Escalon Medical Corp. Annual Report 2005

FY2005 Annual Report · Escalon Medical Corp.

Loading PDF…

2005 Annual Report

ESCALON MEDICAL CORP.

LETTER TO SHAREHOLDERS

During Ñscal 2005, Escalon Medical Corp marked another year of accomplishment. We stayed tightly focused on
achieving our near term goals of Ñnancial discipline and debt reduction. We launched new products, integrated the Drew
ScientiÑc Group acquisition, and worked on building our long-term vision Ó developing a more diversiÑed business portfolio to
better position the company for long-term sustainable growth. Throughout the year we forged excellent progress towards these
goals, but we know that even more is required. Our vision is clear, we want to diÅerentiate ourselves and be a signiÑcant
diagnostic leader in the health care industry.

Acquisitions Support Positioning For The Future

Several years ago, we strategically transformed the company to prepare it for the future. We needed more innovative
products with greater marketplace potential. We needed to broaden our base and enhance our mix of businesses, to achieve our
goals we needed to build an organization to make this possible. Since that time, we have expanded and positioned our
management team. We have invested in building the base businesses with strategic acquisitions, ranging from a large
transaction with Drew ScientiÑc, providing product diversity; to a smaller transaction, MRP Group, which expands and
strengthens our medical imaging business. This along with the realization of the value of the IntraLase stock and the current
stream of IntraLase royalties marks the conclusion of the transition from a development to a commercial organization. As a
result, Escalon Medical is now composed of diversiÑed businesses that have brand recognition in established markets and is
strategically positioned for the future.

Strategy To Capitalize On Growth And Deliver Increased Long-Term ProÑtability

The impact of our eÅorts to date is not fully demonstrated in our Ñscal Ñnancial results, our earnings per share were under
pressure throughout Ñscal 2005. There are several reasons for this Ó product growth drivers in international markets carry lower
margins, costs of the IntraLase law suit, integration of Drew ScientiÑc and the continued strengthening of our internal controls
over Ñnancial reporting, as required by Section 404 of the Sarbanes-Oxley legislation. We expect that this pressure on earnings
per share will continue through the execution of our strategy, including this year and next. However, our progress to date gives
us conÑdence that Escalon Medical is positioned to capitalize on growth opportunities, deliver increased long-term proÑtability
and enhanced shareholder value. Growth, organic or acquisitive, requires investment and is the correct strategy moving forward
in our long-term plan.

The Right Combination Of Businesses For Consistent Growth

In transforming Escalon Medical we have invested to build the right combination of businesses, giving the company a well-
balanced portfolio that promises consistent growth while minimizing the volatility that aÅects so many companies operating in a
single line of business. This model allows us to smooth out cycles with less risk and uncertainty. Our base of businesses provides
us with the potential to capture more opportunities, grow faster and deliver a more consistent return to our shareholders. The
foundation and strategy for our on-going success is to continue to be acquisitive, to improve our product mix, look for new
technologies and build on our base portfolio businesses.

Looking forward, we expect Ñscal 2006 to be another year of progress as we continue to execute on our growth strategies,
build our strengths and enhance our market position. With the help of our employees, their commitment to improvement and
innovation and the support of our shareholders, we expect to achieve our growth and proÑtability goals in the coming year.

Sincerely,

Richard J. DePiano

Chairman and Chief Executive OÇcer

October 24, 2005

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Ñscal year ended June 30, 2005.
TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transitional period from

Commission Ñle number 0-20127

ESCALON MEDICAL CORP.

(Exact name of Registrant as speciÑed in its charter)

Pennsylvania
(State or other jurisdiction of
incorporation or organization)

33-0272839
I.R.S. Employer
IdentiÑcation Number)

565 East Swedesford Road, Suite 200, Wayne, PA 19087
(Address of principal executive oÇces, including zip code)

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

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

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.001 per share

Indicate by check mark whether the Registrant (1) has Ñled all reports required to be Ñled 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 Ñle such reports), and (2) has been subject to such Ñling requirements for
the last 90 days. Yes ¥

No n

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

Indicate by check mark whether the Registrant is an accelerated Ñler (as deÑned in Rule 12b-2 of the

Exchange Act). Yes n

No ¥

Indicate by check mark whether the Registrant is a shell company (as deÑned in Rule 12b-2 of the

Exchange Act Yes). n

No ¥

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

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

Registrant's proxy statement to be Ñled in connection with its 2005 Annual Meeting of Shareholders

incorporated by reference in Part III, Items 10, 11, 12 and 14.

Documents Incorporated by Reference

ESCALON MEDICAL CORP.

ANNUAL REPORT ON FORM 10-K
For The Fiscal Year Ended June 30, 2005

TABLE OF CONTENTS

PART I

Item 1.
Item 2.
Item 3.
Item 4.

Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Submission of Matters to a Vote of Security HoldersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer

Purchases of Equity Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Selected Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 6.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 8.
Financial Statements and Supplementary Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in an Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 9B. Other Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

PART III

Item 10. Directors and Executive OÇcers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 11. Executive CompensationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Security Ownership of Certain BeneÑcial Owners and Management and Related
Item 12.
Stockholder Matters ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 13. Certain Relationships and Related Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Principal Accountant Fees and Services ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Item 14.

PART IV

Page

2
15
15
17

17
19
20
33
33

33
34

34
34

34
34
34

Item 15. Exhibits and Financial Statement Schedules ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

ITEM 1. Business

Company Overview

PART I

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

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

Drew Business

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

Diabetes

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

Hematology

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

Sonomed Business

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

A-Scans

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

B-Scans

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

Pachymeters

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

UBM

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

Vascular Business

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

PD AccessTM and SmartneedleTM Monitors, needles and catheter

Products

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

Medical/Trek/EMI Business

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

Adatosil» 5000 Silicone Oil (""Silicone Oil'')

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

Ispan Intraocular Gases

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

Viscous Fluid Transfer Systems

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

Fiber Optic Light Sources

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

CFA Camera Back

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

Pharmaceutical Business

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

Research and Development

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

Manufacturing and Distribution

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

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

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

The manufacture, testing and marketing of each of the Company's products entails risk of product

liability. Product liability insurance is carried by Escalon to cover primary risk.

Governmental Regulations

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

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

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

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

Marketing and Sales

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

Service and Support

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

Third-Party Reimbursement

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

Patents, Trademarks and Licenses

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

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

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

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

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

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

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

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

4. Termination by either party due to the commission of any material breach of any covenant or

promise by the other party under the license agreement; or

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

See the Notes to the Consolidated Financial Statements for a description of the Company's legal

proceedings with IntraLase.

Competition

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

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

Sonomed designs and manufactures ophthalmic ultrasound products: A-Scans, pachymeters, B-Scans
and UBMs. The A-Scans and pachymeters furnish internal measurements of the eye and B-Scans provide an
image of the rear of the eye. A UBM is a high frequency/high resolution ultrasound device, designed to
provide highly detailed information of the anterior segment of the eye. Sonomed's principal competitors are
Alcon Laboratories, Inc, Quantel, Inc. and Accutome, Inc. Management believes that the Company is in a

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

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

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

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

Human Resources

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

Cautionary Factors That May AÅect Future Results

Certain statements contained in, or incorporated by reference in, this Annual Report on Form 10-K are
forward-looking statements, made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, which provide current expectations or forecasts of future events. Such statements can be
identiÑed by use of terminology such as ""anticipate,'' believe,'' ""could,'' ""estimate,'' ""expect,'' ""forecast,''
""intend,'' ""may,'' ""plan,'' ""possible,'' ""project,'' ""should,'' ""will,'' and similar words or expressions. The
Company's forward-looking statements include certain information relating to general business strategy,
growth strategies, Ñnancial results, liquidity, product development, the introduction of new products, the
potential markets and uses for the Company's products, the Company's regulatory Ñlings with the FDA,
acquisitions, the development of joint venture opportunities, the loss of revenue due to the expiration or
termination of certain agreements, the eÅect of competition on the structure of the markets in which the

Company competes and defending the Company in litigation matters. The reader must carefully consider
forward-looking statements and understand that such statements involve a variety of risks and uncertainties,
known and unknown, and may be aÅected by assumptions that fail to materialize as anticipated. Conse-
quently, no forward-looking statement can be guaranteed, and actual results may vary materially. It is not
possible to foresee or identify all factors aÅecting the Company's forward-looking statements, and the reader
therefore should not consider the following list of such factors to be an exhaustive statement of all risks,
uncertainties or potentially inaccurate assumptions.

The Company cautions the reader to consider carefully the following factors as well as the speciÑc factors
discussed with each speciÑc forward-looking statement in this annual report and in the Company's other Ñlings
with the Securities and Exchange Commission (""SEC''). In some cases, these factors have impacted, and in
the future (together with other unknown factors) could impact, the Company's ability to implement the
Company's business strategy and may cause actual results to diÅer materially from those contemplated by
such forward-looking statements. No assurance can be made that any expectations, estimate or projection
contained in a forward-looking statement can be achieved.

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

Any acquisitions, strategic alliances, joint ventures and divestitures that the company eÅects could result
in Ñnancial results that diÅer from market expectations.

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

Costs associated with Intralase litigation may adversely impact earnings in the near term.

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

The company no longer receives revenue from the sale of silicone oil by Bausch & Lomb. Payments
ceased eÅective August 12, 2005.

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

From 8/13/00 to 8/12/01 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
From 8/13/01 to 8/12/02 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
From 8/13/02 to 8/12/03 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
From 8/13/03 to 8/12/04 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
From 8/13/04 to 8/12/05 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

100%
82%
72%
64%
45%

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

The Company's results Öuctuate from quarter to quarter.

The Company has experienced quarterly Öuctuations in operating results and anticipates continued

Öuctuations in the future. A number of factors contribute to these Öuctuations:

‚ Acquisitions, such as Drew, and subsequent integration of the acquired company, although there is no

assurance that further acquisitions will occur;

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

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

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

‚ Fluctuations in royalty income;

‚ The gain or loss of signiÑcant customers;

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

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

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

‚ Litigation expense.

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

Failure of the market to accept the company's products could adversely impact the company's business
and Ñnancial condition.

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

‚ The price of products;

‚ The receipt of regulatory approvals for multiple indications;

‚ The establishment and demonstration of the clinical safety and eÇcacy of the Company's

products; and

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

Any failure to achieve signiÑcant market acceptance of the Company's products will have a material

adverse impact on the Company's business.

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

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

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

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

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

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

Escalon's failure to comply with the applicable regulations would subject the Company to Ñnes, delays or
suspensions of approvals or clearances, seizures or recalls of products, operating restrictions, injunctions or

civil or criminal penalties, which would adversely impact the Company's business, Ñnancial condition and
results of operations.

The success of competitive products could have an adverse impact on the company's business.

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

‚ Properly identify customer needs;

‚ Innovate and develop new technologies, services and applications;

‚ Establish adequate product distribution coverage;

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

‚ Protect the Company's intellectual property;

‚ Successfully commercialize new technologies in a timely manner;

‚ Manufacture and deliver the Company's products in suÇcient volumes on time;

‚ DiÅerentiate the Company's oÅerings from the oÅerings of the Company's competitors;

‚ Price the Company's products competitively;

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

‚ Anticipate general market and economic conditions.

Escalon cannot assure that the Company will be able to compete eÅectively in the competitive

environments in which the Company operates.

The company's products employ proprietary technology, and this technology may infringe on the
intellectual property rights of third parties.

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

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

Lack of availability of key system components could result in delays, increased costs or costly redesign
of the company's products.

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

The company's ability to market or sell the company's products may be adversely impacted by
limitations on reimbursements by government programs, private insurance plans and other third party
payors.

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

Future legislation or changes in government programs may adversely impact the market for the
company's products.

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

The company may become involved in product liability litigation, which may subject the company to
liability and divert management attention.

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

The company's international operations could be adversely impacted by changes in laws or policies of
foreign governmental agencies and social and economic conditions in the countries in which the company
operates.

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

The company is dependent on its management and key personnel to succeed.

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

The market price of the company's stock has historically been volatile, and the company has not paid
cash dividends.

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

‚ Any acquisitions, strategic alliances, joint ventures and divestitures that the Company eÅects;

‚ Announcements of technological innovations;

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

competitors;

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

‚ Developments or disputes relating to patent or proprietary rights and public concern as to the safety

and eÇcacy of the procedures for which the Company's products are used.

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

The Company has not paid cash dividends on its common stock and does not anticipate paying cash

dividends in the foreseeable future.

The impact of terrorism or acts of war could have a material adverse impact on the company's business.

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

The company charter documents and Pennsylvania law may inhibit a takeover.

Certain provisions of Pennsylvania law and the Company's Bylaws could delay or impede the removal of
incumbent directors and could make it more diÇcult for a third party to acquire, or discourage a third party

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

Item 2. Properties

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

Item 3. Legal Proceedings

Intralase Corp. Legal Proceedings

In October 1997, Escalon and IntraLase entered into a License Agreement wherein Escalon granted
IntraLase the exclusive right to use Escalon's intellectual laser properties, including patented and non-
patented technology, in exchange for an equity interest in IntraLase as well as royalties based on a percentage
of net sales of future products. The shares of common stock were restricted for sale until April 6, 2005. See
Management's Discussion and Analysis of Financial Condition and Results of Operations and the Notes to
Consolidated Financial Statements for discussions on the Company's sales of IntraLase common stock.

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

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

accounts receivable are not ""consideration received'' under the License Agreement and expressly ruled that
IntraLase must pay Escalon royalties on IntraLase's accounts receivable. The Court agreed with IntraLase,
however, holding that IntraLase is not required to pay royalties on research grants. The Court also held that
IntraLase must give Escalon an accounting of third-party royalties.

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

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

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

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

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

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

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

Drew Legal Proceedings

Carver Litigation

CDC Technologies seeking a total of approximately $420,000 for, among other things, repayment of loans
made to CDC Technologies, payment of past wages and reimbursement of business expenses. The PlaintiÅs'
claims arose out of a certain asset purchase for stock transaction in which CDC Acquisition, a wholly owned
subsidiary of Drew, acquired the assets of CDC Technologies and IV Diagnostics. CDC Acquisition and IV
Diagnostics, also a subsidiary of Drew, asserted counterclaims against the plaintiÅs for, among other things,
breach of Ñduciary duty, unfair trade and conversion. In addition, CDC Acquisition and IV Diagnostics
asserted cross-claims against its co-defendants for indemniÑcation pursuant to the transaction agreements. A
bench trial was held in June, 2005. In August, 2005 the Court rendered a decision resulting in the Court's
award of only $76,000 to PlaintiÅs. Judgment has not yet been entered on the award. CDC Acquisition and IV
Diagnostics have Ñled a motion for reconsideration of certain issues ruled upon by the Court. Further, CDC
Acquisition and IV Diagnostics are presently negotiating with co-defendants over the companies' indemniÑca-
tion claims.

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

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

Other Legal Proceedings

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

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

None.

PART II.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

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

Fiscal year ended June 30, 2004

High

Low

Quarter ended September 30, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Quarter ended December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Quarter ended March 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Quarter ended June 30, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 6.60
$ 8.10
$23.85
$27.49

$3.00
$5.47
$6.33
$8.83

Fiscal year ended June 30, 2005

High

Low

Quarter ended September 30, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Quarter ended December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Quarter ended March 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Quarter ended June 30, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$15.43
$13.99
$ 9.08
$ 8.49

$5.92
$7.70
$4.62
$3.70

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

Escalon has never declared or paid a cash dividend on its common stock and presently intends to retain

any future earnings to Ñnance future growth and working capital needs.

Item 6. Selected Financial Data

The following selected Ñnancial data are derived from the consolidated Ñnancial statements of the
Company. The data should be read in conjunction with ""Managements Discussion and Analysis of Financial
Condition and Results of Operations'' included herein in Item 7 and the Ñnancial statements and related notes
thereto included herein in Item 8.

Statement of Operations Data:
Product revenue, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Costs and expenses:

Cost of goods soldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Research and development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Marketing, general and administrative ÏÏÏÏÏÏÏÏÏÏ
Writedown of license and distribution rights ÏÏÏÏÏ

13,158
1,893
12,556

Total costs and expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

27,607

Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(682)

Gain on sale of available for sale securities ÏÏÏÏÏÏÏÏ
Loss from termination of joint ventureÏÏÏÏÏÏÏÏÏÏÏÏ
Equity in (loss)/gain of unconsolidated joint

venture ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

3,412
Ì

(64)
69
(55)

Income before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2,680
232

2005

For the Year Ended June 30,
2003
(in thousands, except per share amounts)

2004

2002

2001

$23,864
3,061

$12,348
2,373

$11,191
2,175

$10,293
1,781

$ 9,626
2,254

26,925

14,721

13,366

12,074

11,880

5,476
776
5,206
Ì

11,458

3,263

Ì
Ì

4,896
780
5,034
196

10,906

2,460

Ì
Ì

Ì
59
(407)

2,915
173

Ì
3
(638)

1,825
112

4,640
555
5,097
Ì

10,292

1,782

Ì
(23)

8
2
(791)

978
Ì

978

0.29

4,297
492
5,430
Ì

10,219

1,661

Ì
Ì

(19)
2

(1,052)

592
Ì

592

0.18

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 2,448

$ 2,742

$ 1,713

Basic net income per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ .42

Diluted net income per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ .39

0.70

0.64

0.51

0.48

Weighted average shares Ì basic used in per share

computation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

5,832

3,897

3,365

3,346

3,292

Weighted average shares Ì diluted used in per

share computationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

6,231

4,304

3,573

3,360

3,308

2005

2004

At June 30,
2003
(in thousands)

2002

2001

Balance Sheet Data:
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Working capital/(deÑcit)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt, net of current portion ÏÏÏÏÏÏ
Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated deÑcit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total shareholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

5,116
13,613
40,049
392
5,530
(32,136)
34,519

$ 12,602
13,966
29,457
2,396
5,996
(34,585)
23,461

298
889
16,890
4,080
7,951
(37,326)
8,939

221
(240)
16,912
5,191
9,719
(39,039)
7,193

81
(3,004)
17,798
4,502
11,691
(40,018)
6,107

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

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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

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

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

Executive Overview Ì Fiscal Years Ended June 30, 2005 and 2004

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

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

‚ In connection with the acquisition of Drew, the Company issued 900,000 shares of its Common Stock

during the twelve-month period ended June 30, 2005.

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

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

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

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

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

‚ Approximately 55.8% of the increase in operating expenses in Ñscal 2005 as compared to Ñscal 2004 is
due to the acquisition of Drew. Of the remaining 44.2%, approximately 33% of the increase is related to
a one-time supplemental retirement beneÑt awarded to the Company's chairman and CEO in
June 2005. The balance of the increase relates primarily to an unusually high amount of legal and
accounting fees primarily related to the Company's Ñrst quarterly Ñling with the SEC subsequent to the
Drew acquisition, Intralase litigation costs, increased auditor's fees in proportion to the increase in the
Company's size due to the acquisition of Drew and initial costs incurred related to compliance with the
Sarbanes-Oxley Act of 2002. While the Company expects these legal, accounting and compliance
expenses to impact earnings in the near term, it does not believe that all of these expenses will continue
in the future at such levels.

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

Subsequent Event

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

Results of Operations

Fiscal Year Ended June 30, 2005 Compared to Fiscal Year Ended June 30, 2004

The following table shows consolidated product revenue by business segment as well as identifying trends

in business segment product revenues for the Ñscal years ended June 30, 2005 and 2004.

Fiscal Years Ended June 30,
2004

2005

% Change

Product revenue:
Drew ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Sonomed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
VascularÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medical/Trek/EMI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$11,294
7,663
3,180
1,727

$ Ì 100.00%
.87%
4.09%
1.83%

7,597
3.055
1,696

$23,864

$12,348

93.26%

Product revenue increased $11,516,000, or 93.26%, to $23,864,000 in Ñscal 2005 as compared to
$12,348,000 in Ñscal 2004. The increase is primarily attributed to the acquisition of Drew on July 23, 2004.
The balance of the increase was $222,000, or .93%. In the Sonomed business unit, product revenue increased
$67,000,or 0.87% during Ñscal 2005. The increase is primarily caused by an increase in the sales of the
Company's EZ AB scan ultrasound systems and increased export sales, which oÅset a decrease in demand for
the Company's pachymeter product. Unit sales of the pachymeter decreased by 57% as compared to Ñscal
2004. The domestic market for pachymeters had previously expanded due to enhanced techniques in

glaucoma screening performed by optometrists. Historically, the typical optometrist had not been a user of the
pachymeter. Domestic demand for the pachymeter returned to historic levels during the fourth quarter of
Ñscal 2004 due to market saturation and increased price competition within the marketplace. In the Vascular
business unit, revenue increased $125,000, or 4.09%, to $3,180,000 during Ñscal 2005 as compared to Ñscal
2004. The increase in Vascular product revenue was primarily caused by an increase in direct sales to end
users by the Company's domestic sales team and, to a lesser extent, increases in the European market. These
increases were partially oÅset by decreases in revenue from the Company's distributor network. The Company
has terminated its relationship with several of its distributors during the current Ñscal year. In the Medical/
Trek/EMI business unit, product revenue increased $31,000, or 1.83%, to $1,727,000 during 2005 as
compared Ñscal 2004. The increase in Medical/Trek/EMI product revenue is primarily attributed to an
approximate $21,000 increase in OEM revenue from Bausch & Lomb.

Other revenue increased $687,000, or 28.95%, to $3,060,000 during 2005 as compared to Ñscal 2004. The
increase is primarily attributed to a $902,000 increase in royalty payments received from Intralase related to
the licensing of the Company's intellectual laser technology. Intralase royalties increased partially due to a
court order amending Intralase's method of calculating its royalty payments to the Company (see notes 9 and
11 to the consolidated Ñnancial statements). The Company received $240,000 from Bio-Rad related to an
OEM agreement between Bio-Rad and Drew. While this agreement terminated as of May 15, 2005, the
parties have continued to operate under the terms of the expired agreement pending negotiation of a potential
extension and/or revision. These increases were partially oÅset by an $455,000 decrease in royalties received
from Bausch & Lomb in connection with their sales of Silicone Oil. The Company's contract with Bausch &
Lomb called for annual step-downs in the calculation of Silicone Oil revenue to be received by the Company
from 64% from August 13, 2003 to August 12, 2004 to 45% from August 13, 2004 to August 12, 2005. The
Company's contract with Bausch & Lomb ended in August 2005. For Ñscal 2005, the step-down under the
Company's contract with Bausch & Lomb caused a $627,000 decrease in Silicone Oil revenue, which was
partially oÅset by $172,000 of royalties generated from a higher volume of product sales. The Company does
not have knowledge as to what factors have aÅected Bausch & Lomb's sales of Silicone Oil. See note 11 of the
notes to the consolidated Ñnancial statements for a description of the step-down provisions under the contract
with Bausch & Lomb.

The following table presents consolidated cost of goods sold by reportable business segment and as a

percentage of related segment product revenues for the Ñscal years ended June 30, 2005 and 2004.

Cost of goods sold:
Drew ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SonomedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Vascular ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medical/Trek/EMI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Year Ended June 30,

2005

2004

Dollars
(in
thousands)

$ 7,554
3,115
1,432
1,058

66.89%
40.65%
45.03%
61.26%

$13,159

55.14%

$ Ì
3,076
1,381
1,019

$5,476

0.00%
40.49%
45.20%
60.04%

44.35%

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

Cost of goods sold in the Sonomed business unit totaled $3,115,000 or 40.65% of product revenue in Ñscal
2005 as compared to $3,076,000, or 40.49% of product revenue for Ñscal 2004. The primary factor aÅecting the
increase in cost of goods sold as a percentage of product revenue is an increase in international sales, where

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

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

Marketing, general and administrative expenses:
Drew ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SonomedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Vascular ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medical/Trek/EMIÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2005
(in
thousands)

Year Ended June 30,
2004
(in
thousands)

% Change

$ 4,104
1,608
1,424
5,420

$12,556

$ Ì
1,196
1,353
2,657

$5,206

100.00%
34.45%
5.25%
103.99%

141.18%

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

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

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

Marketing, general and administrative expenses in the Medical/Trek/EMI business unit increased
$2,763,000, or 103.99%, to $5,420,000 as compared to Ñscal 2004. Of the increase, $1,087,000 is due to a one-
time supplemental retirement beneÑt awarded to the Company's Chairman and CEO in June 2005 (see
note 10 to the consolidated Ñnancial statements). In addition, legal, accounting and investor relations fees
increased by $1,163,000 as compared to Ñscal 2004. The increase in legal fees is primarily due to litigation

costs with Intralase, which the Company expects will continue to impact earnings in the near term (see note 9
to the consolidated Ñnancial statements.) and incremental costs related to the Company's Ñrst quarterly Ñling
with the SEC subsequent to the Drew acquisition. The increase in accounting fees is due to the Company's
Ñrst quarterly Ñling with the SEC subsequent to the Drew acquisition as well as increased auditor's fees in
proportion to the increase in the Company's size due to the acquisition of Drew on July 23, 2004 and initial
costs incurred related to compliance with the Sarbanes-Oxley Act of 2002. Also contributing to the increase
was an increase in personnel-related expenses primarily due to increased headcount to support the larger
organization and, higher investor related and insurance costs due to the Drew acquisition. See the Executive
Overview for further information regarding the operations of Drew.

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

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

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

Interest income was $69,000 and $59,000 for Ñscal 2005 and 2004, respectively. The increase relates to

higher average cash balances in the current Ñscal year.

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

Fiscal Year Ended June 30, 2004 Compared to Fiscal Year Ended June 20, 2003

The following table presents consolidated product revenues by business segment as well as identifying

trends in business segment product revenues for the Ñscal years ended June 30, 2004 and 2003.

2004

Fiscal Year Ended June 30,
2003
(in thousands)

% Change

Product revenue:
Sonomed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
VascularÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medical/Trek ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EMI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 7,596
3,055
1,448
249

$ 6,495
2,761
1,502
433

16.95%
10.65%
¿3.60%
¿42.49%

$12,348

$11,191

10.34%

Product revenue increased $1,157,000, or 10.34%, to $12,348,000 in Ñscal 2004 as compared to
$11,191,000 in Ñscal 2003. Product revenue in the Sonomed business unit increased $1,101,000, or 16.95%, to
$7,596,000. The increase was attributed to a $336,000 increased in the domestic market, a $324,000 increase
in the Middle East, a $297,000 increase in Europe and a $261,000 increase in Latin America oÅset by a
$93,000 decrease in Asia and the PaciÑc Rim. The increase in the domestic market related to increased
demand for the Company's pachymeter product. The domestic market for pachymeters expanded due to
enhanced techniques in glaucoma screening performed by optometrists. Historically, the typical optometrist
has not been a user of the pachymeter. Domestic demand for the pachymeter returned to historic levels in the
fourth quarter of Ñscal 2004. The increases in the Middle East and Europe were the result of additional sales

and marketing resources and management attention to developing these markets whereas the increase in Latin
America was the result of recovering economies in South America. Product revenue in the Vascular business
unit increased $294,000, or 10.65%, to $3,055,000. The increase primarily related to increased usage in the
domestic marketplace. Product revenue in the Medical/Trek business unit decreased $54,000, or 3.60%, to
$1,448,000. The decrease primarily related to decreased market demand for Medical/Trek's products. Product
revenue in the EMI business unit decreased $184,000, or 42.49%, to $249,000.

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

The following table presents consolidated cost of good sold by reportable business segment and as a

percentage of related segment product revenue for the Ñscal years ended June 30, 2004 and 2003.

Cost of goods sold:
SonomedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Vascular ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medical/TrekÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EMI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Fiscal Year Ended June 30,

2004

2003

Dollars
(in
thousands)

$3,076
1381
911
108

$5,476

40.49%
45.20%
62.91%
43.37%

44.35%

$2,524
1195
961
216

$4,896

38.86%
43.28%
63.98%
49.88%

43.75%

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

Marketing, general and administrative expenses:
Sonomed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Vacular ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medical/Trek ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EMI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Fiscal Year Ended June 30,
2003
2004
(in thousands)

% Change

$1,196
1,353
2,427
230

$1,281
1,205
2,294
254

¿6.64%
12.28%
5.80%
¿9.45%

$5,206

$5,034

3.42%

Marketing, general and administrative expenses increased $172,000, or 3.42%, for the Ñscal year ended
June 30, 2004 as compared to the Ñscal year ended June 30, 2003. In the Sonomed business unit, marketing,
general and administrative expenses decreased $134,000, primarily the result of headcount changes. Commis-
sion expense decreased $35,000 as a result of changes in the commission structure with an international
distributor. OÅsetting these decreases was an $84,000 increase in consulting expense, which increased as a
result of the Company's marketing eÅorts in the international markets. In the Vascular business unit,
marketing, general and administrative expenses increased $148,000, or 12.28%, to $1,353,000. Salaries and
other personnel-related expenses increased $155,000, primarily the result of increases in headcount. Consult-
ing expenses increased $55,000 as a result of marketing eÅorts in the international markets. Sales and
marketing travel-related expenses also increased $68,000. The Company agreed to pay royalties for a Ñve-year
period following the acquisition of the vascular access division of Endologix Inc. (""Endologix''). That Ñve-
year period ended in December 2003. This resulted in a $122,000 decrease in royalty expense. In the Medical/
Trek business unit, marketing, general and administrative expenses increased $133,000, or 5.80%, to
$2,427,000. Accrued compensation increased $108,000. Payroll taxes increased $86,000 primarily due to the
exercise of employee stock options. Depreciation and amortization expense decreased $32,000 primarily due to
the abandonment of the Company's license and distribution rights to Povidone Iodine 2.5% in March 2003 and
consulting expense decreased $14,000 as the Company incurred expense in Ñscal 2003 related to the
Company's search for alternate debt Ñnancing. In the EMI business unit, marketing, general and administra-
tive expenses decreased $24,000, or 9.45%, to $230,000.

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

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

Interest income was $59,000 and $3,000 for the Ñscal years ended June 30, 2004 and 2003, respectively.

The increase related to increased average cash balances in the current Ñscal year.

Interest expense was $407,000 and $638,000 for the Ñscal years ended June 30, 2004 and 2003,

respectively. The decrease related to reduced total debt levels and lower interest rates.

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

Liquidity and Capital Resources

Changes in overall liquidity and capital resources from continuing operations during the Ñscal year ended

June 30, 2005 are reÖected in the following table:

Current Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less: Current Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

June 30,
2005

June 30,
2004

(dollars are in thousands)
$ 17,566
$ 17,665
3,600
4,052

Working CapitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current Ratio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Notes Payable and Current Maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 13,613
4.4 to 1
230
392

Total Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

622
34,519

$ 13,966
4.9 to 1
1,872
2,396

4,268
23,461

Total Capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Debt to Total Capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 35,141

$ 27,729

1.77%

15.39%

Working Capital Position

Working capital decreased $353,000 as of June 30, 2005 and the current ratio decrease to 4.4 to 1 from
4.9 to 1 when compared to June 30, 2004. The decrease in working capital was caused primarily by the pay-oÅ
of all of the Company's pre-acquisition debt as well as substantially all of the debt acquired from Drew. The
Company paid oÅ debt of approximately $6,348,000 during the Ñscal year ended June 30, 2005. The primary
oÅset to this decrease in working capital was a $3,412,000 realized gain and a $1,207,000 increase in available
for sale securities, which relates to sale and remaining available for sale securities that the Company received
from IntraLase in connection with the license of the Company's intellectual laser properties to IntraLase.

Cash Used in Operating Activities

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

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

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

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

Cash Flows Used in Investing And Financing Activities

Cash Öows generated by investing activities of approximately $2,187,000 during Ñscal 2005 relate
primarily to the net proceeds of approximately $3,412,000 realized on the sale of a portion of the IntraLase

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

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

Cash Öows from Ñnancing activities were $9,440,000 for the Ñscal year ended June 30, 2004. Cash Öows
from Ñnancing activities primarily related to proceeds from a private placement of common stock and common
stock warrants as well as proceeds from the issuance of common stock through the exercise of stock options.
On March 17, 2004, the Company completed a private placement of common stock resulting in net proceeds
of $9,788,000 and, during the Ñscal year ended June 30, 2004, issued common stock related to the exercise of
stock options resulting in proceeds to the Company of $1,992,000. This was oÅset by repayments of the
Company's term debt and line of credit. The Company paid down its line of credit by $725,000 and paid down
its term debt by $1,615,000.

Debt History

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

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

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

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

Balance Sheet

The components of the balance sheet of the Company were increased as of July 23, 2004 by the

acquisition of Drew as follows:

Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other current assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Furniture and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PatentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other long-term assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Line of credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exchange of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 150,849
1,439,120
2,069,146
351,505
868,839
9,574,655
297,246
7,406
1,617,208
3,392,286
1,072,457
7,430,439

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

OÅ-Balance Sheet Arrangements and Contractual Obligations

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

Total

Less than
1 Year

1-3 Years

3-5 Years

More than
5 Years

Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating lease obligations ÏÏÏÏ

$ 622,137
2,999,000

$ 230,344
890,000

$ 391,793
1,132,000

Ì $

$
578,000

Ì
399,000

$3,621,137

$1,120,344

$1,523,793

$578,000

$399,000

Forward-looking Statement About SigniÑcant Items Likely to Impact Liquidity

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

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

Escalon Common Stock

The Company's Common Stock is currently listed on the Nasdaq SmallCap Market. In order to continue

to be listed on the Nasdaq SmallCap market, the following requirements must be met:

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

‚ 500,000 publicly held shares;

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

‚ A minimum bid price of $1;

‚ 300 round lot shareholders;

‚ Two market makers; and

‚ Compliance with corporate governance standards.

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

Critical Accounting Policies

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

Revenue Recognition

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

The Company's considerations for recognizing revenue upon shipment of product to a distributor are

based on the following:

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

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

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

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

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

Valuation of Intangible Assets

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

Income/(loss) Per Share

The Company computes net income/(loss) per share under the provisions of SFAS No. 128, ""Earnings

Per Share,'' (SFAS 128) and StaÅ Accounting Bulletin, No. 98 (SAB 98).

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

Taxes

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

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

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

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

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

Interest Rate Risk

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

2006

2007

2008

Thereafter

Total

Texas Mezzanine Fund Note ÏÏÏÏÏÏ
Interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Symbiotics, Inc. NoteÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$130,348

$153,706

$121,417

99,996

16,674

$230,344

$253,702

$138,091

Ì $405,471

216,666

Ì $622,137

Exchange Rate Risk

During the Ñscal years ended June 30, 2005 and 2004, approximately 36.4% and 21.6%, respectively, of
Escalon's consolidated net revenue was derived from international sales. Prior to the acquisition of Drew, the
price of all product sold overseas was denominated in United States Dollars and consequently the Company
incurred no exchange rate risk on revenue. However, a portion of Drew's product revenue is denominated in
United Kingdom Pounds and Euros. During the Ñscal year ended June 30, 2005, Drew recorded approximately
$2,378,000 and $99,000 of revenue denominated in United Kingdom Pounds and Euros, respectively.

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

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

Item 8. Financial Statements and Supplementary Data

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

Item 9A. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

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

(b) Internal Control Over Financial Reporting

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

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

Item 9B. Other Information

None.

Item 10. Directors and Executive OÇcers of the Registrant

PART III.

The information required by this Item 10 is incorporated by reference to the Company's proxy statement

for the Company's 2005 Annual Meeting of Shareholders to be Ñled with the SEC.

Item 11. Executive Compensation

The information required by this Item 11 is incorporated by reference to the Company's proxy statement

for the Company's 2005 Annual Meeting of Shareholders to be Ñled with the SEC.

Item 12. Security Ownership of Certain BeneÑcial Owners and Management and Related Shareholder

Matters

The information required by this Item 12 is incorporated by reference to the Company's proxy statement

for the Company's 2005 Annual Meeting of Shareholders to be Ñled with the SEC.

Item 13. Certain Relationships and Related Transactions

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

Item 14. Principal Accountant Fees and Services

The information required by this Item 14 is incorporated by reference to the Company's proxy statement

for the Company's 2005 Annual Meeting of Shareholders to be Ñled with the SEC.

PART IV.

Item 15. Exhibits and Financial Statement Schedules

Consolidated Financial Statements

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

Consolidated Financial Statement Schedules

All schedules, Schedule II, have been omitted because they are not applicable, or not required, or the

information is shown in the Ñnancial statements or notes therein.

Exhibits

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

3.1

3.2
4.5

4.6

4.7

4.8
4.9
4.10
4.11

10.6

10.7

10.9

10.13

10.15

10.16
10.17
10.18
10.20
10.21

10.22
10.23
10.24
10.29
10.30

10.31

(a) Restated Articles of Incorporation of Registrant.(8)
(b) Agreement and Plan of Merger dated as of September 28, 2001 between Escalon

Pennsylvania, Inc. and Escalon Medical Corp.(8)
Bylaws of Registrant.(8)

(a) Warrant Agreement between Registrant and U.S. Stock Transfer Corporation.(1)
(b) Amendment to Warrant Agreement between the Registrant and U.S. Stock Transfer

Corporation.(2)

Corporation.(3)
Securities Purchase Agreement, dated as of December 31, 1997 by and among the Registrant
and Combination.(4)
Registration Rights Agreement, dated as of December 31, 1997 by and among the Registrant
and Combination.(4)
Warrant to Purchase Common Stock issued December 31, 1997 to David Stefansky.(4)
Warrant to Purchase Common Stock issued December 31, 1997 to Combination.(4)
Warrant to Purchase Common Stock issued December 31, 1997 to Richard Rosenblum.(4)
Warrant to Purchase Common Stock issued December 31, 1997 to Trautman, Kramer &
Company.(4)
Employment Agreement between the Registrant and Richard J. DePiano dated May 12,
1998.(6)**
Non-Exclusive Distributorship Agreement between Registrant and Scott Medical Products
dated October 12, 2000.(9)
Assets Sale and Purchase Agreement between the Registrant and Endologix, Inc. dated
January 21, 1999.(5)
Supply Agreement between the Registrant and Bausch & Lomb Surgical, Inc. dated
August 13, 1999.(5)
Registrant's Amendment and Supplement Agreement and Release between the Registrant and
Endologix, Inc. dated February 28, 2001.(10)
2003 Amendment to Loan Agreement.(12)
Allonge to the Amended and Restated Term/Time Note.(12)
Allonge to the Amended and Restated Line of Credit Note.(12)
PNC Bank, N.A. Letter Agreement dated November 16, 2001.(11)
PNC Bank, N.A. Amended and Restated Committed Line of Credit Note dated
November 16, 2001.(11)
PNC Bank, N.A. Amended and Restated Time Note dated November 16, 2001.(11)
PNC Bank, N.A. Pledge Agreement dated November 16, 2001.(11)
PNC Bank, N.A. Amended and Restated Security Agreement dated November 16, 2001.(11)
Registrant's amended and restated 1999 Equity Incentive Plan.(13)**
Securities Purchase Agreement dated as of March 16, 2004 (the ""Securities Purchase
Agreement'') between the Company and the Purchasers signatory thereto.(14)
Registration Rights Agreement dated as of March 16, 2004 between the Company and the
Purchasers signatory thereto.(14)

10.32

10.33

10.34

21
31.1

31.2

32.1

32.2

Form of Warrant to Purchase Common Stock issued to each Purchaser under the Securities
Purchase Agreement.(14)
Manufacturing Supply and Distribution Agreement between Sonomed, Inc. and Ophthalmic
Technologies, Inc. dated as of March 11, 2004.(15)
Supplemental Executive Retirement BeneÑt Agreement for Richard DePiano dated June 23,
2005.(16)**
Subsidiaries.(11)
CertiÑcation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Ì Richard J.
DePiano.(*)
CertiÑcation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Ì Mark H.
Karsch.(*)
CertiÑcation pursuant to Section 1350 of Title 18 of the United States Code Ì Richard J.
DePiano.(*)
CertiÑcation pursuant to Section 1350 of Title 18 of the United States Code Ì Mark H.
Karsch.(*)

* Filed herewith.

** Management contract of compensatory plan.

(1) Filed as an exhibit to Pre-EÅective Amendment No. 2 to the Company's Registration Statement on

Form S-1 dated November 9, 1993 (Registration No. 33-69360).

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

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

(4) Filed as an exhibit to the Company's Registration Statement on Form S-3 dated January 20, 1998

(Registration No. 333-44513).

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

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

(7) Filed as an exhibit to the Company's Registration Statement on Form s-* dated February 25, 2000

(Registration No. 333-31138).

(8) Filed as an exhibit to the Company's Proxy Statement on Schedule 14A, as Ñled by the Company with

the SEC on September 21, 2001.

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

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

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

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

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

(14) Filed as an exhibit to the Company's Registration Statement on Form S-3 dated April 8, 2004

(Registration No. 333-114332).

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

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

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.

SIGNATURES

ESCALON MEDICAL CORP.
(Registrant)

By:

/s/ RICHARD J. DEPIANO

Richard J. DePiano
Chairman and Chief Executive OÇcer

Dated: September 28, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below

by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

By:

/s/ RICHARD J. DEPIANO

Richard J. DePiano

Chairman and Chief Executive
OÇcer (Principal Executive
OÇcer) and Director

September 28, 2005

By:

/s/ MARK KARSCH

Mark Karsch

Chief Financial OÇcer (Principal
Financial OÇcer)

September 28, 2005

By:

/s/ ANTHONY COPPOLA

Director

September 28, 2005

Anthony Coppola

By:

/s/

JAY L. FEDERMAN
Jay L. Federman

Director

September 28, 2005

By:

/s/ WILLIAM L.G. KWAN

Director

September 28, 2005

William L.G. Kwan

By:

/s/ LISA NAPOLITANO

Director

September 28, 2005

Lisa Napolitano

ESCALON MEDICAL CORP.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-2
Report of Independent Registered Public Accounting Firm ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-3
Consolidated Balance Sheets at June 30, 2005 and 2004ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-4
Consolidated Statements of Income for the Years Ended June 30, 2005, 2004 and 2003 ÏÏÏÏÏÏÏÏÏÏÏ F-5
Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 2005, 2004 and 2003 F-6
Consolidated Statements of Cash Flows for the Years Ended June 30, 2005, 2004 and 2003 ÏÏÏÏÏÏÏ F-7
Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ F-8

Page

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

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

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

Philadelphia, Pennsylvania
September 22, 2005

BDO SEIDMAN, LLP

F-2

REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM

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

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

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Ñnancial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the Ñnancial statements. An
audit also includes assessing the accounting principles used and signiÑcant estimates made by management, as
well as evaluating the overall Ñnancial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, the consolidated Ñnancial statements referred to above present fairly, in all material
respects, the Ñnancial position of Escalon Medical Corp. and subsidiaries as of June 30, 2004, and the results
of their operations and cash Öows for each of the two years in the period ended June 30, 2004 in conformity
with accounting principles generally accepted in the United States of America.

PARENTE RANDOLPH, LLC

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

F-3

ESCALON MEDICAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

June 30,
2005

June 30,
2004

Current assets:

ASSETS

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Available for sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts receivable, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Inventory, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Note receivable, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other current assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

5,115,772
1,207,317
4,752,310
5,856,285
100,000
633,214

$ 12,601,971
Ì
2,492,689
1,781,592
150,000
539,508

Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

17,664,898

17,565,760

Property and equipment, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Trademarks and trade names, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Patents, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

911,700
20,166,450
616,906
402,814
286,568

409,187
10,591,795
616,906
172,078
101,389

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 40,049,336

$ 29,457,115

Current liabilities:

LIABILITIES AND SHAREHOLDERS' EQUITY

Line of credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current portion of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Ì $

230,344
1,135,680
2,685,670

Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

4,051,694

Long-term debt, net of current portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued post retirement beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

391,793
1,087,000

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

5,530,487

250,000
1,621,687
499,242
1,229,498

3,600,427

2,396,019
Ì

5,996,446

Shareholders' equity:

Preferred stock, $0.001 par value; 2,000,000 shares authorized; no shares
issuedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Common stock, $0.001 par value; 35,000,000 shares authorized;

5,963,477 and 5,017,122 shares issued and outstanding at June 30,
2005 and 2004, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock warrants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated deÑcitÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

5,964
1,601,346
63,898,190
(32,136,487)
1,149,836

5,018
1,601,346
56,438,903
(34,584,598)
Ì

Total shareholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

34,518,849

23,460,669

Total liabilities and shareholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 40,049,336

$ 29,457,115

See notes to consolidated Ñnancial statements

F-4

ESCALON MEDICAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

For the Years Ended June 30,
2004

2003

2005

Product revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$23,864,322
3,060,300

$12,347,922
2,372,845

$11,191,493
2,174,537

Revenues, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

26,924,622

14,720,767

13,366,030

Costs and expenses:

Cost of goods sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Marketing, general and administrativeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Research and development ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Write-down of Povidone Iodine license and distribution

rights ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

13,158,061
12,556,374
1,892,706

5,475,703
5,206,067
776,496

4,895,574
5,033,852
780,333

195,950

Total costs and expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

27,607,141

11,458,266

10,905,709

(Loss) income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(682,519)

3,262,501

2,460,321

Other income and expenses:

Gain on sale of available for sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Equity in Ocular Telehealth Management, LLC ÏÏÏÏÏÏÏÏÏÏ
Interest incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

3,411,761

(63,613)
69,262
(55,116)

Ì
Ì
59,072
(406,543)

Ì
Ì
2,813
(638,345)

Total other income and expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

3,362,294

(347,471)

(635,532)

Income before income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2,679,775
231,664

2,915,030
173,300

1,824,789
112,412

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 2,448,111

$ 2,741,730

$ 1,712,377

Basic net income per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Diluted net income per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

0.420

0.393

0.704

0.637

0.509

0.479

Weighted average shares Ì basicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

5,831,564

3,896,951

3,365,359

Weighted average shares Ì diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

6,231,024

4,304,375

3,573,192

See notes to consolidated Ñnancial statements

F-5

Escalon Medical Corp. and Subsidiaries

Consolidated Statement of Shareholders' Equity
For the Years Ended June 30, 2005, 2004 and 2003

Amount

Common
Stock
Warrants

Additional
Paid-In
Capital

Accumulated
DeÑcit

Accumulated
Other
Comprehensive
Income

Total
Shareholders'
Equity

3,345,851

$3,346

Ì $46,228,710

$(39,038,705)

Ì $ 7,193,351

10,000
9,508
Ì

10
9
Ì

Ì
Ì
Ì

15,090
18,611
Ì

Ì
Ì
1,712,377

3,365,359

3,365

Ì 46,262,411

(37,326,328)

800,000
856,412

800
857

1,601,346
Ì

8,185,772
2,021,075

Ì
Ì

(4,649)
Ì

(4)
Ì

Ì
Ì

(30,355)
Ì

Ì
2,741,730

5,017,122

5,018

1,601,346

56,438,903

(34,584,598)

900,000

900

7,429,538

32,855
13,500

33
13

Ì
Ì

(33)
29,782

2,448,111

Ì
Ì

Ì
Ì
Ì

Ì
Ì

15,100
18,620
1,712,377

8,939,448

9,787,918
2,021,932

(30,359)
2,741,730

23,460,669

2,448,111

1,207,317

(57,481)

3,597,947
7,430,438

Ì
29,795

Ì
Ì

Balance at June 30, 2002
Common stock issued in

connection with
acquisition of trade
nameÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercise of stock options
Net income ÏÏÏÏÏÏÏÏÏÏÏ

Balance at June 30, 2003
Private placement

oÅering ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercise of stock options
Treasury stock

retirement ÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏ

Balance at June 30, 2004
Comprehensive Income:

Net income ÏÏÏÏÏÏÏÏÏ
Unrealized gains on

securities ÏÏÏÏÏÏÏÏÏ

Foreign currency

translation ÏÏÏÏÏÏÏÏ

Total comprehensive

income ÏÏÏÏÏÏÏÏÏÏÏ
Acquisition of Drew ÏÏÏÏ
Exercise of common
stock purchase
warrants ÏÏÏÏÏÏÏÏÏÏÏÏ
Exercise of stock options

Balance at June 30, 2005

5,963,477

$5,964

$1,601,346

$63,898,190

$(32,136,487)

$1,149,836

$34,518,849

See Notes to consolidated Ñnancial statements

F-6

ESCALON MEDICAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

Cash Flows from Operating Activities:
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments to reconcile net income to net cash provided by

(used in) operating activities:
Depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Post retirement beneÑtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gain on sale of available for sale securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss of Ocular Telehealth Management, LLCÏÏÏÏÏÏÏÏÏÏÏÏ
Reserve on notes receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Abandonment of leasehold improvementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Write-down of license and distribution rights ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Disposal of property and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in operating assets and liabilities:

Accounts receivable, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Inventory, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other current and long-term assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts payable, accrued and other liabilities ÏÏÏÏÏÏÏÏÏ
Net cash (used in) provided by operating activities ÏÏÏ

Cash Flows from Investing Activities:
Purchase of Drew, net of cash acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Acquisition costs related to Drew ScientiÑc ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from the sale of available for sale securitiesÏÏÏÏÏÏÏÏ
Investment in Ocular Telehealth Management, LLC ÏÏÏÏÏÏÏÏ
Purchase of Ñxed assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash provided by (used in) investing activitiesÏÏÏÏ

Cash Flows from Financing Activities:
Line of credit borrowing ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Line of credit repaymentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Principal payments on term loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of common stock Ì private placement ÏÏÏÏÏÏÏÏÏÏÏÏ
Issuance of common stock Ì stock options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash (used in) provided by investing activitiesÏÏÏÏ
EÅect of exchange rate changes on cash & cash

equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash and cash equivalents, end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Supplemental Schedule of Cash Flow Information:
Interest paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Income taxes paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Issuance of Common Stock for EMS trade name ÏÏÏÏÏÏÏÏÏÏÏ

Restructure of line of credit to long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2005

Years Ended June 30,
2004

2003

$ 2,448,111

$ 2,741,730

$ 1,712,377

387,651
1,087,000
(3,411,761)
63,613
50,000
12,458
Ì
Ì

(838,624)
(1,882,149)

63,750
(1,330,009)
(3,349,960)

151,459
(1,015,362)
3,411,761
(256,000)
(104,396)
2,187,462

(1,905,822)
(4,441,761)

Ì
29,795
(6,317,788)

241,453
Ì

Ì
Ì
Ì
Ì
Ì

(128,319)
3,888
(39,228)
343,762
3,163,286

Ì
(231,014)
Ì
Ì

(68,274)
(299,288)

310,315
Ì
Ì
Ì
Ì
Ì
195,950
927

(270,493)
(213,413)
242,007
193,246
2,170,916

Ì
Ì
Ì
Ì

(76,040)
(76,040)

153,981
(878,981)
(1,614,908)
9,787,918
1,991,573
9,439,583

775,000
(1,050,000)
(1,760,932)
Ì
18,620
(2,017,312)

(5,913)
(7,486,199)
12,601,971
$ 5,115,772

Ì
12,303,581
298,390
$12,601,971

198,647

327,176

338,155

173,300

Ì
77,564
220,826
298,390

544,155

112,412

Ì $

15,100

Ì $ 3,000,000

Issuance of common stock for the Drew acquisition ÏÏÏÏÏÏÏÏÏ

$ 7,430,438

Increase in unrealized appreciation of available for sale

securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 1,207,317

Ì $

See notes to consolidated Ñnancial statements

F-7

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Organization and Description of Business

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

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

(2) SigniÑcant Accounting Policies

Principles of Consolidation

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

Use of Estimates

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

Cash and Cash Equivalents

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

Fair Value of Financial Instruments

The Company follows Statement of Financial Accounting Standards No. 107 (""SFAS'' 107''), ""Disclo-
sure about Fair Value of Financial Instruments''. The carrying amounts for cash and cash equivalents,
accounts receivable, line of credit, accounts payable and accrued liabilities approximate their fair value

F-8

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

because of their short-term maturity. The carrying value of available for sale securities approximates market
based-upon market arms-length transactions in the underlying security. The carrying amounts of long-term
debt approximate fair value since the Company's interest rates approximate current interest rates. While we
believe the carrying value of the assets and liabilities is reasonable, considerable judgment is used to develop
estimates of fair value; thus the estimates are not necessarily indicative of the amounts that could be realized
in a current market exchange.

Marketable Securities

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

Revenue Recognition

The Company's considerations for recognizing revenue upon shipment of product to a distributor are

based on the following:

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

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

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

Shipping and Handling Revenues and Costs

Shipping and handling revenues are included in product revenue and the related costs are included in cost

of goods sold.

F-9

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Inventories

Raw materials, work in process and Ñnished goods are recorded at lower of cost (Ñrst-in, Ñrst-out) or

market. The composition of inventories is as follows:

June 30,

2005

2004

Raw materialsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Work in process ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Finished goods ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$3,476,493
473,252
2,073,208

$1,419,606
Ì
367,111

Valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

6,022,953
(166,668)

1,786,717

(5,125)

Total inventory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$5,856,285

$1,781,592

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

Balance, July 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Write-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

5,125
161,543

$64,020
5,907
Ì (64,802)

$44,953
61,934
(42,867)

Balance, June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$166,668

$ 5,125

$64,020

2005

2004

2003

Accounts Receivable

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

2005

2004

2003

Balance, July 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for bad debtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Write-oÅs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other(a) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$121,212
202,446
(41,028)
208,015

$ 261,351
784
(140,923)
Ì

$183,287
96,004
(17,940)
Ì

Balance, June 30 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$490,645

$ 121,212

$261,351

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

Property and Equipment

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

F-10

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

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

Property and equipment consist of the following at:

Equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Furniture and Ñxtures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Leasehold improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 1,921,731
120,460
121,193

$1,169,504
62,168
113,081

June 30,

2005

2004

Less: Accumulated depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2,163,384
(1,251,684)

1,344,753
(935,566)

911,700

$ 409,187

Long-Lived Assets

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

Intangible Assets

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

Accrued Warranties

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

Business Combinations

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

F-11

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Stock-Based Compensation

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

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

Net income, as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deduct: Total stock-based employee compensation

expense determined under fair value based method for
all awards, net of related tax eÅects ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2005

2004

2003

$2,448,111

$2,741,730

$1,712,377

(539,026)

(406,357)

(145,110)

Pro forma net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1,908,085

$2,335,373

$1,567,267

Earnings per share:

Basic Ì as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Basic Ì pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Diluted Ì as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Diluted Ì pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

0.420

0.327

0.393

0.306

0.704

0.599

0.637

0.543

0.509

0.466

0.479

0.439

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

Research and Development

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

Advertising Costs

Advertising costs are charged to operations as incurred. Advertising expense for the three years ended

June 30, 2005, 2004 and 2003 was $190,963, $35,439 and $25,466, respectively.

F-12

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Net Income Per Share

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

2005

2004

2003

Numerator:

Numerator for basic and diluted earnings per share:

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$2,448,111

$2,741,730

$1,712,377

Denominator:

Denominator for basic earnings per share Ì weighted
average sharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

EÅect of dilutive securities:

5,831,564

3,896,951

3,365,359

Stock options and warrants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

399,460

407,424

207,833

Denominator for diluted earnings per share Ì

weighted average and assumed conversion ÏÏÏÏÏÏÏÏ

6,231,024

4,304,375

3,573,192

Basic earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

0.420

0.393

0.704

0.637

0.509

0.479

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

Income Taxes

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

Comprehensive Income

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

Foreign Currency Translation

The Company translates the assets and liabilities of international subsidiaries into U.S. dollars at the
current rates of exchange in eÅect as of each balance sheet date. Revenues and expenses are translated using
average rates in eÅect during the period. Gains and losses from translation adjustments are included in
accumulated other comprehensive income on the consolidated balance sheet. Foreign currency transaction
gains or losses are recognized in current operations and have not been signiÑcant to the Company's operating

F-13

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

results in any period. In addition, the eÅect of foreign currency rate changes on cash and cash equivalents has
not been signiÑcant in any period.

New Accounting Pronouncements

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

(3) Intangible Assets

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

Patents

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

Goodwill, Trademarks and Trade Names

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

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

In accordance with SFAS 142, eÅective July 1, 2001, the Company discontinued the amortization of
goodwill and identiÑable intangible assets that have indeÑnite lives. Intangible assets that have Ñnite lives
continue to be amortized over their estimated useful lives. Management has evaluated the carrying value of
goodwill and its identiÑable intangible assets that have indeÑnite lives during each of the Ñscal years
subsequent to July 1, 2001, utilizing discounted cash Öows of the respective business units. After evaluating

F-14

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

the discounted cash Öow of each of its respective business units, management concluded that the carrying
value of goodwill and identiÑable intangible assets did not exceed their fair values and therefore were not
impaired. In accordance with SFAS 142, these intangible assets will continue to be assessed on an annual
basis, and impairment, if any, would be recorded as a charge against income from operations.

The following table presents intangible assets by business unit as of June 30, 2005 and 2004:

2005
Net Carrying
Amount

2004
Net Carrying
Amount

Goodwill
Sonomed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Drew ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Vascular ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medical/Trek/EMI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 9,525,550
9,574,655
941,218
125,027

$ 9,525,550
Ì
941,218
125,027

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$20,166,450

$10,591,795

2005
Net Carrying
Amount

2004
Net Carrying
Amount

Unamortized Intangible Assets
Sonomed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$616,906

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$616,906

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

Gross
Carrying
Amount

Impairment

Adjusted
Gross
Carrying
Amount

Accumulated
Amortization

Net Carrying
Value

Amortized Intangible Assets
Patents
Drew ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Vascular (pending issue) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medical/Trek/EMI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$297,246
36,916
257,301

Ì $297,246
36,916
Ì
257,301
Ì

$ (55,908)

(132,741)

$241,338
36,916
124,560

$591,463

Ì $591,463

$(188,649)

$402,814

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

Gross
Carrying
Amount

Impairment

Adjusted
Gross
Carrying
Amount

Accumulated
Amortization

Net Carrying
Value

Amortized Intangible Assets
Patents
Vascular (pending issue) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medical/Trek/EMI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 36,916
257,301

$294,217

Ì $ 36,916
257,301
Ì

Ì $ 36,916
135,162

(122,139)

Ì $294,217

$(122,139)

$172,078

F-15

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Amortization expense, relating entirely to patents, is estimated to be approximately $70,000 per year for

each of the next Ñve Ñscal years.

(4) Note Receivable

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

(5) Accrued Expenses

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

June 30,
2005

June 30,
2004

Accrued compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Warranty accruals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Severance accruals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Legal accrualsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other accruals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1,276,639
201,413
195,263
251,000
761,355

$ 908,568
Ì
Ì
Ì
320,930

$2,685,670

$1,229,498

Severance accruals as of June 30, 2005 relate to certain former directors and oÇcers of Drew who

management had the intent to terminate as of the consummation date of the transaction.

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

(6) Long-Term Debt

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

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

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

F-16

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

September 30, 2004, the Company paid oÅ and terminated both the remaining term debt and the outstanding
line of credit.

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

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

The schedule below presents principal amortization for the next Ñve years under each of the Company's

loan agreements as of June 30, 2005:

Twelve Months Ending June 30,

2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Texas
Mezzanine

$130,348
153,706
121,417
Ì
Ì

Symbiotics

Total

$ 99,996
99,996
16,674
Ì
Ì

$ 230,344
253,702
138,091
Ì
Ì

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$405,471

$216,666

$ 622,137

Current portion of long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Long-term portionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$(230,344)

$ 391,793

(7) Capital Stock Transactions

Stock Option Plans

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

F-17

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

The following is a summary of Escalon's stock option activity and related information for the Ñscal years

ended June 30, 2005, 2004 and 2003:

2005

2004

2003

Common
Stock
Options

Weighted
Average
Exercise Price

Common
Stock
Options

Weighted
Average
Exercise Price

Common
Stock
Options

Weighted
Average
Exercise Price

618,706
242,004
(13,500)
Ì

$3.395
$6.131
$2.244
$ Ì

1,313,367
166,200
(856,412)
(4,449)

$2.301
$6.940
$2.361
$1.684

1,153,458
172,750
(9,508)
(3,333)

$2.385
$1.450
$1.958
$1.601

Outstanding at beginning
of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏ
ExercisedÏÏÏÏÏÏÏÏÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏ

Outstanding at end of

year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

847,210

$4.195

618,706

$3.395

1,313,367

$2.301

Exercisable at end of year

581,556

419,152

1,125,796

Weighted average fair
value of options
granted during year ÏÏÏ

$6.131

$6.940

$0.840

The following table summarizes information about stock options outstanding as of June 30, 2005:

Range of
Exercise
Prices

1.45 to 2.12
2.13 to 2.37
2.38 to 4.89
4.90 to 6.93
6.94 to 7.58

Number
Outstanding
at June 30,
2005

109,959
153,772
200,425
228,350
154,704

Sale of Common Stock and Warrants

Weighted
Average
Remaining
Contractual
Life
(Years)

6.08
3.35
4.81
9.25
8.49

Weighted
Average
Exercise
Price

$1.68
$2.22
$2.82
$6.04
$7.00

Number
Exercisable
at June 30,
2005

74,437
153,772
182,869
82,172
87,306

Weighted
Average
Exercise
Price

$1.75
$2.22
$2.84
$6.17
$7.04

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

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

F-18

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Exercise of Warrants to Purchase Common Stock

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

Exchange OÅer for Drew ScientiÑc Group, PLC

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

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

The Company did not eÅect any repurchases of its common stock during the Ñscal year ended June 30,

2005.

(8) Income Taxes

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

Current income tax provision

Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2005

2004

2003

100,000
131,664

231,664

30,748
142,552

173,300

Ì
112,412

112,412

Deferred income tax provision

Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Change in valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

1,572,610
370,026
(1,942,636)

342,915
(363,580)
20,665

3,070,701
722,518
(3,793,219)

Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

231,664

$ 173,300

112,412

Income taxes as a percentage of income for the years ended June 30, 2005, 2004 and 2003 diÅer from

statutory federal income tax rate due to the following:

2005

2004

2003

34.0%
Statutory federal income tax rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State income taxes, net of federal income tax impact ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.2%
Change in valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ¿34.0% ¿34.0% ¿34.0%
0.0%
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

34.0%
4.9%

3.7%

1.1%

EÅective income tax rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

8.6%

6.0%

6.2%

F-19

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

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

The components of the net deferred tax income tax assets and liabilities as of June 30, 2005 and 2004 are

as follows:

Deferred income tax assets:

2005

2004

Net operating loss carryforward ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock options loss carryforward ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Executive post retirement costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
General business credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued vacation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Inventory reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accelerated depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Warranty reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 13,436,126
2,032,153
456,540
450,199
76,256
156,040
51,654
46,354
84,805

$ 11,513,579
1,999,931
Ì
450,199
50,909
78,626
2,153
Ì
8,163

Total deferred income tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

16,790,127
(15,139,874)

14,103,560
(13,197,238)

1,650,253

906,322

Deferred income tax liabilities:

Accelerated depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accelerated amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Ì
(1,650,253)

(43,538)
(862,784)

Total deferred income tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(1,650,253)

(906,322)

Ì $

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

F-20

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

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

(9) Commitments and Contingencies

Commitments

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

Year Ending June 30,

2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Lease
Obligations

$ 890,000
721,000
411,000
285,000
293,000
399,000

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$2,999,000

Rent expense charged to operations during the years ended June 30, 2005, 2004 and 2003 was

approximately $772,000, $386,000 and $360,000, respectively.

Contingencies

Royalty Agreement: Clinical Diagnostics Solutions

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

Intralase Corp. Legal Proceedings

F-21

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

declaratory relief asking the Court to validate its interpretation of certain terms of the License Agreement
relating to the amount of royalties owed to Escalon (""First Action''). The parties mutually agreed to the entry
of a temporary restraining order which was entered by the Court shortly thereafter. At the close of discovery,
IntraLase and Escalon Ñled cross-motions for summary judgment. On May 5, 2005, the District Court, having
ruled on such motions, entered judgment in the First Action.

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

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

F-22

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Drew Legal Proceedings

Carver Litigation

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

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

Other Legal Proceedings

F-23

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

or is likely to have a material adverse impact on the Company's business, Ñnancial condition or results of
operations.

(10) Retirement and Post-Retirement Plans

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

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

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

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

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

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

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

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

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

F-24

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

(11) Sale of Silicone Oil Product Line, Licensing of Laser Technology and Other Revenue

Sale of Silicone Oil Product Line

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

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

From 8/13/00 to 8/12/01 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
From 8/13/01 to 8/12/02 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
From 8/13/02 to 8/12/03 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
From 8/13/03 to 8/12/04 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
From 8/13/04 to 8/12/05 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

100%
82%
72%
64%
45%

Intralase: Licensing Of Laser Technology

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

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

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

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

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

4. Termination by either party due to the commission of any material breach of any covenant or

promise by the other party under the license agreement; or

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

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

Bio-Rad Laboratories, Inc. Royalty

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

F-25

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

The material terms of the OEM Agreement, provided:

‚ Drew receives an agreed royalty per test;

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

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

Other Revenue

Other revenue includes quarterly payments received from:

(1) Bausch & Lomb in connection with the sale of the Silicone Oil product line. This agreement

expired August 12, 2005;

(2) Royalty payments received from IntraLase relating to the licensing of the Company's intellec-

tual laser technology; and

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

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

2004 and 2003:

2005

2004

2003

Silicone OilÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
IntraLase royalty ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Bio-Rad royalty ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1,486,000
1,334,000
240,000

$1,941,000
432,000
Ì

$1,858,000
316,000
Ì

$3,060,000

$2,373,000

$2,174,000

(12) Acquisition of Drew and Pro Forma Results of Operations

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

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

F-26

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

The following table summarizes the purchase price allocation of estimated fair values of assets acquired

and liabilities assumed as of the date of acquisition of Drew of July 23, 2004.

Current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Furniture and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PatentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other long-term assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 3,859,771
868,839
297,246
7,406
9,574,655

Total assets acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$14,607,917

Line of credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 1,617,208
3,392,286
1,072,457

Total liabilities assumed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 6,081,951

Net assets acquired ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 8,525,966

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

Fiscal Year Ended,

2005

2004

RevenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cost of goods sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$26,924,622
13,158,061

$29,691,225
17,155,481

Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other (income) expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

13,766,561
14,449,080
(3,362,294)

12,535,744
14,634,421
574,319

Net income (loss) before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2,679,775
231,664

(2,672,996)
138,635

Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 2,448,111

$(2,811,631)

Basic net income (loss) per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Diluted net income (loss) per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

0.420

0.393

(0.586)

Weighted average shares Ì basicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

5,831,564

4,796,951

Weighted average shares Ì diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

6,231,024

4,796,951

F-27

e
d
i
v
o
r
p

t
a
h
t

s
t
n
e
m
g
e
s

e
l
b
a
t
r
o
p
e
r

l
a
p
i
c
n
i
r
p

r
u
o
f

o
t
n
i

d
e
Ñ
i
s
s
a
l
c

e
r
e
w

s
n
o
i
t
a
r
e
p
o

s
'
n
o
l
a
c
s
E

,
4
0
0
2

d
n
a

5
0
0
2

,
0
3

e
n
u
J

d
e
d
n
e

s
r
a
e
y

l
a
c
s
Ñ

e
h
t

g
n
i
r
u
D

n
e
e
b

s
a
h
w
e
r
D

,
y
l
t
n
e
u
q
e
s
b
u
s
d
n
a

,
4
0
0
2

,
3
2

y
l
u
J

n
o
w
e
r
D
d
e
r
i
u
q
c
a

y
n
a
p
m
o
C
e
h
T

.
4
0
0
2

l
a
c
s
Ñ
m
o
r
f

e
g
n
a
h
c

s
t
n
e
s
e
r
p
e
r

s
i
h
T

.
s
e
c
i
v
r
e
s

r
o

s
t
c
u
d
o
r
p

t
n
e
r
e
Å
i
d

n
o
i
t
a
z
i
n
a
g
r
o

s
t
i

f
o

e
r
u
t
c
u
r
t
s

l
a
n
r
e
t
n
i

e
h
t

d
e
g
n
a
h
c

o
s
l
a

t
n
e
m
e
g
a
n
a
m

,
5
0
0
2

l
a
c
s
Ñ

f
o

r
e
t
r
a
u
q

t
s
r
Ñ

e
h
t

g
n
i
r
u
D

.
t
n
e
m
g
e
s

s
s
e
n
i
s
u
b

l
a
n
o
i
t
i
d
d
a

n
a

s
a

d
e
d
d
a

e
v
i
t
a
r
a
p
m
o
c

t
n
e
s
e
r
p

o
t

d
e
t
a
t
s
e
r

n
e
e
b

e
v
a
h

s
d
o
i
r
e
p

g
n
i
d
n
o
p
s
e
r
r
o
c

e
h
T

.
t
n
e
m
g
e
s

e
l
b
a
t
r
o
p
e
r

e
n
o

s
a

d
e
t
r
o
p
e
r

e
b

o
t

M
E

d
n
a

k
e
r
T

l
a
c
i
d
e
M

g
n
i
s
u
a
c

y
g
o
l
o
n
h
c
e
t

d
n
a

n
o
i
t
c
u
d
o
r
p

,
g
n
i
t
e
k
r
a
m

t
n
e
r
e
Å
i
d

o
t

t
c
e
j
b
u
s

s
i

t
i
n
u

s
s
e
n
i
s
u
b

h
c
a
e

e
s
u
a
c
e
b

d
e
r
i
u
q
e
r

s
i

t
n
e
m
g
e
s

h
c
a
e

f
o

t
n
e
m
e
g
a
n
a
m
e
t
a
r
a
p
e
S

n
o
i
t
a
m
r
o
f
n
i

.
s
e
i
g
e
t
a
r
t
s

3
0
0
2

l
a
t
o
T

4
0
0
2

5
0
0
2

3
0
0
2

4
0
0
2

5
0
0
2

3
0
0
2

4
0
0
2

5
0
0
2

3
0
0
2

4
0
0
2

5
0
0
2

3
0
0
2

4
0
0
2

5
0
0
2

M
E
/
k
e
r
T
/
l
a
c
i
d
e
M

r
a
l
u
c
s
a
V

d
e
m
o
n
o
S

w
e
r
D

1
9
1
,
1
1
$

8
4
3
,
2
1
$

4
6
8
,
3
2
$

5
3
9
,
1
$

6
9
6
,
1

7
2
7
,
1

1
6
7
,
2
$

5
5
0
,
3
$

0
8
1
,
3
$

5
9
4
,
6

7
9
5
,
7

3
6
6
,
7

Ì
$

4
9
2
,
1
1
$

Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï

e
u
n
e
v
e
r

t
c
u
d
o
r
P

g
n
i
t
r
o
p
e
R

l
a
t
n
e
m
g
e
S

)
3
1
(

5
7
1
,
2

3
7
3
,
2

0
6
0
,
3

6
6
3
,
3
1

1
2
7
,
4
1

4
2
9
,
6
2

6
9
8
,
4

4
1
8
,
5

6
7
4
,
5

2
8
9
,
5

9
5
1
,
3
1

8
4
4
,
4
1

6
9
1

0
6
4
,
2

3
6
2
,
3

)
3
8
6
(

6
0
9
,
0
1

8
5
4
,
1
1

7
0
6
,
7
2

9
5

)
8
3
6
(

)
7
0
4
(

)
5
3
6
(

)
8
4
3
(

5
2
8
,
1

3
7
1

5
1
9
,
2

)
4
6
(

2
1
4
,
3

0
7

)
5
5
(

3
6
3
,
3

2
3
2

0
8
6
,
2

5
7
1
,
2

0
1
1
,
4

7
7
1
,
1

2
7
2
,
1

6
9
1

5
4
6
,
2

5
6
4
,
1

3
7
3
,
2

9
6
0
,
4

9
1
0
,
1

5
6
0
,
1

4
8
0
,
2

5
8
9
,
1

9
5

2
1
1

8
6
4
,
1

3
7
1

4
4
0
,
2

0
2
8
,
2

7
4
5
,
4

8
5
0
,
1

7
9
8
,
3

)
8
0
4
(

)
4
6
(

2
1
4
,
3

6
6

9
2

3
4
4
,
3

1
1
2

5
3
0
,
3

5
2
8
,
1

2
4
7
,
2

8
4
4
,
2

6
5
3
,
1
$

1
7
8
,
1

4
2
8
,
2

0
1
3

1
4
2

8
8
3

0
9
8
,
6
1
$

7
5
4
,
9
2
$

9
4
9
,
0
4
$

6
7

9
6

4
0
1

0
5
2

6
3
4
,
2
$

6
2

3
7
1

6
0
1

5
5
9
,
4

4
3
7
,
2

3
4
0
,
3

9
7
1
,
3

8
2
5
,
5

5
9
1
,
1

9
3
5
,
1

1
8
3
,
1

2
6
6
,
1

2
3
4
,
1

7
4
7
,
1

4
2
5
,
2

4
0
0
,
3

7
2

2
1

7
6
9

6
7
0
,
3

5
5
2
,
3

1
3
3
,
6

6
6
2
,
1

)
7
2
(

)
2
1
(

)
1
(

)
1
1
6
(

)
5
9
3
(

)
7
2
(

)
2
1
(

)
1
(

)
1
1
6
(

)
5
9
3
(

1
4

4
4

5
4

6
5
3

9
1

1
7
8

4
2

5
1
1
,
3

3
9
5
,
3

5
5
9

8
0
7
,
6

5
5
9

1
2

4
3
9

4
2

1
6
7
,
2

5
5
0
,
3

0
8
1
,
3

5
9
4
,
6

7
9
5
,
7

3
6
6
,
7

3
5
7
,
4
1
$

6
2
4
,
6
1
$

6
5
2
,
2
$

2
4
1
,
2
$

4
7
1
,
2
$

8
9
1
,
2
1
$

2
6
5
,
2
1
$

2
7
4
,
3
1
$

Ì
$

0
4
2

Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
e
u
n
e
v
e
r

r
e
h
t
O

4
3
5
,
1
1

Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï

e
u
n
e
v
e
r

l
a
t
o
T

4
5
5
,
7

1
1
2
,
5

Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï

d
l
o
s

s
d
o
o
g

f
o

t
s
o
C

Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
s
e
s
n
e
p
x
e

g
n
i
t
a
r
e
p
O

Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï

s
t
h
g
i
t

n
o
i
t
u
b
i
r
t
s
i
d

d
n
a

e
s
n
e
c
i
l

f
o

n
w
o
d

e
t
i
r

5
6
7
,
2
1

Ï
Ï
Ï
Ï
Ï

s
e
s
n
e
p
x
e

d
n
a

s
t
s
o
c

l
a
t
o
T

:
s
e
s
n
e
p
x
e

d
n
a

s
t
s
o
C

)
1
3
2
,
1
(

Ï
Ï
Ï
Ï
Ï
Ï
s
n
o
i
t
a
r
e
p
o
m
o
r
f

e
m
o
c
n
I

Ï
Ï
e
c
a
L
a
r
t
n
I

f
o

e
l
a
S

n
o

n
i
a
G

Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
M
T
O
n
i

y
t
i
u
q
E

Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
e
m
o
c
n
i

t
s
e
r
e
t
n
I

:
s
e
s
n
e
p
x
e

d
n
a

e
m
o
c
n
i

r
e
h
t
O

)
3
8
(

Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï

e
s
n
e
p
x
e

t
s
e
r
e
t
n
I

)
9
7
(

Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
s
e
s
n
e
p
x
e

d
n
a

e
m
o
c
n
i

r
e
h
t
o

l
a
t
o
T

)
0
1
3
,
1
(

Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
s
e
x
a
t

e
r
o
f
e
b

e
m
o
c
n
I

Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
s
e
x
a
t

e
m
o
c
n
I

Ì
$

)
0
1
3
,
1
(
$

Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï

)
s
s
o
l
(

e
m
o
c
n
i

t
e
N

F-28

Ì
$

3
1
2

7
7
9
,
7

n
o
i
t
a
z
i
t
r
o
m
a

d
n
a

n
o
i
t
a
i
c
e
r
p
e
D

Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
s
t
e
s
s
A

Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï

r
o
f

s
e
r
u
t
i
d
n
e
p
x
E

Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï
Ï

s
t
e
s
s
a

d
e
v
i
l
-
g
n
o
l

0
5

4
4

6
1

4
1

1
1

4
3

3
2

Ì
$

6
2

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

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

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

2005

2004

Drew ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Sonomed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Vascular ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Medical/Trek/EMI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$5,616,000
3,818,000
323,000
48,000

Ì
2,941,000
194,000
42,000

$9,806,000

$3,177,000

(14) Related-Party Transactions

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

Commencing in July 2004, a relative of a senior executive oÇcer of Escalon began providing legal
services to the Company in connection with various legal proceedings. Expenditures related to this individual

F-29

during the Ñscal year ended June 30, 2005 were $118,140. Commencing in August 2005, this individual was
retained as an employee of the Company.

(15) Quarterly Data

Year ended June 30, 2005

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

Full
Year

Total revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic net income per share(a) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted net income per share(a) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Year ended June 30, 2004

$5,292
2,621
116
$0.021
$0.019

$3,412
2,199
623
$0.185
$0.154

$ 6,362
3,012
(428)
$(0.072)
$(0.072)

$ 3,757
2,507
821
$ 0.243
$ 0.196

$7,229
4,230
744
$0.125
$0.119

$3,613
2,248
739
$0.192
$0.172

$8,042
3,904
2,016
$0.338
$0.323

$3,939
2,291
559
$0.111
$0.103

$26,925
13,767
2,448
$ 0.420
$ 0.393

$14,721
9,245
2,742
$ 0.704
$ 0.637

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

(16) Intralase Initial Public OÅering and Sale of Intralase Common Stock

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

(17) Subsequent Event Ì Sale of Intralase Common Stock

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

F-30

INVESTOR INFORMATION

DIRECTORS AND OFFICERS

DIRECTORS

CORPORATE OFFICERS

Richard J. DePiano
Chairman and
Chief Executive OÇcer

Mark Karsch
Chief Financial OÇcer

Harry M. Rimmer
Secretary & Treasurer

Richard J. DePiano
Chairman and
Chief Executive OÇcer
Escalon Medical Corp.

Jay L. Federman, M.D.
Ophthalmics Subspecialty
Consultants
Narberth, Pennsylvania

Fred G. Choate
Atlantic Capital Funding LLC
Wayne, Pennsylvania

William L. G. Kwan
Fort Worth, Texas

Anthony J. Coppola
Town of Historic Smithville, LLC
Smithville, New Jersey

Lisa A. Napolitano
Global Tax Management
Newtown Square, Pennsylvania

TRANSFER AGENT AND
REGISTRAR

American Stock Transfer and
Trust Company
Brooklyn, New York
(800) 937-5449

ANNUAL MEETING

November 29, 2005, 9:00 am
Duane Morris LLP
30 South 17th Street
Philadelphia, Pennsylvania

FORM 10-K

The Form 10-K, contained
herein, for the Company's Ñscal
year ended June 30, 2005, is
not accompanied by the
exhibits, which were Ñled with
the Securities and Exchange
Commission. The Company
will furnish any exhibits to
those shareholders who request
the same upon payment to the
Company of its reasonable
expenses in furnishing such
exhibits. Requests for any such
exhibits should be made in
writing to the Company's
Secretary at its corporate oÇce.

CORPORATE OFFICE

Headquarters
Escalon Medical Corp.
565 East Swedesford Road
Suite 200
Wayne, Pennsylvania 19087
(610) 688-6830

Manufacturing Operations
Escalon Medical Corp.
2440 South 179th Street
New Berlin, WI 53146
(262) 821-9182

Sonomed, Inc.
1979 Marcus Avenue
Suite C105
Lake Success, NY 11042
(516) 354-0900

Drew ScientiÑc Group PLC
Sowerby Woods Industrial
Estate
Park Road
Barrow in Furness
Cumbria LA14 4QR
United Kingdom
1229 432089

4230 Shilling Way
Dallas, TX 75237
(214) 210-4900

353 Christian Street
Oxford, CT 06478
(203) 267-7022

STOCK LISTING

Nasdaq Small Cap
Market System
Trading Symbol: ESMC

INDEPENDENT AUDITORS

BDO Seidman, LLP
Philadelphia, Pennsylvania

GENERAL COUNSEL

Duane Morris LLP
Philadelphia, Pennsylvania

The Company has adopted a code of ethics which can be viewed at www.escalonmed.com

This report includes forward-looking statements about the Company's future growth, product development, regulatory Ñlings, potential joint
venture arrangements, potential markets and competitive position. Any such statements are subject to risks and uncertainties that could cause
the actual results to vary materially. Such risks are discussed in the Company's report on Form 10-K for its 2005 Ñscal year.

SAFE HARBOR STATEMENT

Escalon Medical Corp.
565 East Swedesford Road Suite 200
Wayne, PA 19087
Voice: 610.688.6830
Fax: 610.688.3641
www.escalonmed.com