

         Furniture and equipment is recorded at cost. Depreciation is computed
using the straight-line method over the economic useful life of the related
assets, which are estimated to be eighteen months to seven years. Depreciation
expense for the years ended June 30, 1996, 1997 and 1998 was $459,553, $107,687
and $43,433 respectively.

         Assets under capital leases, consisting of office equipment, are
amortized over the lesser of the useful life or the applicable lease terms,
whichever is shorter, which ranged from 3 to 5 years.

         Furniture and equipment consist of the following at:
<TABLE>
<CAPTION>
                                                               JUNE  30,
                                                     ----------------------------
                                                         1997             1998
                                                     -----------        ---------
<S>                                                  <C>                <C>      
Equipment                                            $   660,192        $ 167,315
Furniture and fixtures                                    36,211           25,863
Leasehold improvements                                     6,404           27,804
Assets under capital leases                                9,847            3,129
Testing and applications research systems              1,061,409               --
                                                     -----------        ---------
                                                       1,774,063          224,111
Less accumulated depreciation and amortization        (1,676,086)         (89,377)
                                                     -----------        ---------
                                                     $    97,977        $ 134,734
                                                     ===========        =========
</TABLE>

Acquired License and Distribution Rights

In connection with the acquisition described in Note 4, a portion of the
purchase price was allocated to certain product license and distribution
agreements. Such cost allocation was based on an independent valuation, with
such costs being amortized over an eight-year period using the straight-line
method. At June 30, 1997, the Company evaluated the ongoing value assigned to
these license and distribution agreements. Based on such evaluation, the Company
determined that an asset, with a carrying value of $2,199,000, was impaired due
to changes in estimates relating to the future sales associated with such
agreements. The change in the sales estimates resulted from (i) anticipated
competition related to one of the Company's major products and (ii) delays in
the development of the international distribution


                                      F-9
<PAGE>   27
                      ESCALON MEDICAL CORP. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(2)  SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

for another of the Company's products which could result in the loss of the
exclusive distributorship for such product. As a result, the Company wrote down
its license and distribution rights by $918,253 to its estimated fair value.
Fair value was based on estimated future cash flows to be generated from the
license and distribution agreements, discounted at a market rate of interest.
Accumulated amortization of license and distribution rights was $192,063 and
$332,647 at June 30, 1997 and 1998, respectively.

Patents

         It is the Company's practice to seek patent protection on processes and
products in various countries. Patent application costs are capitalized and
amortized over their estimated useful lives, not exceeding 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 $60,542 and $80,823 at June 30, 1997 and 1998, respectively.

Goodwill

         Goodwill represents the excess of the purchase price over the fair
value of the net assets acquired (Note 4). These costs are being amortized over
a ten-year period using the straight-line method. The Company periodically
reviews the value of its goodwill to determine if impairment has occurred. As
noted in the above paragraph, "Acquired License and Distribution Rights," the
Company wrote down the value of its license and distribution rights due to an
impairment. As required by the Financial Accounting Standards Board Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS No. 121") goodwill associated with the acquired
license and distribution rights was likewise written down by $2,400,635 at June
30, 1997. Accumulated amortization of goodwill for the years ended June 30, 1997
and 1998 was $180,889 and $308,576, respectively.

Research and Development

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

Net Income (Loss) Per Share

         In 1997, the Company adopted Financial Accounting Standards Board
Statement No. 128, "Earnings Per Share" ("SFAS No. 128"). Earnings per share
information has been restated for all prior periods presented as prescribed by
SFAS No. 128. After taking into account the deemed dividend attributable to the
preferred stock offering, current year earnings available to common shareholders
reflects a net loss. This combined with the antidilutive effect of conversion of
the remaining convertible preferred stock causes such conversion to be excluded
from computation of diluted net income (loss) per share for the year ended June
30, 1998.

         The following table sets forth the computation of basic and diluted
earnings per share:

<TABLE>
<CAPTION>
                                                                   1996               1997              1998
                                                               -----------        -----------        ---------
<S>                                                            <C>                <C>                <C>      
Numerator:
   Numerator for basic and dilutive earnings per share:
      Net income (loss)                                        $(4,082,295)       $(5,684,970)       $ 171,472
      Preferred stock dividends and  accretion                          --                 --         (276,750)
                                                               -----------        -----------        ---------
      Net Loss available to common shareholders                $(4,082,295)       $(5,684,970)       $(105,278)
                                                               ===========        ===========        =========
</TABLE>


                                      F-10
<PAGE>   28
                      ESCALON MEDICAL CORP. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(2)  SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)

<TABLE>
<S>                                                                 <C>             <C>           <C>      
     Denominator:
        Denominator for basic and dilutive earnings per share-
           weighted-average shares                                  1,892,728       2,629,624     2,673,093
                                                                    ==========      ==========    =========

     Basic and diluted earnings per share                              $(2.16)        $(2.16 )      $(0.04)
                                                                       ======         ========      =======
</TABLE>

Income Taxes

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

Principles of Consolidation

         The consolidated financial statements include the accounts of the
Company and its 100 percent investment in Escalon Pharmaceutical, Inc., which
will hold title to and distribute Providone-Iodine 2.5% Solution. All
intercompany transactions and balances have been eliminated.

Accounting Pronouncements

         In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for the reporting and display of comprehensive income and
its components and is applicable to all enterprises. SFAS No. 130 is effective
for financial statements relating to fiscal years beginning after December 15,
1997. The adoption of SFAS No. 130 will have no impact on the Company's results
of operations, financial position or cash flows.

         In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 is
effective for financial statements relating to fiscal years beginning after
December 15, 1997. The adoption of SFAS No. 131 will have no impact on the
Company's result of operations, financial position or cash flows.

         In February 1998, the Financial Accounting Standards Board issued
Statement No. 132, "Employers'Disclosure about Pensions and Other Postretirement
Benefits" ("SFAS No. 132"). SFAS No. 132 expands and standardizes the disclosure
requirements for pensions and postretirement benefits. SFAS No. 132 is effective
for financial statements relating to fiscal years beginning after December 15,
1997. The adoption of SFAS No. 132 will have no impact on the Company's result
of operations, financial position or cash flows.

 (3) INVESTMENTS

         As of June 30, 1997 and 1998, the Company held investments consisting
of fixed-rate certificates of deposits of $1,585,000 and $1,980,016,
respectively. Such investments are recorded at cost, which approximates fair
value at June 30, 1997 and 1998. Included in cash and cash equivalents at June
30, 1997 and 1998 were certificates of deposits totaling $1,350,000 and
$1,650,000 with original maturities of 90 days or less.


                                      F-11
<PAGE>   29
                      ESCALON MEDICAL CORP. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(4) ACQUISITION OF ESCALON OPHTHALMICS, INC.

         On February 12, 1996, the Company acquired substantially all of the
assets and certain of the liabilities of EOI, a developer, marketer and
distributor of ophthalmic medical devices, pharmaceuticals and drug delivery
systems, in exchange for 4,770,772 shares of the Company's Common Stock. Total
estimated cost of the acquisition was $8.9 million, including liabilities
assumed of $1,016,340 and estimated transaction costs of approximately $928,000.
The acquisition was accounted for using the purchase method of accounting as
prescribed by Accounting Principles Board Opinion No. 16 and includes the
acquisition of accounts receivable, inventories, equipment and various other
tangible and intangible assets. The total purchase price over the fair value of
net assets acquired approximated $4.1 million at the date of acquisition.
Another $1.0 million of the purchase price was assigned to in-process technology
and was charged to operations immediately following the acquisition. As
described in Note 2, goodwill related to the impaired license and distribution
agreements was written down to $0 in accordance with SFAS No. 121.

         The following pro forma results of operations information has been
prepared to give effect to the purchase as if such transaction had occurred at
the beginning of the period presented. The historical results of operations,
included in the pro forma results, reflect additional amortization expense based
on the independent valuation of assets acquired as well as the $1.0 million
charge to operations related to the acquired in-process technology. The
information presented is not necessarily indicative of results of future
operations of the combined companies.

                         PRO FORMA RESULTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                        FOR THE YEAR ENDED JUNE 30,
                                        --------------------------
                                                    1996
                                                    ----
<S>                                     <C>         
Revenues                                       $  5,031,862
Net loss                                       $ (4,864,327)
Basic net loss per share                       $      (1.85)
Weighted average shares outstanding               2,624,706
</TABLE>

(5) OPERATING LEASES

         The Company leases its research, manufacturing and corporate office
facilities and certain equipment under non-cancelable operating lease
arrangements. The future minimum rentals to be paid under these leasing
arrangements as of June 30, 1998 are as follows:

<TABLE>
<CAPTION>
       YEAR ENDING JUNE 30,                                 AMOUNT
       --------------------                                 ------
<S>                                                        <C>     
                1999                                       $126,262
                2000                                         75,788
                2001                                         68,813
                2002                                         69,296
                2003                                         58,458
                                                           --------
                                                           $398,617
</TABLE>

         Total minimum future rental payments have not been reduced by $38,279,
the value of sublease rentals to be received under non-cancelable subleases.

         Rent expense charged to operations during the years ended June 30,
1996, 1997 and 1998 was $239,732, $190,153 and $123,408, respectively.


                                      F-12
<PAGE>   30
                      ESCALON MEDICAL CORP. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(5) OPERATING LEASES - (CONTINUED)

         The Company leases its Pennsylvania office from an entity which is 100%
owned by the Chief Executive Officer and Chairman of the Board of the Company.
The lease is classified as an operating lease and provides for minimum annual
rentals of $6,000 through December 31, 1998.


(6) CAPITAL STOCK TRANSACTIONS

Reverse Stock Split

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

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

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

Preferred Stock Offering

         On December 31, 1997, the Company issued $1,350,000 of Series A 6%
Convertible Preferred Stock ("Preferred Stock") in a private placement. Net
proceeds of $1,194,750 from this offering were received on January 2, 1998.
After March 1, 1998, the Preferred Stock may be converted at the option of the
holder into shares of the Company's Common Stock at a rate determined by
dividing the liquidation value of the Preferred Stock being converted by the
conversion price then in effect. The conversion price will be the lesser of (i)
$8.6125 (which is the average of the closing bid price of the Common Stock for
each of the five trading days immediately prior to December 31, 1997) or, (ii)
up to 82% of the five-day average closing bid price prior to the conversion
date. Any Preferred Stock that is outstanding on December 31, 1999 will be
automatically converted into Common Stock. The Preferred Stock pays cumulative
dividends of 6% per annum payable quarterly in cash or Common Stock, at the
Company's option. The Preferred Stock may be redeemed at any time at the option
of the Company. The Preferred Stock was accompanied by an immediately
exercisable five-year Warrant to purchase 40,000 shares of Common Stock at
exercise prices ranging from $8.6125 to $11.626875. The Company also issued to
the private placement agent and its designees a similar warrant to purchase an
aggregate of 50,000 shares of Common Stock at an exercise price of $10.335 per
share. The warrants were valued at $234,500 using the Black-Scholes option
pricing method with the following assumptions: risk-free interest rate of 5.5%;
expected volatility of .0879; expected warrant life of one-half year from
vesting; and an expected dividend rate of 0.0%. The value of the warrants was
accounted for as part of the offering related expenses.

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


                                      F-13
<PAGE>   31
                      ESCALON MEDICAL CORP. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(6) CAPITAL STOCK TRANSACTIONS - (CONTINUED)

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

Redeemable Common Stock Purchase Warrants

         During November 1993, the Company successfully completed an
underwritten public offering of 862,500 Units (the "Units"), each Unit
consisting of one share of Common Stock, one Class A Redeemable Common Stock
Purchase Warrant and one Class B Redeemable Common Stock Purchase Warrant (the
"Public Offering"). Each Class A and Class B Warrant entitles the holder thereof
to purchase one share of Common Stock at a price of $25 and $30, respectively.
The warrants are currently exercisable and expire in November 2000. The
underwriter of the Public Offering was granted an option to purchase 75,000
Units at $32 per unit. The option is exercisable commencing November 1994 and
expires in November 1998. The Public Offering price for the Units was $20 per
Unit. The net proceeds to the Company from the Public Offering, after deducting
underwriting discounts and commissions and related expenses payable by the
Company was approximately $14,800,000.

         In October 1993, in connection with the certain loan arrangements, the
Company issued an aggregate of 41,875 Class C Common Stock warrants. Each Class
C warrant entitles the holder to purchase one share of Common Stock at $20 per
share. Those warrants are currently exercisable and expire in November 1998.

Stock Option Plans

         The Company has adopted seven employee stock option plans, which
provide for incentive stock options and non-qualified stock options to purchase
220,622 shares of the Company's common stock. Under the terms of the plans,
options may be granted at not less than fair market value of the Common Stock at
the date of grant. Vesting generally occurs ratably over four years and is
exercisable over a period no longer than ten years after the grant date. At June
30, 1998, options to purchase 172,000 shares of the Company's Common Stock were
exercisable and 48,622 shares are reserved for future grants.

         Financial Accounting Standards Board Statement No. 123 ("SFAS No. 123")
requires pro forma information regarding net income and earnings per share as if
the Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of SFAS No. 123. The fair value of
these equity awards was estimated at the date of grant using the Black-Scholes
option pricing method. For fiscal 1998, the weighted average assumptions used
were: risk-free interest rate of 5.11%; expected volatility of 1.359; expected
option life of one year from vesting and an expected dividend rate of 0.0%.
Fiscal 1997's weighted average assumptions were: risk-free interest rate of
5.6%; expected volatility of 0.865; expected option life of one year from
vesting and an expected dividend rate of 0.0%. No options were issued in fiscal
1996.

         For purposes of the pro forma disclosures, the estimated fair value of
the equity awards is amortized to expense over the options' vesting period. For
the fiscal year ended June 30, 1997, the pro forma net loss and basic and
diluted net loss per share of Common Stock were $(5,774,970) and ($2.20),
respectively. For the fiscal year ended June 30, 1998, the pro forma net loss
and basic and diluted net loss per share were $(162,993) and $(0.06),
respectively.

         The following is a summary of the Company's stock option activity and
related information for the fiscal years ended June 30, 1997 and 1998:


                                      F-14
<PAGE>   32
                      ESCALON MEDICAL CORP. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(6) CAPITAL STOCK TRANSACTIONS - (CONTINUED)

<TABLE>
<CAPTION>
                                                     1997                                     1998
                                          --------------------------------    --------------------------------

                                          COMMON STOCK    WEIGHTED AVERAGE    COMMON STOCK    WEIGHTED AVERAGE
                                            OPTIONS       EXERCISE PRICE         OPTIONS       EXERCISE PRICE
                                          ------------    ----------------    ------------    ----------------
                                                                               
                                                                             
<S>                                       <C>             <C>                  <C>           <C>         
Outstanding at beginning of year            72,422        $     16.564         112,500       $      2.252
                                                                             
     Granted                               112,500        $      2.252          59,500       $      1.875
                                                                             
     Forfeited                             (72,422)       $     16.564              --                 --
                                          --------                             -------       
                                                                             
                                                                             
Outstanding at end of year                 112,500        $      2.252         172,000       $      2.120
                                          ========                             =======       
                                                                             
                                                                             
Exercisable at end of year                 112,500                             172,000
                                          ========                             =======       
Weighted average fair value of                                               
    options granted during the year                       $      0.800                       $      0.970
</TABLE>

         Options outstanding at June 30, 1997 have an exercise price of $2.252
and a remaining contractual life of 8.9 years. The options issued in fiscal
1998, have an exercise price of $1.875 and a remaining contractual life of 9.7
years.

         Non-plan options to purchase 1,367 and 1,367 shares of Common Stock, at
prices of $1.460 and $7.308, respectively, were outstanding and exercisable at
June 30, 1998. These options generally have vesting and exercise provisions
consistent with options granted under the plans.

(7) RETIREMENT PLAN

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

(8) INCOME TAXES

         Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liability, which are
primarily considered to be noncurrent, consisted of the following at:
<TABLE>
<CAPTION>
                                                                                         JUNE 30,
                                                                            --------------------------------
                                                                                 1997                1998
                                                                            ------------        ------------
<S>                                                                         <C>                 <C>         
Deferred tax assets:
   Reserves and allowances                                                  $    268,000        $     31,000
   NOL carryforward                                                           14,873,000          15,110,000
   Tax credit carryforwards                                                      736,000             680,000
                                                                            ------------        ------------
         Total deferred tax assets                                            15,877,000          15,821,000
Deferred tax liability:
   License and distribution rights                                              (353,000)           (297,000)
                                                                            ------------        ------------
Net deferred tax assets                                                       15,524,000          15,524,000
Valuation allowances                                                         (15,524,000)        (15,524,000)
                                                                            ------------        ------------
Net deferred taxes                                                          $         --        $         --
                                                                            ============        ============
</TABLE>

         At June 30, 1998, the Company has federal income tax and state income
tax net operating loss carryforwards of approximately $41.4 million and $17.1
million, respectively. The difference between the federal and state carryforward
amounts is primarily attributable to differences in research and development
expenses and to California's


                                      F-15
<PAGE>   33
                      ESCALON MEDICAL CORP. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


(8) INCOME TAXES - (CONTINUED)

statutory 50% annual reduction rule. In addition, the Company has federal and
California research credit carryforwards of $562,000 and $118,000, respectively,
at June 30, 1998. Federal and state operating losses and tax credits will expire
at various dates between 2001 and 2013.

         For the years ended June 30, 1997 and 1998, the Company recorded
valuation allowances of $15,524,000.

         Under the provisions of Section 382 of the Internal Revenue Code, use
of net operating loss (NOL) and credit carryforwards is subject to an annual
limitation if there is a change in ownership during a specified testing period.
As a result of such ownership changes in fiscal 1990 and in fiscal 1994,
approximately $11,493,000 of federal NOL carryforward is subject to limitation.

         No formal study has been performed to test for additional ownership
changes which may have occurred at the time of the acquisition of EOI (Note 4)
or afterward. If an additional ownership change did occur, an additional
limitation would apply to all of the NOL carryforwards attributable to periods
before that change. Depending on the existence and time of such change,
potentially all of the federal NOL carryforwards at June 30, 1998 could be
subject to a limitation, which would be based on the value of the Company
immediately before the change, multiplied by a published interest rate. Based on
the value of the Company's stock and the published interest rates since the EOI
acquisition occurred, the potential annual limitation could range from
approximately $128,000 to $2.2 million. The limitation could also restrict the
use of the tax credit carryforwards and approximately $17 million of the NOL
carryforwards for state tax purposes.

         Approximately $8.2 million of the federal NOL carryforward at June 30,
1998 represents amounts that were transferred to the Company as a result of the
acquisition of EOI. Use of this transferred NOL is also limited under Section
382. Any tax benefit realized from such use would first reduce acquired
goodwill. Although the Company believes that the acquisition of EOI qualified as
a tax-free reorganization, there is no certainty that the Internal Revenue
Service will agree. If the acquisition were not to qualify as a tax free
reorganization, the NOL carryforward of EOI would be treated as a purchase of
assets and the tax basis of the acquired assets would be increased.

(9) LICENSE OF INTELLECTUAL LASER PROPERTIES

         In October 1997, the Company licensed its intellectual laser properties
to IntraLase Corporation ("IntraLase") in exchange for an initial 25% equity
interest in IntraLase. In addition, the Company is entitled to a 2.5% royalty on
future products sales which are based on the Company's patented technology, a
1.5% royalty on product sales not dependent on the Company's technology and an
annual license fee of $5,000 and $10,000 in 1999 and 2000, respectively, and
$15,000 in 2001 and each year thereafter during the term of the license. The
license fee may be credited in full against all royalties otherwise due to be
paid to the Company. The Company will also be reimbursed $75,000 for previously
expensed patent costs. Also contributed to the venture was the Company's laser
inventory, equipment and related furniture having a net book value of $0.

(10) COMMITMENTS

         Pursuant to various collaborative research and development, technology
license, and consulting arrangements relating to the Company's drug delivery
technology, the Company has financial commitments of $125,000 to be paid during
fiscal 1999 and 2000; $175,000 in fiscal 2001; and $200,000 in fiscal 2002 and
2003.

         Due to a change in supplier process for Betadine 5% and the protracted
lead-time necessary to validate processing on new equipment, the Company
committed $840,000 to purchase adequate inventory to cover anticipated sales
needs for approximately 20 months. This inventory expenditure should occur late
in the first quarter of fiscal 1999.


                                      F-16
<PAGE>   34
                      ESCALON MEDICAL CORP. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(10) COMMITMENTS - (CONTINUED)

         The Company also committed $100,000 to purchased treasury stock from
EOI. This transaction was completed in the first quarter of fiscal 1999.

(11) CONTINGENCIES

Litigation

           As previously reported in reports filed with the Securities and
Exchange Commission, on or about June 8, 1995, a purported class action
complaint captioned George Kozloski v. Intelligent Surgical Lasers, Inc., et
al., 95 Civ. 4299, was filed in the U.S. District Court for the Southern
District of New York as a "related action" to In Re Blech Securities Litigation
(a litigation matter which the Company is no longer a party to). The plaintiff
purports to represent a class of all purchasers of the Company's stock from
November 17, 1993, to and including September 21, 1994. The complaint alleges
that the Company, together with certain of its officers and directors, David
Blech and D. Blech & Co., Inc., issued a false and misleading prospectus in
November 1993 in violation of Sections 11, 12 and 15 of the Securities Act of
1933. The complaint also asserts claims under Section 10(b) of the Securities
Exchange Act of 1934 and common law. Actual and punitive damages in an
unspecified amount are sought, as well as a constructive trust over the proceeds
from the sale of stock pursuant to the offering. On June 6, 1996, the court
denied a motion by the Company and the named officers and directors to dismiss
the Kozloski complaint and, on July 22, 1996, the Company Defendants filed an
answer to the complaint denying all allegations of wrongdoing and asserting
various affirmative defenses. On March 31, 1997, the court issued Pretrial Order
No. 2, which set discovery cut off and ready trial dates, as well as providing
for certain coordination of discovery in the Kozloski case, and certain related
cases involving other issuers and D. Blech & Co. Discovery in the related
actions is ongoing. It currently is scheduled to be completed by March 15, 1999
and the cases ready for trial by May 20, 1999. Class certification motions have
been dismissed for failure to prosecute, with leave to renew.

         In an effort to curtail its legal expenses related to this litigation,
while continuing to deny any wrongdoing, the Company has reached an agreement in
principle to settle this action on its behalf and on behalf of its former and
present officers and directors, for $500,000. This settlement is subject to
agreement upon final documentation and court approval. The Company's directors
and officers insurance carrier has agreed to fund a significant portion of the
settlement amount. In view of the anticipated settlement, no discovery or motion
practice is proceeding in the Kozlowki case.


                                      F-17
<PAGE>   35
                                  EXHIBIT INDEX


<TABLE>
<CAPTION>
Exhibit No.                                          Description
-----------                                          -----------
<S>                   <C>                                                                             
2.1                   Assets Sale and Purchase Agreement between Registrant and Escalon Ophthalmics, Inc., dated October
                      9, 1995. (7)
3.1    (a)            Restated Articles of Incorporation of Registrant. (8)
       (b)            Certificate of Amendment of Restated Articles of Incorporation of Registrant dated November 8,
                      1993.(8)
       (c)            Certificate of Amendment of Restated Articles of Incorporation of Registrant dated February 12,
                      1996.(8)
       (d)            Certificate of Determination of Series A 6% Convertible Preferred Stock. (10)
3.2                   Amended and Restated Bylaws of Registrant. (1)
4.1                   Form of Class A Redeemable Common Stock Purchase Warrants. (3)
4.2                   Form of Class B Redeemable Common Stock Purchase Warrants. (3)
4.3                   Form of Class C Common Stock Purchase Warrants. (3)
4.4                   Form of Underwriters Class A Common Stock Purchase Warrants. (3)
4.5                   Form of Underwriters Class B Common Stock Purchase Warrants. (3)
4.6    (a)            Warrant Agreement between the Registrant and U.S. Stock Transfer Corporation. (3)
       (b)            Amendment to Warrant Agreement between Registrant and U.S. Stock Transfer Corporation. (5)
       (c)            Amendment to Warrant Agreement between Registrant and American Stock Transfer Company. (6)
4.7                   Securities Purchase Agreement, dated as of December 31, 1997 by and among the Company and Combination. (10)
4.8                   Registration Rights Agreement, dated as of December 31, 1997 by and among the Company and Combination. (10)
4.9                   Warrrant to Purchase Common Stock issued December 31, 1997 to David Stefansky. (10)
4.10                  Warrant to Purchase Common Stock issued December 31, 1997 to Combination. (10)
4.11                  Warrant to Purchase Common Stock issued December 31, 1997 to Richard Rosenblum. (10)
4.12                  Warrant to Purchase Common Stock issued December 31, 1997 to Trautman Kramer & Company. (10)
10.1   (a)            1993 Stock Option Plan of Registrant. (4)
       (b)            Form of Nonqualified Stock Option Agreement of Registrant under the 1993 Stock Option Plan. (4)
       (c)            Form of Incentive Stock Option Agreement of Registrant under the 1993 Stock Option Plan. (4)
10.2                  Form of Indemnification Agreement between the Registrant and each of its directors and executive
                      officers. (2)
10.3                  Underwriting Agreement between the Registrant and the Underwriter. (3)
10.34                 Registration Rights Agreement between the Company and EOI Corp. dated as of February 12, 1996. (8)
10.4                  Unit Purchase Option between the Registrant and the Underwriter. (3)
10.5                  Registration Rights Agreement between Registrant and EOI Corp. dated as of February 12, 1996.(8)
10.6                  Employment Agreement between Registrant and John T. Rich dated January 15, 1990, as amended as of
                      January 15, 1995 and as further amended on September 12, 1995. (8)
10.7                  Employment Agreement between Registrant and Ronald Hueneke dated October 4, 1991. (8)
10.8                  Employment Agreement between Registrant and Richard J. DePiano dated March 1, 1997. (9)
10.9                  Distribution and License Agreement between Registrant and The Purdue Frederick Company dated
                      August 31, 1995. (8)
</TABLE>
<PAGE>   36
<TABLE>
<CAPTION>
Exhibit No.     Description
-----------     -----------
<S>             <C>                                                                                                       
10.10           Distribution and Development Agreement between Registrant and Adatomed Pharmazeutische Und
                Medizintechnische Gesellschaft Mbh dated January 1, 1990, as amended January 26, 1993 and as
                further amended May 17, 1993. (8)
10.11           Distributorship Agreement between Registrant and Scott Medical Products dated as of September 8,
                1992, as amended September 8, 1995. (8)
10.12           Research and Development Agreement between Registrant and The West Company, Incorporated dated
                April 3, 1995. (8)
10.13           Supply and Distribution Agreement between Registrant and Storz Instrument Company dated as of July 7, 1995. (8)
21              Subsidiaries. *
23.1            Consent of Ernst & Young LLP, independent auditors. *
23.2            Consent of Parente, Randolph, Orlando, Carey & Associates, LLC, independent auditors. *
27.1            Financial Data Schedule. *
</TABLE>

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

         *        Filed herewith

         (1)      Filed as an exhibit to the Company's Registration Statement on
                  Form S-1 dated April 24, 1992 (Registration No. 33-47439).

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

         (3)      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).

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

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

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

         (7)      Filed as an appendix to the Registration Statement on Form S-4
                  dated December 5, 1995 (Registration Statement No. 33-80037).

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

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

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