ESCALON MEDICAL CORP - Annual Report: 2008 (Form 10-K)

          Medical/Trek Business

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

          Ispan Intraocular Gases

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

          Viscous Fluid Transfer Systems

          The Company markets viscous fluid transfer systems and related disposable syringe products, which aid surgeons in the process of injecting and extracting Silicone Oil. Adjustable pressures and vacuums provided by the equipment allow surgeons to manipulate the flow of Silicone Oil during surgery. Silicon Oil refers to Adatosil^® 5000 Silicone Oil, whose license of distribution rights were sold to Bausch & Lomb Surgical, Inc. Pursuant to that agreement, the Company has not received any revenue from Silicon Oil since August 2005.

          Fiber Optic Light Sources

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

Research and Development

          The Company conducts development of medical devices for the diagnosis and monitoring of medical disorders in the areas of diabetes, cardiovascular diseases and hematology at the Company’s Dallas, Texas, Oxford, Connecticut and Barrow-in-Furness, United Kingdom facilities. The Company conducts medical device and vascular access product development at its New Berlin, Wisconsin facility located near Milwaukee. The development of ultrasound ophthalmic equipment is performed at the Company’s Lake Success, New York facility on Long Island. Company-sponsored research and development expenditures for the fiscal years ended June 30, 2008, 2007 and 2006 were approximately $4,058,000, $3,461,000 and $2,828,000, respectively.

Manufacturing and Distribution

          The Company leases an aggregate of approximately 42,000 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, Miami, Florida and Barrow-in-Furness, United Kingdom facilities. See “Business Conditions” in “Management’s Discussion and Analysis of Financial Condition of Results of Operations” for additional information.

          The Company leases approximately 11,200 square feet of space in New Berlin, Wisconsin, near Milwaukee, for its surgical products and vascular access operations. The facility is currently used for engineering, product design and development, manufacturing and product assembly. The Company also leases approximately 2,500 square feet in Lawrence, Massachusetts used primarily for product design and development in the EMI business unit. The Company subcontracts component manufacture, assembly and

sterilization to various vendors. The New Berlin manufacturing facility includes a class 10,000 clean room. A class 10,000 clean room is a controlled environment for producing devices while avoiding any significant contaminants. The cleanliness provided by the clean room exceeds the requirements of the FDA. The Company’s ophthalmic surgical products and vascular access products are distributed from the Company’s Wisconsin facility.

          The Company designs, develops and services its ultrasound ophthalmic products at its approximately 12,200 square foot facility in Lake Success, New York. The Company has achieved ISO9001 certification at all of its manufacturing facilities for all medical devices, ultrasound devices and consumables the Company produces. ISO9001 requires an implemented quality system that applies to product design. These certifications can be obtained only after a complete audit of a company’s quality system by an independent outside auditor. These certifications require that facilities undergo periodic reexamination. The Company has obtained European Community certification (“CE”) for disposable delivery systems, fiber optic light probes, medical devices and consumables for the diagnosis and monitoring of medical disorders in the areas of diabetes, cardiovascular diseases and hematology, vascular access products and certain ultrasound models.

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

Governmental Regulations

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

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

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

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

Marketing and Sales

          The Drew business unit sells its products through internal sales and marketing employees located in the United States and in the United Kingdom as well as through a large network of distributors, both domestic and international.

          The Sonomed product line is sold through internal sales employees as well as independent sales representatives located in the United States and Europe, to a large network of distributors and directly to medical institutions.

          Vascular business unit products are marketed domestically through internal sales and marketing employees located in the United States as well as through an independent sales representative in Europe and a network of domestic and foreign distributors that are managed by the Company’s sales team.

          The Medical/Trek and EMI business units sell their ophthalmic devices and instruments directly to end users through internal sales and marketing employees located at the Company’s Wisconsin and Massachusetts facilities. Sales are primarily made to teaching institutions, key hospitals and eye surgery centers focusing primarily on physicians and operating room personnel performing vitreoretinal surgery. The EMI product line is sold through internal sales employees and independent sales representatives in the United States.

Service and Support

          The Company maintains a full-service program for all products sold. The Company provides limited warranties on all products against defects and performance. Product repairs are made at the Wisconsin facility for surgical devices, vascular access products and EMI devices. Sonomed’s products are serviced at the Company’s New York facility. Drew’s products are serviced at its Dallas, Texas and Barrow-in-Furness, UK facilities.

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 payors include Medicare, Medicaid and private insurers. Government agencies generally reimburse health care providers at a fixed rate based on the procedure performed. Third party payors may deny reimbursement if they determine that a procedure performed using any one of the Company’s products was unnecessary, inappropriate, not cost-effective, experimental or used for a non-approved indication.

Patents, Trademarks and Licenses

          The pharmaceutical and medical device communities place considerable importance on obtaining patent and trade secret protection for new technologies, products and processes for the purpose of strengthening the Company’s position in the market place and protecting the Company’s economic interests. The Company’s policy is to protect its technology by aggressively obtaining patent protection for substantially all of its developments and products, both in the United States and in selected countries outside the United States. It is the Company’s policy to file for patent protection in those foreign countries in which the Company believes such protection is necessary to protect its economic interests. The duration of the Company’s patents, trademarks and licenses vary through 2020. The Company has 21 United States patents and 19 patents issued abroad that cover the Company’s surgical products and pharmaceutical technology.

          With respect to the Company’s ultrafast laser technology, licensed to Intralase Corp. “Intralase”, 16 patents have been issued in the United States and 11 overseas. In 1997, Intralase and Escalon entered into an agreement under which Intralase became the exclusive licensee of these patents, technology and intellectual property owned by the Company, which agreement was amended and restated

in October 2000. On February 27, 2007, the Company settled all outstanding disputes and litigation with Intralase pursuant to which the Company transferred to Intralase its ownership of all patents and intellectual property formerly licensed to Intralase, the license agreement was terminated and Intralase made a lump-sum payment to the Company of $9,600,000.

          Drew has approximately 60 patents related to its technology.

          The Company intends to vigorously defend its patents if the need arises.

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

	•		The Escalon trademark is due for renewal on January 19, 2013, and the Company intends to renew the trademark. The Sonomed trademark was renewed on November 25, 2006.
	•		In the Vascular business unit, the Company has two patents that are of material importance. The first patent is an apparatus for the cannulation of blood vessels. This patent will expire on February 23, 2011. The second patent is also an apparatus for the cannulation of blood vessels. This patent will expire on January 11, 2009. The Vascular unit has also one patent application pending for the cannulation of blood vessels with a hypodermic needle.

Competition

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

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

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

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

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

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

Human Resources

          As of June 30, 2008, the Company employed 150 full-time employees and 11 part-time employees. 70 of the Company’s employees are employed in manufacturing, 45 are employed in general and administrative positions, 23 are employed in sales and marketing and 23 are employed in research and development. The Company’s employees are not covered by a collective bargaining agreement, and the Company considers its relationship with its employees to be good.

ITEM 1A. RISK FACTORS

Cautionary Factors That May Affect Future Results

          Certain statements contained in, or incorporated by reference in, this report are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which provide current expectations or forecasts of future events. Such statements can be identified by the use of terminology such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “possible,” “project,” “should,” “will,” “would,” “seek,” and similar words or expressions. The Company’s forward-looking statements include certain information relating to general business strategy, growth strategies, financial results, liquidity, product development, the introduction of new products, the enhancement of existing products, the potential markets and uses for the Company’s products, the Company’s regulatory filings with the FDA, acquisitions, the development of joint venture opportunities, intellectual property and patent protection and infringement, the loss of revenue due to the expiration on termination of certain agreements, the effect of competition on the structure of the markets in which the Company competes, increased legal, accounting and Sarbanes-Oxley compliance costs, defending the Company in litigation matters and the Company’s cost-saving initiatives. The reader must carefully consider forward-looking statements and understand that such statements involve a variety of risks and uncertainties, known and unknown, and may be affected by assumptions that fail to materialize as anticipated. Consequently, no forward-looking statement can be guaranteed, and actual results may vary

materially. It is not possible to foresee or identify all factors affecting the Company’s forward-looking statements, and the reader therefore should not consider the following list of such factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions.

          The Company cautions the reader to consider carefully these factors as well as the specific factors discussed with each specific forward-looking statement in this Form 10-K annual report and in the Company’s other filings with the Securities and Exchange Commission (the “SEC”). In some cases, these factors have impacted, and in the future (together with other unknown factors) could impact, the Company’s ability to implement the Company’s business strategy and may cause actual results to differ materially from those contemplated by such forward-looking statements. Any expectation, estimate or projection contained in a forward-looking statement may not be achieved.

          The Company also cautions the reader that forward-looking statements speak only as of the date made. The Company undertakes no obligation to update any forward-looking statement, but investors are advised to consult any further disclosures by the Company on this subject in the Company’s filings with the SEC. Although it is not possible to create a comprehensive list of all factors that may cause actual results to differ from the Company’s forward-looking statements, the material factors include, without limitation, the following:

          Any acquisitions, strategic alliances, joint ventures and divestitures that the Company effects could result in financial results that differ from market expectations.

          In the normal course of business, the Company engages in discussions with third parties regarding possible acquisitions, strategic alliances, joint ventures and divestitures. As a result of any such transactions, the Company’s financial results may differ from the investment community’s expectations in a given quarter. In addition, acquisitions and alliances may require the Company to integrate a different company culture, management team, business infrastructure, accounting systems and financial reporting systems. The Company may not be able to effect any such acquisitions or alliances. The Company may have difficulty developing, manufacturing and marketing the products of a newly acquired business in a way that enhances the performance of the Company’s combined businesses or product lines to realize the value from any expected synergies. Depending on the size and complexity of an acquisition, the Company’s successful integration of the entity depends on a variety of factors, including the retention of key employees and the management of facilities and employees in separate geographical areas. These efforts require varying levels of management resources, which may divert the Company’s attention from other business operations.

          The Company acquired Drew during the first quarter of fiscal 2005. Drew does not have a history of producing positive operating cash flows and, as a result, at the time of acquisition, was operating under financial constraints and was under-capitalized and has continued to negatively impact the Company’s financial results. As Drew is integrated into the Company, management continues to work to reverse the situation, while at the same time seeking to strengthen Drew’s market position. The Company loaned approximately $20 million to Drew. The funds have been primarily used to procure components to build up inventory to support the manufacturing process, to pay off accounts payable and debt of Drew, and to expand the sales and marketing and research and development efforts, to fund new product development and underwrite operating losses since its acquisition. The Company cannot rule out that further working capital will be required by Drew. If the Company does not realize the expected benefits or synergies of such transactions, the Company’s consolidated financial position, results of operations and stock price could be negatively impacted. The Company tests goodwill for possible impairment on an annual basis and at any other time events occur or circumstances indicate that the carrying amount of goodwill may be impaired. As a result of this years test, the Company recorded a non-cash goodwill impairment charge to Drew’s operations totaling $9,574,655 for the year ended June 30, 2008 (see footnote 3 of the consolidated financial statements. The determination as to whether a write-down of goodwill is necessary involves significant judgment based on short-term and long-term projections of the Company. The assumptions supporting the estimated future cash flows of the reporting unit, including profit margins, long-term forecasts, discount rates and terminal growth rates, reflect the Company’s best estimates.

          The Company’s results fluctuate from quarter to quarter.

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

	•		Acquisitions, such as Drew and JAS, and subsequent integration of the acquired company, although such acquisitions may not occur;
	•		The timing and expense of new product introductions by the Company or its competitors, although the Company might not successfully develop new products and any such new products may not gain market acceptance;
	•		The cancellation or delays in the purchase of the Company’s products;
	•		Fluctuations in customer demand for the Company’s products;
	•		Fluctuations in royalty income;
	•		The gain or loss of significant customers;
	•		Changes in the mix of products sold by the Company;
	•		Competitive pressures on prices at which the Company can sell its products;
	•		Announcements of new strategic relationships by the Company or its competitors;
	•		Litigation costs and settlements; and
	•		General economic conditions and other external factors such as energy costs.

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

          The Company’s Cost Saving Initiatives may not be effective.

          The Company has implemented cost-saving initiatives that may not be effective in returning the Company to profitability. If these initiatives are insufficient, additional measures may be necessary.

          Failure of the market to accept the Company’s products could adversely impact the Company’s business and financial condition.

          The Company’s business and financial condition will depend in part upon the market acceptance of the Company’s products. The Company’s products may not achieve market acceptance. Market acceptance depends on a number of factors including:

	•		The price of the products;
	•		The continued receipt of regulatory approvals for multiple indications;
	•		The establishment and demonstration of the clinical safety and efficacy of the Company’s products; and
	•		The advantages of the Company’s products over those marketed by the Company’s competitors.

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

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

          The FDA and similar health care regulatory authorities in foreign countries extensively regulate the Company’s activities. The Company must obtain either 510(K) clearances or pre-market approvals and

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

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

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

          The Company has received CE approval on several of the Company’s products that allows the Company to sell the products in the countries comprising the European Community. In addition to the CE mark, however, some foreign countries may require separate individual foreign regulatory clearances. The Company may not be able to obtain regulatory clearances for other products in the United States or foreign markets.

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

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

          The success of competitive products could have an adverse impact on the Company’s business.

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

	•		Properly identify customer needs;
	•		Innovate and develop new technologies, services and applications;
	•		Establish adequate product distribution coverage;
	•		Obtain and maintain required regulatory approvals from the FDA and other regulatory agencies;
	•		Protect the Company’s intellectual property;

	•		Successfully commercialize new technologies in a timely manner;
	•		Manufacture and deliver the Company’s products in sufficient volumes on time;
	•		Differentiate the Company’s offerings from the offerings of the Company’s competitors;
	•		Price the Company’s products competitively;
	•		Anticipate competitors’ announcements of new products, services or technological innovations; and
	•		Anticipate general market and economic conditions.

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

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

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

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

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

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

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

          The Company’s customers bill various third party payors, including government programs and private insurance plans, for the health care services provided to their patients. Third party payors may reimburse the customer, usually at a fixed rate based on the procedure performed, or may deny reimbursement if they determine that the use of the Company’s products was elective, unnecessary, inappropriate, not cost-effective, experimental or used for a non-approved indication. Third party payors may deny reimbursement notwithstanding FDA approval or clearance of a product and may challenge the prices charged for the medical products and services. The Company’s ability to sell the Company’s products on a profitable basis may be adversely impacted by denials of reimbursement or limitations on reimbursement, compared with reimbursement available for competitive products and procedures. New

legislation that further reduces reimbursements under the capital cost pass-through system utilized in connection with the Medicare program could also adversely impact the marketing of the Company’s products.

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

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

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

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

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

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

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

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

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

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

	•		Any acquisitions, strategic alliances, joint ventures and divestitures that the Company effects, if any;
	•		Announcements of technological innovations;
	•		Changes in marketing, product pricing and sales strategies or new products by the Company’s competitors;
	•		Changes in domestic or foreign governmental regulations or regulatory requirements; and
	•		Developments or disputes relating to patent or proprietary rights and public concern as to the safety and efficacy of the procedures for which the Company’s products are used.

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

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

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

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

          The Company’s charter documents and Pennsylvania law may inhibit a takeover.

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

          There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with United States GAAP. Any changes in estimates, judgments and assumptions used could have a material adverse effect on the Company’s business, financial position and operating results.

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

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

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

	•		product returns;
	•		allowances for doubtful accounts;
	•		inventories and related reserves;
	•		intangible assets and goodwill;
	•		income and other tax accruals;
	•		deferred tax asset valuation allowances;
	•		discounts and allowances;
	•		warranty obligations; and
	•		contingencies and litigation.

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

          The Company will be exposed to risks relating to evaluations of internal control over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002.

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

          Under the current and proposed rules and regulations of the SEC, the Company is currently not required to comply with all of the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 until the Company files its Annual Report on Form 10-K for the Company’s fiscal year ending June 30, 2010, as long as the Company continues to meet the definition of a non-accelerated filer. In the Company’s Annual Report on Form 10-K for the year ending June 30, 2008, the Company’s management is required to provide an assessment as to the effectiveness of the Company’s internal control over financial reporting, which assessment will be deemed furnished to rather than filed with the SEC. In the Company’s Annual Report on Form 10-K for the year ending June 30, 2010 and for each fiscal year thereafter, the Company’s management will be required to provide an assessment as to the effectiveness of our internal control over financial reporting and the Company’s independent registered public accounting firm will be required to provide an attestation as to the Company’s management’s assessment, which assessment and attestation will be filed with the SEC. The assessment and attestation processes required by Section 404 are relatively new to the Company. Accordingly, the Company may encounter problems or delays in completing its

obligations and receiving an unqualified report on the Company’s internal control over financial reporting by the Company’s independent registered public accounting firm.

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

Substantially all of our cash and cash equivalents and marketable securities are held at a single financial institution.

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

ITEM 1B.		UNRESOLVED STAFF COMMENTS:

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

ITEM 2.		PROPERTIES

          The Company currently leases an aggregate of approximately 71,000 square feet of space for its (i) corporate offices in Wayne, Pennsylvania, (ii) Drew has an administrative office and manufacturing facility in Barrow-in-Furness, United Kingdom, an administrative office and manufacturing facility in Dallas, Texas, and a manufacturing facility in Oxford, Connecticut and Miami, Florida (JAS). (iii) Sonomed has a manufacturing facility in Lake Success, New York, and (iv) Vascular has a manufacturing facility in New Berlin, Wisconsin. The corporate offices in Pennsylvania cover approximately 6,000 square feet and expire in July 2013. The facility in the United Kingdom covers approximately 8,000 square feet whose lease expires in September 2009. The facility in Texas covers approximately 23,000 square feet whose lease expires in March 2014. The Connecticut facility lease covers approximately 3,000 square feet and expires in January 2009. The Miami facility lease covers approximately 8,000 square feet and expires in July 2009. The New York facility leases covering approximately 12,000 square feet, expires in October 2011. The Wisconsin lease, covering approximately 11,000 square feet of space expires in July 2015. Annual rent under all of the Company’s lease arrangements was approximately $782,000.

ITEM 3.		LEGAL PROCEEDINGS

          PointCare Technologies, Inc.

          On February 13, 2008, Escalon’s wholly owned subsidiary, Drew Scientific (“Drew”), filed an Order to Show Cause for Preliminary Injunction and Temporary Restraining Order and a Complaint against PointCare Technologies, Inc. (“PCT”) (Drew Scientific, Inc. v. PointCare Technologies, Inc. (08 CV 1490, S.D.N.Y)). In its pleadings, Drew petitioned the Court to require PCT to honor its obligations to Drew under the Agreement that the parties executed in June 2006 and further sought a ruling that PCT has breached its contractual obligations to Drew, that PCT has intentionally acted in bad faith, and that PCT is liable to Drew for damages resulting from its breach of its contractual obligations to Drew. PCT has denied

the allegations set forth by Drew and has asked the Court to declare that PCT properly terminated its Agreement with Drew and that it owes no further duties and has no further obligations to Drew.

          The Agreement between Drew and PCT was intended to combine the efforts of the parties in two significant but related respects. In the first respect, Drew agreed to modify its Excell 22 ^TM hematology platform to accommodate PCT’s proprietary CD4 Lymphocyte Assay, CD4 sure.^TM The integrated device is intended for use in the diagnosis of patients with HIV infection, particularly in a hospital setting. Drew asserts that the development of the device is a joint responsibility, with both Drew and PCT having allocated responsibilities between them (PCT being responsible for assuring that the CD4 assay is compatible with the HT instrumentation). Two different versions of the integrated device, referred to collectively as a “high throughput” (“HT”) platform, are to be marketed and sold by the respective parties in assigned territories. Drew has thus far invested approximately $1,000,000 in this initiative.

          The second significant aspect relates to PCT’s Near Patient (“NP”) platform, which permits the same type of patient care testing for HIV to be performed locally, i.e., in a non-hospital environment. Once developed and after receiving required regulatory approvals, PCT agreed to privately label and sell NP instruments to Drew, which was granted certain product distribution rights, including the right to be the entity primarily responsible for the marketing and sales of the NP platform in the United States, the United Kingdom, Europe and much of Asia. Drew has already invested in NP marketing efforts and lined up potential customers. Important to the present dispute is the fact that there is a significant technological overlap between the HT and NP devices, and to some extent, they are competitive. For this reason, the Agreement allocates territories to the parties and the party designated for a specific territory is primarily responsible for the marketing and sale of both systems in that assigned territory.

          In June 2007, PCT unilaterally shifted its personnel and resources away from the joint development of the HT instrument, diverting these resources instead to the development of its own NP instrument. Drew believes that at about this time, PCT also began to solicit its own distributors to act on its behalf in the Drew territories. PCT received FDA approval to market its NP instrument in December 2007.

          In November 2007, PCT asserted that Drew was not in compliance with its contractual obligations under the Agreement. Specifically, PCT claimed that Drew was not in compliance with the HT development timeline. Drew denied this claim, noting that PCT’s own conduct contributed materially to the fact that the HT project timeline had to be extended. Further, Drew responded that PCT’s repeated refusal to complete critical software development and to cooperate with Drew with respect to the necessary integration of such software into the HT instrument remained critical violations by PCT of its contractual obligations, frustrating any effort by Drew to complete the HT project.

          Despite Drew’s attempts to resolve outstanding issues with PCT amicably, PCT informed Drew in December 2007, shortly after receiving approval of its own NP instrument, that PCT deemed the Agreement between the parties to be terminated, that PCT would not take the necessary steps to assist Drew to complete the HT instrument project and that PCT would not allow Drew to market or sell the NP instrument within the territories that were granted to Drew under the Agreement.

          Drew filed its legal actions against PCT in February 2008, alleging that PCT’s conduct is intended to irreparably harm Drew’s ability to bring the HT instrument into the marketplace and thus allow PCT to gain a competitive advantage for its NP instrument. Drew further alleges that PCT’s actions are intended to deny Drew the economic benefits associated with its marketing rights relative to both the HT and NP products. Consequently, Drew claims that PCT’s actions have and will continue to harm its reputation and that in addition to its lost profits, Drew is threatened with the loss of the significant economic resources that it has already committed to the development and marketing of both the HT and the NP instrument, as well as other irreparable harm.

          After a brief period of discovery and the submission of legal papers, the Court issued a ruling on May 6, 2008. While denying Drew’s request for a Preliminary Injunction, the Court scheduled the dispute for expedited trial. The parties are making progress on achieving an amicable resolution to this matter. The parties, therefore, have requested and been granted an indefinite extension to ascertain if a full and final resolution can be achieved by the parties.

          The Company is cognizant of the legal expenses and costs associated with the PCT litigation. The Company, however, believes that Drew is taking all necessary actions to protect its rights and interests under the Agreement with PCT. The Company believes, however, that it is necessary to pursue this litigation and possible final resolution: a) to protect the significant R&D expenditure that Drew has already invested in the development of the HT Instrument; b) to prevent PCT from denying Drew access to PCT’s NP Instrument; c) protect Drew’s territorial rights, as well as its reputation in such markets; and d) allow Drew to receive the economic benefits that it is entitled to with respect to both the HT and NP instruments.

Other Legal Proceedings

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

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

          No matters were submitted to a vote of security holders during the quarter ended June 30, 2008.

PART II.

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

          The Company’s common stock trades on the NASDAQ Capital Market under the symbol “ESMC.” The table below sets forth, for the periods indicated, the high and low sales prices as quoted on the NASDAQ Capital Market.

		High				Low
Fiscal year ended June 30, 2008
Quarter ended September 30, 2007		$	8.60			$	3.95
Quarter ended December 31, 2007		$	5.72			$	2.99
Quarter ended March 31, 2008		$	4.39			$	2.78
Quarter ended June 30, 2008		$	3.40			$	2.86
Fiscal year ended June 30, 2007
Quarter ended September 30, 2006		$	5.19			$	4.06
Quarter ended December 31, 2006		$	4.19			$	2.35
Quarter ended March 31, 2007		$	4.38			$	2.55
Quarter ended June 30, 2007		$	4.53			$	3.75

          As of September 20, 2008, there were 4,274 holders of record of the Company’s common stock. On September 19, 2008 the closing price of the Company’s Common Stock as reported by the NASDAQ Capital Market was $2.33 per share.

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

ITEM 6.		SELECTED FINANCIAL DATA

          The following selected financial data are derived from the consolidated financial statements of the Company. The data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein in Item 7 and the financial statements and related notes to consolidated financial statements thereto included herein in Item 8.

						For the Years Ended June 30,
		2008				2007				2006				2005				2004
		(Amounts in thousands, except per share amounts)
Statement of Operations Data:
Net revenues:
Product revenue		$	29,988			$	27,893			$	27,544			$	23,864			$	12,348
Other revenue			222				10,945				2,247				3,060				2,373
Revenues, net			30,210				38,838				29,791				26,924				14,721
Costs and expenses:
Cost of goods sold			17,310				15,771				16,004				13,158				5,476
Marketing, general and administrative			14,392				13,806				13,995				12,556				5,206
Research and development			4,058				3,461				2,828				1,893				776
Total costs and expenses			35,760				33,038				32,827				27,607				11,458
(Loss) income from operations			(5,550	)			5,800				(3,036	)			(683	)			3,263
Other (expense) and income:
Gain on sale of available for sale securities			0				75				1,157				3,412				0
Equity in Ocular Telehealth Management, LLC			(88	)			(88	)			(174	)			(64	)			0
Goodwill Impairment			(9,575	)			0				0				0				0
Interest income			300				208				162				69				59
Interest expense			(12	)			(29	)			(64	)			(55	)			(407	)
Total other (expense) and income			(9,375	)			166				1,081				3,362				(348	)
Net (loss) income before taxes			(14,925	)			5,966				(1,955	)			2,679				2,915
Provision for income taxes			135				51				31				232				173
Net (loss) income		$	(15,060	)		$	5,915			$	(1,986	)		$	2,447			$	2,742
Basic net (loss) income per share		$	(2.36	)		$	0.93			$	(0.32	)		$	0.42			$	0.70
Diluted net (loss) income per share		$	(2.36	)		$	0.92			$	(0.32	)		$	0.39			$	0.64
Weighted average shares — basic used in per share calculation			6,389				6,375				6,152				5,832				3,897
Weighted average shares — diluted used in per share calculation			6,389				6,434				6,152				6,231				4,304

										At June 30,
		2008				2007				2006				2005				2004
		(Amounts in thousands)
Balance Sheet Data:
Cash and cash equivalents		$	3,708			$	8,879			$	3,380			$	5,116			$	12,602
Working capital			10,547				17,238				10,616				13,613				13,966
Total assets			31,896				45,017				38,645				40,049				29,457
Short Term Debt			501,752				150,200				232,837				2,396				0
Long-term debt, net of current portion			250,871				0				163				392				2,396
Total liabilities			7,364				5,612				5,545				5,530				5,996
Accumulated deficit			(43,267	)			(28,208	)			(34,122	)			(32,136	)			(34,585	)

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

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

          The following discussion and analysis should be read together with the consolidated financial statements and notes thereto and other financial information contained elsewhere in this Form 10-K and the discussion under “Risk Factors” included in Part IA of this Form 10-K.

          The Company operates primarily in five reportable business segments: Drew, Sonomed, Vascular, Medical/Trek and EMI.

          Drew is a diagnostics company specializing in the design, manufacture and distribution of instruments for blood cell counting and blood analysis. Drew is focused on providing instrumentation and consumables for the physician office and veterinary office laboratories. Drew also supplies the reagent and other consumable materials needed to operate the instruments. Drew added to its reagent business with its May 29, 2008 purchase of JAS (see footnote 11).

          Sonomed develops, manufactures and markets ultrasound systems used for diagnosis or biometric applications in ophthalmology.

          Vascular develops, manufactures and markets vascular access products.

          Medical/Trek develops, manufactures and distributes ophthalmic surgical products under the Escalon Medical Corp. and/or Trek Medical Products names.

          EMI manufactures and markets digital camera systems for ophthalmic fundus photography. For a more complete description of these businesses and their products, see Item 1 — Description of Business.

          Executive Overview — Fiscal Years Ended June 30, 2008 and 2007

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

•

Product revenue increased approximately 7.5% during fiscal year ended June 30, 2008 as compared to the prior fiscal year. The increase is primarily related to strong sales in the Company’s Drew, Vascular, and EMI business units which increased approximately 14.7%, 18.8%, and 18.7%, respectively, offset by sales decreases in the Sonomed and Trek business units of 4.6% and 5.5%, respectively.

	•		Other revenue decreased approximately $10,723,000 or 98.0% during the fiscal year ended June 30, 2008 as compared to the prior fiscal year. The decrease is due primarily to the $9,600,000 settlement payment received from Intralase on February 27, 2007.
	•		Cost of goods sold as a percentage of product revenue increased to approximately 57.7% of revenues during the fiscal year ended June 30, 2008, as compared to approximately 56.5% of product revenue for the prior fiscal year. Gross margins in the Drew business unit have historically been lower than those in the Company’s other business units. Cost of goods sold in the Drew business unit was approximately 67.0% of product revenue during the fiscal year ended June 30, 2008 as compared to approximately 66.1% in the prior fiscal year. The aggregate cost of goods sold as a percentage of product revenue of the Sonomed, Vascular, EMI and Medical/Trek business units during fiscal year ended June 30, 2008 increased to approximately 52.0% of product revenue from approximately 51.6% in the prior fiscal year.
	•		Operating expenses increased approximately 6.9% during the fiscal year ended June 30, 2008 as compared to the prior fiscal year. This was due to increased consulting expenses related to the implementation of an ERP System during the current period and increased research and development at the Drew, Sonomed and Vascular divisions.
	•		The Company concluded that $9,574,655 of the goodwill recorded at Drew was impaired. As a result, the Company recorded a non-cash goodwill impairment charge to operations totaling $9,574,655 for the year ended June 30, 2008 (see footnote 3 for additional information).

     Results of Operations

          Fiscal Years Ended June 30, 2008 and 2007

          The following table shows consolidated product revenue by business unit as well as identifying trends in business unit product revenues for the fiscal years ended June 30, 2008 and 2007. Table amounts are in thousands:

		Fiscal Years Ended June 30,
		2008				2007				% Change
Product Revenue:
Drew		$	13,332			$	11,627				14.7	%
Sonomed			9,367				9,823				-4.6	%
Vascular			4,119				3,467				18.8	%
EMI			1,762				1,484				18.7	%
Medical/Trek			1,410				1,492				-5.5	%
Total		$	29,990			$	27,893				7.5	%

          Consolidated product revenue increased approximately $2,097,000, or 7.5%, to $29,990,000 during the year ended June 30, 2008 as compared to the last fiscal year.

          In the Drew business unit, product revenue increased $1,705,000, or 14.7%, as compared to last fiscal year. The increase is primarily due to the sales of Drew’s D3 instrument which received FDA market clearance on December 18, 2007, strong demand for the Primus instrument and continued growth of Drew’s reagent sales from it’s United Kingdom facility. Drew anticipates launching its new DS-360 Analyzer for in the second half of fiscal 2009.

          Product revenue decreased $456,000, or 4.6%, to $9,367,000 in the Sonomed business unit as compared to the last fiscal year. The decrease in product revenue was caused by the continued migration of Sonomed’s revenue to international markets. The international market is served primarily by distributors who receive significant discounts as compared to traditional direct sales in the Domestic market.

          Product revenue increased $652,000, or 18.8%, to $4,119,000, at the Vascular business unit during the year ended June 30, 2008 as compared to last fiscal year. The increase was primarily caused by the introduction of the new VascuView instrument which generated $550,000 in revenue during the year. Overall needle volume was slightly lower during the year, however, a midyear price adjustment resulted in higher needle revenue for the year.

          Product revenue increased $278,000, or 18.7%, in the EMI business unit when compared to the last fiscal year. This increase is attributable to the increase in sales of the digital imaging systems from the January 2006 MRP acquisition. The EMI product offering continues to expand and has seen significant market acceptance during the year ended June 30, 2008.

          In the Medical/Trek business unit, product revenue decreased $82,000, or 5.5%, to $1,410,000 during the year ended June 30, 2008 as compared to the last fiscal year.

          The following table presents consolidated other revenue by reportable business unit for the fiscal years ended June 30, 2008 and 2007. Table amounts are in thousands:

		Fiscal Years Ended June 30,
		2008				2007				% Change
Other Revenue:
Drew		$	222			$	243				-8.6	%
Sonomed			0				0				0.0	%
Vascular			0				0				0.0	%
EMI			0				0				0.0	%
Medical/Trek			0				10,702				-100.0	%
Total		$	222			$	10,945				-98.0	%

          Consolidated other revenue decreased by approximately $10,723,000, or 98.0%, to $222,000 during the fiscal year ended June 30, 2008 as compared to the prior fiscal year. The decrease is primarily due to the $9,600,000 settlement reached with Intralase on February 27, 2007. Under the settlement agreement, Intralase made a lump sum payment to Escalon of $9,600,000 in exchange for which all pending litigation between the parties was dismissed, the parties exchanged general releases, the Company transferred to Intralase its ownership of patents and intellectual property formerly licensed to Intralase by the Company, and the License Agreement was terminated. In addition, the payment from Intralase satisfied all outstanding past, current and future royalties owed or alleged to be owed by Intralase to the Company.

          The following table presents consolidated cost of goods sold by reportable business unit and as a percentage of related unit product revenues for the fiscal years ended June 30, 2008 and 2007. Table amounts are in thousands:

		Fiscal Years Ended June 30,
		2008				%				2007				%
Cost of Goods Sold:
Drew		$	8,928				67.0	%		$	7,681				66.1	%
Sonomed			5,029				53.7	%			4,976				50.7	%
Vascular			1,538				37.3	%			1,393				40.2	%
EMI			820				46.5	%			711				47.9	%
Medical/Trek			995				70.6	%			1,011				67.8	%
Total		$	17,310				57.7	%		$	15,772				56.5	%

          Consolidated cost of goods sold totaled approximately $17,310,000, or 57.7%, of product revenue, for the fiscal year ended June 30, 2008 as compared to $15,772,000, or 56.5%, of product revenue, for the prior fiscal year.

          Cost of goods sold in the Drew business unit totaled $8,928,000, or 67.0%, of product revenue, for the fiscal year ended June 30, 2008 as compared to $7,681,000, or 66.1%, of product revenue, for the prior fiscal year. The increase in the cost of goods sold as a percentage of revenue is due to the margin compression related to the continued strength of the Euro against the US Dollar which negatively affects the margins on Drew’s new D3 offering that is manufactured in France by an OEM partner. The decrease in instrument gross margins was partially offset by an increase in the sale of higher volume spare parts and continued sales of higher gross margin reagents. This margin compression is expected to continue in the near term until there is a favorable foreign exchange change and until the introduction of Drew’s higher margin instruments, the HT and DS360, currently under development and expected to become available for sale during fiscal 2009.

          Cost of goods sold in the Sonomed business unit totaled $5,029,000, or 53.7%, of product revenue, for the fiscal year ended June 30, 2008 as compared to $4,976,000, or 50.7%, of product revenue, for prior fiscal year. The increase in Sonomed’s cost of goods sold as a percentage of revenue was primarily caused by an increase in sales discounts during the period as a result of sales to the more price sensitive international market combined with a decrease in overall domestic sales of the Company’s new Vumax II ultrasound systems.

          Cost of goods sold in the Vascular business unit totaled $1,538,000, or 37.3%, of product revenue, for fiscal year ended June 30, 2008 as compared to $1,393,000, or 40.2%, of product revenue, for the last fiscal year. The decrease as a percentage of product revenue was due to a price increase during the year on traditional needle business offset by the $585,000 of revenue during the year on Vascular’s new lower margin VascuView product.

          Cost of goods sold in the EMI business unit totaled $820,000, or 46.5%, of product revenue, for fiscal year ended June 30, 2008 as compared to $711,000, or 47.9%, of product revenue, for the last fiscal year. The decrease as a percentage of product revenue was due to continued production efficiencies and lower sales discounts in the second half of 2008.

          Cost of goods sold in the Medical/Trek business unit totaled $995,000, or 70.6%, of product revenue, for the fiscal year ended June 30, 2008 as compared to $1,011,000, or 67.8%, of product revenue, for the last fiscal year. The increase as a percentage of product revenue was due to increased material costs which Trek was unable to completely pass on to its customers.

          The following table presents consolidated marketing, general and administrative expenses as well as identifying trends in business unit marketing, general and administrative expenses for the fiscal years ended June 30, 2008 and 2007. Table amounts are in thousands:

		Fiscal Years Ended June 30,
		2008				2007				% Change
Marketing, General and Administrative:
Drew		$	5,287			$	5,475				-3.4	%
Sonomed			2,219				1,931				14.9	%
Vascular			1,576				1,598				-1.4	%
EMI			605				480				26.0	%
Medical/Trek			4,705				4,323				8.8	%
Total		$	14,392			$	13,807				4.2	%

          Consolidated marketing, general and administrative expenses increased $585,000, or 4.2%, to $14,392,000 during the fiscal year ended June 30, 2008 as compared to the prior fiscal year.

          Marketing, general and administrative expenses in the Drew business unit decreased $188,000, or 3.4%, to $5,287,000 as compared to the same period last fiscal year. The decrease is primarily due to a reduction in headcount during the year offset by increased legal fees of approximately $580,000 related to breach of contract litigation between Drew and PointCare Technologies. Drew implemented significant reductions in force during June 2008, the full effect of this cost reduction plan of approximately $1.5 million, is expected to be realized during fiscal 2009.

          Marketing, general and administrative expenses in the Sonomed business unit increased by $288,000, or 14.9%, to $2,219,000 as compared to the prior fiscal year. The increase is due primarily to the increase in international marketing consulting in Europe and the addition of a consultant in Southeast Asia, increased travel and advertising related to marketing and trade show activity during the current year.

          Marketing, general and administrative expenses in the Vascular business unit decreased $22,000, or 1.4%, to $1,576,000 as compared to the same period last fiscal year.

          Marketing, general and administrative expenses in the EMI business unit increased $125,000 or 26.0% to $605,000 as compared to last fiscal year. The increase is primarily related to the addition of sales people during the year.

          The Medical/Trek business unit’s marketing, general and administrative expenses increased $382,000 or 8.8% to $4,705,000 as compared to the last fiscal year. The increase was due primarily to the addition of a chief operating officer and controller during the year, compensation expense for directors under SFAS No. 123(R) rules, and increased third party consultants in valuation services, information technology and the implementation of a new company-wide ERP system during the year.

          The following table presents consolidated research and development expenses by reportable business unit and as a percentage of related unit product revenues for the fiscal years ended June 30, 2008 and 2007. Table amounts are in thousands:

		Fiscal Years Ended June 30,
		2008				2007				% Change
Research and Development:
Drew		$	2,745			$	2,355				16.6	%
Sonomed			779				495				57.4	%
Vascular			260				172				51.2	%
EMI			268				350				-23.4	%
Medical/Trek			6				89				-93.3	%
Total		$	4,058			$	3,461				17.3	%

          Consolidated research and development expenses increased $597,000, or 17.3%, to $4,058,000 during the fiscal year ended June 30, 2008 as compared to the prior fiscal year. Research and development expenses were primarily expenses associated with the planned introduction of new or enhanced products in the Drew, Sonomed and Vascular business units.

          Research and development expenses in the Drew business unit increased $390,000, or 16.6%, to $2,745,000. The increase was primarily related to additional salaries and benefits and consulting fees associated with the development of the DS-360, a diabetes instrument, the HT, a CD4 instrument and the development of additional chemical reagents for use on Drew’s Trilogy instrument.

          Research and development expenses in the Sonomed business unit increased $284,000 to $779,000 as compared to the last fiscal year. The increase is primarily due to consulting expenses incurred during the fourth quarter related to the development of Sonomed’s next generation ultrasound instrument, the VuMax III and continued improvements made to Sonomed’s existing product offering. Sonomed expects to submit the VuMax III instrument for FDA market clearance during the second half of fiscal 2009.

          Research and development expenses in the Vascular business unit increased $88,000 to $260,000 as compared to the last fiscal year. The increase was primarily due to completing the development of the VascuViewTM, a new visual ultrasound device, which received FDA market clearance on January 20, 2008.

          Research and development in the EMI business unit decreased $82,000 to $268,000 as compared to the last fiscal year. The decrease was primarily due to higher expenses in the prior period related to various enhancements to EMI’s digital systems.

          Research and development in the Medical/Trek business unit decreased $83,000 to $6,000 as compared to the last fiscal year. This decrease is due primarily to the elimination of the corporate research and development department in the first quarter of fiscal 2007 related to the Company’s previously announced cost reduction plan.

          Goodwill Impairment

          The Company tests goodwill for possible impairment on an annual basis and at any other time events occur or circumstances indicate that the carrying amount of goodwill may be impaired.

          The first step of the SFAS No. 142 impairment analysis consists of a comparison of the fair value of the reporting unit with its carrying amount, including the goodwill. The fair value was determined based on the income approach, which estimates the fair value based on the future discounted cash flows. Under the income approach, the Company assumed, with respect to Drew, a forecasted cash flow period of five years, long-term annual growth rates of 5% and a discount rate of 14%.

          Based on the income approach analysis that was separately performed for each operating segment it was determined that in the Drew segment the carrying amount of the goodwill was in excess of its respective fair value. As such, the Company was required to perform the second step analysis for Drew in

order to determine the amount of the goodwill impairment. The second step analysis consisted of comparing the implied fair value of the goodwill with the carrying amount of the goodwill, with an impairment charge resulting from any excess of the carrying value of the goodwill over the implied fair value of the goodwill. Based on the second step analysis, the Company concluded that all $9,574,655 of the goodwill recorded at Drew was impaired. As a result, the Company recorded a non-cash goodwill impairment charge to operations totaling $9,574,655 for the year ended June 30, 2008.

          The determination as to whether a write-down of goodwill is necessary involves significant judgment based on short-term and long-term projections of the Company. The assumptions supporting the estimated future cash flows of the reporting unit, including profit margins, long-term forecasts, discount rates and terminal growth rates, reflect the Company’s best estimates.

          Other Income and Expenses

          Gain on sale of available for sale securities was approximately $0 and $75,000 during the fiscal years ended June 30, 2008 and 2007, respectively due to the sale of 0 shares and 3,000 shares of Intralase common stock during fiscal 2008 and 2007, respectively. The Company has no remaining available for sale securities.

          The Company recognized a loss of approximately $88,000 and $88,000 related to its investment in Ocular Telehealth Management (“OTM”) during the fiscal years ended June 30, 2008 and 2007, respectively. Commencing July 1, 2005, the Company began recognizing all of the losses of OTM in its consolidated financial statements. OTM is an early stage privately held company. Prior to July 1, 2005, the share of OTM’s loss recognized by the Company was in direct proportion to the Company’s ownership equity in OTM. OTM began operations during the three-month period ended September 30, 2004. (See note 13 of the notes to consolidated financial statements.)

          Interest income was $300,000 and $208,000 for the fiscal years ended June 30, 2008 and 2007, respectively. The increase was due to higher cash balances and effective yields on investments.

          Interest expense was $12,000 and $29,000 for the fiscal years ended June 30, 2008 and 2007, respectively.

     Results of Operations

          Fiscal Years Ended June 30, 2007 and 2006

          The following table shows consolidated product revenue by business unit as well as identifying trends in business unit product revenues for the fiscal years ended June 30, 2007 and 2006. Table amounts are in thousands:

		Fiscal Years Ended June 30,
		2007				2006				% Change
Product Revenue:
Drew		$	11,627			$	14,253				-18.4	%
Sonomed			9,823				7,737				27.0	%
Vascular			3,467				3,640				-4.8	%
EMI			1,484				434				241.9	%
Medical/Trek			1,492				1,480				0.8	%
Total		$	27,893			$	27,544				1.3	%

          Consolidated product revenue increased approximately $349,000, or 1.3%, to $27,893,000 during the year ended June 30, 2007 as compared to the fiscal year ended June 30, 2006.

          In the Drew business unit, product revenue decreased $2,626,000, or 18.4% as compared to as compared to the fiscal year ended June 30, 2006. The decrease is primarily due to the non-renewal of two OEM agreements and the continued delay in the introduction of Drew’s new line of products in fiscal 2007. In July 2007, Drew received 510(k) clearance from the FDA to market the new TRILOGY Analyzer. TRILOGY, a multifunction analyzer used in determination of analytes in body fluids, is an open system intended for clinical use in a professional setting for use with various chemistry assays. Drew anticipates receiving approval on its new D3 Analyzer in the second quarter of fiscal 2008 which will provide two upgraded instruments for sale in fiscal 2008. Additionally, Drew anticipates submitting its new DS-360 Analyzer for FDA approval in the second half of fiscal 2008.

          Product revenue increased $2,086,000, or 27.0%, to $9,823,000 in the Sonomed business unit as compared to the fiscal year ended June 30, 2006. The increase in product revenue was primarily caused by an increase in sales of the Company’s EZ AB scan ultrasound systems as well as increased sales of the new VuMax high frequency systems and an overall increase in export sales.

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

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

          In the Medical/Trek business unit, product revenue increased $12,000, or 0.8%, to $1,492,000 during the year ended June 30, 2007 as compared to the fiscal year June 30, 2006.

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

		Fiscal Years Ended June 30,
		2007				2006				% Change
Other Revenue:
Drew		$	243			$	283				(14.1	)%
Sonomed			0				0				0.0	%
Vascular			0				0				0.0	%
EMI			0				0				0.0	%
Medical/Trek			10,702				1,964				444.9	%
Total		$	10,945			$	2,247				387.1	%

          Consolidated other revenue increased by approximately $8,698,000, or 387.1%, to $10,945,000 during the fiscal year ended June 30, 2007 as compared to the fiscal year June 30, 2006. The increase is primarily due to the $9,600,000 settlement reached with Intralase on February 27, 2007. Under the settlement agreement, Intralase made a lump sum payment to Escalon of $9,600,000 in exchange for which all pending litigation between the parties was dismissed, the parties exchanged general releases, the Company transferred to Intralase its ownership of patents and intellectual property formerly licensed to Intralase by the Company, and the License Agreement was terminated. In addition, the payment from Intralase satisfied all outstanding past, current and future royalties owed or alleged to be owed by Intralase to the Company.

          Other revenue from the prior year of $3,060,000 and the amount in the current year in excess of the $9,600,000 Intralase settlement of $1,102,000 is related to royalties received from Intralase license agreement received prior to the settlement and royalties received by Drew related to the Bio-Rad license agreement.

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

		Fiscal Years Ended June 30,
		2007				%				2006				%
Cost of Goods Sold:
Drew		$	7,681				66.1	%		$	9,225				64.7	%
Sonomed			4,976				50.7	%			3,962				51.2	%
Vascular			1,393				40.2	%			1,535				42.2	%
EMI			711				47.9	%			290				66.8	%
Medical/Trek			1,011				67.8	%			992				67.0	%
Total		$	15,772				56.5	%		$	16,004				58.1	%

          Consolidated cost of goods sold totaled approximately $15,772,000, or 56.5% of product revenue, for the fiscal year ended June 30, 2007 as compared to $16,004,000 or 58.1 of product revenue for the fiscal year ended June 30, 2006.

          Cost of goods sold in the Drew business unit totaled $7,681,000, or 66.1% of product revenue, for the fiscal year ended June 30, 2007 as compared to $9,225,000, or 64.7% of product revenue, for the fiscal year ended June 30, 2006. The increase in the cost of goods sold as a percentage of revenue is due to the margin compression related to the continued aging of Drew’s existing product offering. The decrease in instrument gross margins was partially offset by an increase in the sale of higher volume spare parts and continued sales of higher gross margin reagents.

          Cost of goods sold in the Sonomed business unit totaled $4,976,000, or 50.7% of product revenue, for the fiscal year ended June 30, 2007 as compared to $3,962,000, or 51.2% of product revenue, for fiscal year ended June 30, 2006. The primary reason for the decrease as a percentage of product revenue was an increase in the percentage of domestic sales during the period. The Company historically experiences a higher selling price per unit on its domestic product sales.

          Cost of goods sold in the Vascular business unit totaled $1,393,000, or 40.2% of product revenue, for fiscal year ended June 30, 2007 as compared to $1,535,000, or 42.2% of product revenue, for the fiscal year ended June 30, 2006. The decrease as a percentage of product revenue was due to lower overtime and higher production efficiencies in the current period as compared to the prior year.

          Cost of goods sold in the EMI business unit totaled $711,000, or 47.9% of product revenue, for fiscal year ended June 30, 2007 as compared to $290,000, or 66.8% of product revenue, for the fiscal year ended June 30, 2006. The significant improvement in gross margins is related to improved production techniques implemented during the year and EMI’s ability to drive down the cost of components due to increased purchases made during the year to keep pace with its significant sales growth.

          Cost of goods sold in the Medical/Trek business unit totaled $1,011,000, or 67.8% of product revenue, for the fiscal year ended June 30, 2007 as compared to $992,000, or 67.0% of product revenue, for the fiscal year ended June 30, 2006.

          The following table presents consolidated marketing, general and administrative expenses as well as identifying trends in business unit marketing, general and administrative expenses for the fiscal years ended June 30, 2007 and 2006. Table amounts are in thousands:

		Fiscal Years Ended June 30,
		2007				2006				% Change
Marketing, General and Administrative:
Drew		$	5,475			$	6,006				-8.9	%
Sonomed			1,931				2,098				-8.0	%
Vascular			1,598				1,682				-5.0	%
EMI			480				550				-12.7	%
Medical/Trek			4,323				3,659				18.2	%
Total		$	13,807			$	13,995				-1.4	%

          Consolidated marketing, general and administrative expenses decreased $188,000, or 1.4%, to $13,807,000 during the fiscal year ended June 30, 2007 as compared to the fiscal year ended June 30, 2006.

          Marketing, general and administrative expenses in the Drew business unit decreased $531,000, or 8.9%, to $5,475,000 as compared to the fiscal year ended June 30, 2006. The decrease is primarily due to the realization of previously announced cost reductions initiated during the first quarter of the 2007 fiscal year, offset by related charges incurred in consolidating our foot print in the United Kingdom down to one site from three in the previous year, and from increased legal and severance costs. The full effect of our previously announced cost reduction plan is expected to be realized during fiscal 2008.

          Marketing, general and administrative expenses in the Sonomed business unit decreased by $167,000, or 8.0%, to $1,931,000 as compared to the fiscal year ended June 30, 2006. The decrease is due primarily to the decreased need, as compared to the prior fiscal year, for travel and advertising expenses related to the introduction and expansion into international markets related to the roll out of Sonomed’s new UBM Instrument.

          Marketing, general and administrative expenses in the Vascular business unit decreased $84,000, or 5.0%, to $1,598,000 as compared to the fiscal year ended June 30, 2006. The decrease was due mainly to the discontinuance of the relationship with an under performing European sales consultant and a more efficient approach to domestic sales travel and other marketing related expenses, including printed material and attendance at trade shows.

          Marketing, general and administrative expenses in the EMI business unit decreased $70,000 or 12.7%, to $480,000 as compared the fiscal year ended June 30, 2006. The decrease is primarily related to additional costs incurred in the prior year on printed and other advertising materials.

          The Medical/Trek business unit’s marketing, general and administrative expenses increased $664,000, or 18.2%, to $4,323,000 as compared to the fiscal year ended June 30, 2006. The increase was due primarily to $163,000 incurred during this fiscal year under the new SFAS No. 123(R) rules, increased discretionary bonuses of $175,000, increased corporate salaries of approximately $194,000 and increased third party consultants in accounting, valuation services, and information technology of $68,000 and increased insurance costs of $64,000.

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

		Fiscal Years Ended June 30,
		2007				2006				% Change
Research and Development:
Drew		$	2,355			$	1,734				35.8	%
Sonomed			495				511				-3.1	%
Vascular			172				164				4.9	%
EMI			350				85				311.8	%
Medical/Trek			89				334				-73.4	%
Total		$	3,461			$	2,828				22.4	%

          Consolidated research and development expenses increased $633,000, or 22.4%, to $3,461,000 during the fiscal year ended June 30, 2007 as compared to the fiscal year ended June 30, 2006. Research and development expenses were primarily expenses associated with the planned introduction of new or enhanced products in the Drew and EMI business units.

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

          Research and development expenses in the Sonomed business unit decreased $16,000 to $495,000 as compared to the fiscal year ended June 30, 2006. The decrease is primarily due to a completion of Sonomed’s new UBM instrument in the prior year offset by continued enhancements to Sonomed’s existing products.

          Research and development in the Vascular business unit increased $8,000 to $172,000 as compared to the fiscal year ended June 30, 2006.

          Research and development in the EMI business unit increased $265,000 to $350,000 as compared to the fiscal year ended June 30, 2006. The increase is due to additional employees related to continued development and enhancement of the Company’s digital ophthalmic product offerings.

          Research and development in the Medical/Trek business unit decreased $245,000 to $89,000 as compared to the fiscal year ended June 30, 2006. This decrease is due primarily to the elimination of the corporate research and development department in the first quarter of fiscal 2007 related to the Company’s previously announced cost reduction plan.

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

          The Company recognized a loss of approximately $88,000 and $174,000 related to its investment in Ocular Telehealth Management (“OTM”) during the fiscal years ended June 30, 2007 and 2006, respectively. Commencing July 1, 2005, the Company began recognizing all of the losses of OTM in its consolidated financial statements. OTM is an early stage privately held company. Prior to July 1, 2005, the share of OTM’s loss recognized by the Company was in direct proportion to the Company’s ownership equity in OTM. OTM began operations during the three-month period ended September 30, 2004. (See note 13 of the notes to consolidated financial statements.)

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

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

Liquidity and Capital Resources

          The following table presents overall liquidity and capital resources from continuing operations during the fiscal years ended June 30, 2008 and 2007. Table amounts are in thousands:

		June 30,
		2008				2007
Current Ratio:
Current assets		$	16,573			$	21,763
Less: Current liabilities			6,026				4,525
Working capital		$	10,547			$	17,238
Current ratio		2.8 to 1				4.8 to 1
Debt to Total Capital Ratio:
Notes payable and current maturities		$	502			$	150
Long-term debt		$	251				0
Total debt		$	753			$	150
Total equity			24,532				39,406
Total capital		$	25,285			$	39,556
Total debt to total capital			3.0	%			0.4	%

           Working Capital Position

          Working capital decreased $6,691,000 as of June 30, 2008 and the current ratio decreased to 2.8 to 1 from 4.8 to 1 when compared to June 30, 2007. The decrease in working capital was caused primarily by a decrease in cash of $5,171,000 from $8,879,000 to $3,708,000 in 2007 and 2008, respectively. Accounts receivable decreased $757,000 from $4,653,000 in 2007 to $3,896,000 in 2008. Overall total current assets decreased $5,190,000 from $21,763,000 in 2007 to $16,573,000 in 2008. Total current liabilities which consist of current portion of long term debt, accounts payable and accrued expenses increased $1,501,000, from $4,525,000 in 2007 to $6,026,000 in 2008.

           Our principal source of short term liquidity is existing cash and cash equivalents which we believe will be sufficient to meet our operating needs and anticipated capital expenditures over at least the next twelve months. For the long term, we intend to utilize principally existing cash and cash equivalents as well as internally generated funds, which are anticipated to be derived primarily from the sale of existing products and reagents and instrumentation products and reagents currently under development. To the extent that these sources of liquidity are insufficient, we may consider issuing debt or equity securities or curtailing or reducing our operations.

          Cash Used In or Provided By Operating Activities

          During fiscal 2008, the Company used approximately $2,936,000 of cash for operating activities as compared to generating approximately $5,783,000 from operating activities during the year ended June 30, 2007. The net decrease in cash generated from operating activities of approximately $8,719,000 in fiscal 2008 as compared to fiscal 2007 is due primarily to the following factors:

          Loss from operations increased approximately $20,974,000 in fiscal 2008 as compared to fiscal 2007, from $5,915,000 in 2007 to $(15,060,000) in 2008, the net loss for 2008 includes a non-cash goodwill impairment charge in the amount of $9,575,000. The net income in 2007 was driven by net income in the other Escalon companies of approximately $9,585,000 offset by a net loss at our Drew division of approximately $3,670,000. The income in the legacy Escalon companies includes the $9,600,000 settlement payment received from Intralase.

          Cash Flows Used In Investing and Financing Activities

          Cash flows used in investing activities for 2008 were approximately $2,007,000. This amount is made up of purchases of fixed assets of $613,000, investment in OTM of $69,000, and the purchase of JAS Diagnostics, Inc. in the amount of $1,325,000.

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

          Any necessary capital expenditures have generally been funded out of cash from operations, and the Company is not aware of any factors that would cause historical capital expenditure levels to not be indicative of capital expenditures in the future and, accordingly, does not believe that the Company will have to commit material resources to capital investment for the foreseeable future.

          Cash flows used in financing activities in the amount of $143,000 during 2008 relate to repayment of debt of $150,000 and offset by the proceeds from the issuance of common stock options and issuance of $7,000.

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

          Debt History

          Drew had long-term debt facilities through the Texas Mezzanine Fund and through Symbiotics, Inc. The Texas Mezzanine Fund debt provided for interest at fixed rate of 8% per annum until July 1, 2005. The interest rate was then adjusted to the prime rate plus 4% per annum. Each June 1, the rate was adjusted to the prime rate plus 4% per annum. The debt had a minimum interest rate of 8% per annum to a maximum interest rate of 18% per annum. The note was paid off in April 2008 and had been secured by certain assets of Drew. The outstanding balance on the Symbiotics as of June 30, 2008 and 2007 was approximately, $0 and $16,666, respectively.

          On May 29, 2008 Drew issued a note payable in the amount of $752,623 related to the purchase of JAS Diagnostics, Inc. The note is collateralized by JAS’ common stock. Principal is payable in six quarterly installments of $124,437 plus interest at the prime rate (5% on June 30, 2008) as published by the Bank of America.

          Off-Balance Sheet Arrangements and Contractual Obligations

          The Company was not a party to any off-balance sheet arrangements as of and for the fiscal years ended June 30, 2008 and 2007. The following table presents the Company’s contractual obligations as of June 30, 2008 (interest is not included in the table as it is not material):

						Less than								3-5				More than
		Total				1 Year				1-3 Years				Years				5 Years
Long-term debt		$	752,623			$	501,752			$	250,871			$	0			$	0
Operating lease agreements			3,445,258				704,501				1,314,637				1,122,846				303,274
Total		$	4,197,881			$	1,206,253			$	1,565,508			$	1,122,846			$	303,274

          Forward-Looking Statement About Significant Items Likely To Impact Liquidity

          On July 23, 2004, the Company acquired approximately 67% of the outstanding ordinary shares of Drew, pursuant to the Company’s exchange offer for all of the outstanding ordinary shares of Drew and subsequently acquired the remaining shares during the fiscal year ended June 30, 2005. As of June 30, 2006, the Company has acquired all of the outstanding ordinary shares of Drew. Drew does not have a history of producing positive operating cash flows and, as a result, at the time of acquisition, was operating under financial constraints and was under-capitalized. As Drew is integrated into the Company, management continues to work to reverse the situation, while at the same time seeking to strengthen Drew’s market position. The Company has loaned approximately $20 million to Drew. The funds have been primarily used to procure components to build up inventory to support the manufacturing process as well as to pay off accounts payable and debt of Drew. The Company may need to provide further working capital for Drew.

           Common Stock

          The Company’s common stock is currently listed on the NASDAQ Capital Market. In order to continue to be listed on the NASDAQ Capital Market, the following requirements must be met:

	•		Shareholders’ equity of $2,500,000 or market value of listed securities of $35,000,000 or net income from continuing operations (in the latest fiscal year or two of the last three fiscal years) of $500,000;
	•		500,000 publicly held shares;
	•		$1,000,000 market value of publicly held shares;
	•		A minimum bid price of $1;
	•		300 round lot shareholders;
	•		Two market makers; and
	•		Compliance with corporate governance standards.

          As of June 30, 2008, Escalon complied with these requirements.

          Critical Accounting Policies

          The preparation of financial statements requires management to make estimates and assumptions that impact amounts reported therein. The most significant of those involve the application of Statement of Accounting Standards (“SFAS’) No. 142 “Goodwill and Other Intangible Assets,” discussed further in the notes to consolidated financial statements included in this Form 10-K. The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, and, as such, include amounts based on informed estimates and judgments of management. For example, estimates are used in determining valuation allowances for deferred income taxes, uncollectible receivables, obsolete inventory, sales returns and rebates and purchased intangible assets. Actual results

achieved in the future could differ from current estimates. The Company used what it believes are reasonable assumptions and, where applicable, established valuation techniques in making its estimates.

          Revenue Recognition

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

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

	•		Persuasive evidence that an arrangement (purchase order and sales invoice) exists between a willing buyer (distributor) and the Company that outlines the terms of the sale (company information, quantity of goods, purchase price and payment terms). The buyer (distributor) does not have a right of return.
	•		Shipping terms are ex-factory shipping point. At this point the buyer (distributor) takes title to the goods and is responsible for all risks and rewards of ownership, including insuring the goods as necessary.
	•		The Company’s price to the buyer (distributor) is fixed and determinable as specifically outlined on the sales invoice. The sales arrangement does not have customer cancellation or termination clauses.
	•		The buyer (distributor) places a purchase order with the Company; the terms of the sale are cash, COD or credit. Customer credit is determined based on the Company’s policies and procedures related to the buyer’s (distributor’s) creditworthiness. Based on this determination, the Company believes that collectibility is reasonably assured.

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

          Valuation of Intangible Assets

          The Company annually evaluates for impairment its intangible assets and goodwill in accordance with SFAS 142, “Goodwill and Other Intangible Assets,” or whenever events or changes in circumstances indicate that the carrying value may not be recoverable, see footnote 3 to consolidated financial statements included in this Form 10-K for details on a goodwill impairment charge related to the carrying amount of Drew’s goodwill. These intangible assets include goodwill, trademarks and trade names. Factors the Company considers important that could trigger an impairment review include significant under-performance relative to historical or projected future operating results or significant negative industry or economic trends. If these criteria indicate that the value of the intangible asset may be impaired, an evaluation of the recoverability of the net carrying value of the asset is made. If this evaluation indicates that the intangible asset is not recoverable, the net carrying value of the related intangible asset will be reduced to fair value. See footnote 3 to the consolidated financial statements.

          Income/(Loss) Per Share

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

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

          Taxes

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

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

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

          Through June 30, 2008, the Company has recorded a full valuation allowance against the Company’s net operating losses due to uncertainty of their realization as a result of the Company’s earnings history, the number of years the Company’s net operating losses and tax credits can be carried forward, the existence of taxable temporary differences and near-term earnings expectations. The amount of the valuation allowance could decrease if facts and circumstances change that materially increase taxable income prior to the expiration of the loss carryforwards. Any reduction would reduce (increase) the income tax expense (benefit) in the period such determination is made by the Company.

          Stock-Based Compensation

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

          Valuations are based on highly subjective assumptions about the future, including stock price volatility and exercise patterns. The fair value of share-based payment awards was estimated using the Black-Scholes option pricing model. Expected volatilities are based on the historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee terminations. The expected term of options granted represents the period of time that options granted are

expected to be outstanding. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

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

          Recently Issued Accounting Standards

          In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, in-process research and development and restructuring costs. In addition, under SFAS 141(R), changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early application is not permitted. The effect of SFAS 141(R) on our consolidated financial statements will be dependent on the nature and terms of any business combinations that we consummate on or after July 1, 2009.

          In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. We do not expect the adoption of SFAS 160 to have a significant impact on our consolidated financial statements unless a future transaction results in a noncontrolling interest in a subsidiary.

          In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits a company to choose to measure many financial instruments and other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing a company with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 and, accordingly, we adopted the provisions of this Statement on July 1, 2008. We are currently evaluating the impact of the adoption of SFAS No. 159 on our consolidated financial statements. However, we do not expect the effect to be significant.

          In June 2007, the FASB ratified Emerging Issues Task Force Issue 07-3, Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities (“EITF 07-3”). EITF 07-3 provides guidance on the capitalization of non-refundable advance payments for goods and services to be used in future research and development activities until such goods have been delivered or the related services have been performed. As applicable to us, this pronouncement became effective for our fiscal year beginning on July 1, 2008. We do not expect the adoption of this pronouncement to have a material effect on our consolidated financial statements.

          In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the enterprise’s financial statements. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in the tax return. We adopted the provisions of FIN 48 on July 1, 2007. As of the date of adoption, the 2005-2007 tax years remain subject to examination

by major tax jurisdictions. As of June 30, 2008, the 2005-2007 tax years remain subject to examination by major tax jurisdictions.

          As a result of the implementation of FIN 48, we recognized no material adjustments in the liability for unrecognized income tax benefits and, at the adoption date of July 1, 2008, we had no unrecognized tax benefits which would have affected our effective tax rate if recognized. At June 30, 2008, we also had no unrecognized tax benefits. If uncertain tax positions had been recorded, then we would recognize interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2008, no accrued interest related to uncertain tax positions has been recorded.

          In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and, accordingly, we adopted the provisions of this Statement on July 1, 2008. We are currently evaluating the impact of the adoption of SFAS No. 157 on our consolidated financial statements. However, we do not expect the effect to be significant.

ITEM 7A.		QUANTITATIVE AND QUALIITATIVE DISCLOSURE ABOUT MARKET RISK

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

           Interest Rate Risk

          The table below provides information about the Company’s financial instruments consisting of fixed interest rate debt obligations. For debt obligations, the table represents principal cash flows and related interest rates by expected maturity dates. (See note 5 of the notes to consolidated financial statements for further information regarding the Company’s debt obligations.)

		2008				Total
Notes Payable — Former JAS Shareholders		$	752,623			$	752,623
Interest Rate			5.0	%

          Currency Fluctuations

          For the years ended June 30, 2008, 2007 and 2006, approximately 13.2%, 12.5% and 12.8%, respectively, of our net revenues were generated in currencies other than the United States dollar. Fluctuations in the value of foreign currencies relative to the United States dollar affect our reported results of operations. If the United States dollar weakens relative to the foreign currency, then our earnings generated in the foreign currency will, in effect, increase when converted into United States dollars and vice versa. Exchange rate differences resulting from the strength or weakness of the United States dollar against the Euro and the United Kingdom Pound Sterling resulted in increases of approximately $235,000 in net revenues in 2008 compared to 2007, $279,000 in net revenues in 2007 compared to 2006 and an increase of approximately $37,000 in net revenues in 2006 compared to 2005. During the three years ended June 30, 2008, no subsidiary was domiciled in a highly inflationary environment and the impact of inflation and changing prices on our net sales and revenues and on loss from continuing operations was not material.

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

		June 30,				June 30,
		2008				2007
Total Foreign Sales			12,661,554				11,255,394
Total Net Revenues			29,988,386				27,892,738
International Percentage			42.2	%			40.4	%

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Escalon Medical Corp.
Index to Consolidated Financial Statements

		Page
Report of Independent Registered Public Accounting Firm			38
Consolidated Balance Sheets at June 30, 2008 and 2007			39
Consolidated Statements of Operations for the Years Ended June 30, 2008, 2007 and 2006			40
Consolidated Statements of Shareholders’ Equity for the Years Ended June 30, 2008, 2007 and 2006			41
Consolidated Statements of Cash Flows for the Years Ended June 30, 2008, 2007 and 2006			42
Notes to Consolidated Financial Statements			43

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Escalon Medical Corporation

We have audited the accompanying balance sheets of Escalon Medical Corporation as of June 30, 2008 and 2007, and the related statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year periods ended June 30, 2008. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Escalon Medical Corporation as of June 30, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2008 in conformity with accounting principles generally accepted in the United States of America.

Mayer Hoffman McCann P.C.

Plymouth Meeting, Pennsylvania

September 29, 2008

ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

		June 30,				June 30,
		2008				2007
ASSETS
Current assets:
Cash and cash equivalents		$	3,708,456			$	8,879,462
Accounts receivable, net			3,896,297				4,653,073
Inventory, net			8,670,160				7,761,370
Other current assets			297,807				469,107
Total current assets			16,572,720				21,763,012
Furniture and equipment, net			1,078,839				873,191
Goodwill			11,590,786				21,072,260
Trademarks and trade names			694,006				620,106
Patents, net			157,883				216,228
Covenant not to compete and customer list, net			1,691,610				326,860
Other assets			110,176				145,556
Total assets		$	31,896,020			$	45,017,213
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	501,752			$	150,200
Accounts payable			2,628,004				1,626,274
Accrued expenses			2,895,920				2,748,133
Total current liabilities			6,025,676				4,524,607
Long-term debt, net of current portion			250,871				0
Accrued post-retirement benefits			1,087,000				1,087,000
Total long-term liabilities			1,337,871				1,087,000
Total liabilities			7,363,547				5,611,607
Shareholders equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized; no shares issued
Common stock, $0.001 par value; 35,000,000 share authorized; 6,413,930 and 6,386,857 issued and outstanding at June 30, 2008 and June 30, 2007, respectively			6,414				6,387
Common stock warrants			1,601,346				1,601,346
Additional paid-in capital			66,299,242				66,045,050
Accumulated deficit			(43,267,466	)			(28,207,824	)
Accumulated other comprehensive (loss)			(107,063	)			(39,353	)
Total shareholders’ equity			24,532,473				39,405,606
Total liabilities and shareholders’ equity		$	31,896,020			$	45,017,213

See notes to consolidated financial statements

ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended June 30,		2008				2007				2006
Net revenues:
Product revenue		$	29,988,386			$	27,892,738			$	27,543,785
Other revenue			222,075				10,945,042				2,246,913
Revenues, net			30,210,461				38,837,780				29,790,698
Costs and expenses:
Cost of goods sold			17,309,671				15,771,254				16,003,904
Marketing, general and administrative			14,392,004				13,806,399				13,994,788
Research and development			4,058,289				3,461,322				2,828,196
Goodwill impairment			9,574,655				0				0
Total costs and expenses			45,334,619				33,038,975				32,826,888
(Loss) income from operations			(15,124,158	)			5,798,805				(3,036,190	)
Other (expense) and income:
Gain on sale of available for sale securities			0				75,000				1,157,336
Equity in Ocular Telehealth Management, LLC			(88,206	)			(87,852	)			(173,844	)
Interest income			299,538				208,457				161,588
Interest expense			(11,827	)			(28,753	)			(63,521	)
Total other (expense) income			199,505				166,852				1,081,559
Net (loss) income before taxes			(14,924,653	)			5,965,657				(1,954,631	)
Provision for income taxes			134,990				51,054				31,309
Net (loss) income		$	(15,059,643	)		$	5,914,603			$	(1,985,940	)
Basic net (loss) income per share		$	(2.36	)		$	0.93			$	(0.32	)
Diluted net (loss) income per share		$	(2.36	)		$	0.92			$	(0.32	)
Weighted average shares — basic			6,389,008				6,374,929				6,152,455
Weighted average shares — diluted			6,389,008				6,434,275				6,152,455

See notes to consolidated financial statements

ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED JUNE 30, 2008, 2007 and 2006

																						Accumulated
										Common				Additional								Other				Total
		Common Stock								Stock				Paid-in				Accumulated				Comprehensive				Shareholders’
		Shares				Amount				Warrants				Capital				Deficit				Income (Loss)				Equity
BALANCE AT JUNE 30, 2006			6,344,657			$	6,345			$	1,601,346			$	65,699,370			$	(34,122,427	)		$	(84,527	)		$	33,100,107
Comprehensive Income (Loss):
Net income			0				0				0				0				5,914,603				0				5,914,603
Change in unrealized gains on available for sale securities			0				0				0				0				0				(50,220	)			(50,220	)
Foreign currency translation			0				0				0				0				0				95,394				95,394
Total comprehensive income			0				0				0				0				5,914,603				45,174				5,959,777
Exercise of stock options			42,200				42				0				84,692				0				0				84,734
Compensation expense			0				0				0				162,576				0				0				162,576
Income tax benefit from exercise of stock options			0				0				0				98,412				0				0				98,412
BALANCE AT JUNE 30, 2007			6,386,857				6,387				1,601,346				66,045,050				(28,207,824	)			(39,353	)			39,405,606
Comprehensive Income (Loss):
Net (loss)			0				0				0				0				(15,059,643	)			0				(15,059,643	)
Foreign currency translation			0				0				0				0				0				(67,710	)			(67,710	)
Total comprehensive income																		$	(15,059,643	)			(67,710	)			(15,127,353	)
Exercise of stock options			27,073				27				0				7,435				0				0				7,462
Compensation expense			0				0				0				246,757				0				0				246,757
BALANCE AT JUNE 30, 2008			6,413,930			$	6,414			$	1,601,346			$	66,299,242			$	(43,267,467	)		$	(107,063	)		$	24,532,472