ESCALON MEDICAL CORP - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JUNE 30, 2002.

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO .

COMMISSION FILE NUMBER 0-20127

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

PENNSYLVANIA 33-0272839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

351 EAST CONESTOGA ROAD, WAYNE, PA 19087
(Address of principal executive offices, including zip code)

(610) 688-6830
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE

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

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

At August 22, 2002, 3,345,851 shares of Common Stock were outstanding, and
the aggregate market value of the shares of Common Stock held by the
Registrant's nonaffiliates was approximately $6,122,908 (based upon the closing
price of the Common Stock on the Nasdaq SmallCap Market on such date).

A list of Exhibits to this Annual Report on Form 10-K begins on page 21.
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ESCALON MEDICAL CORP.

ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2002

TABLE OF CONTENTS

1

PART I

ITEM 1. BUSINESS

COMPANY OVERVIEW

Escalon Medical Corp. ("Escalon") was incorporated in California in 1987 as
Intelligent Surgical Lasers, Inc. Escalon's present name was adopted in August
1996. Escalon reincorporated in Delaware in November 1999, and then
reincorporated in Pennsylvania in November 2001. Within this document, the
"Company" collectively shall mean Escalon and its wholly-owned subsidiaries:
Sonomed, Inc. ("Sonomed"), Escalon Vascular Access, Inc. ("Vascular"), Escalon
Digital Vision, Inc. ("Digital") and Escalon Pharmaceutical, Inc.
("Pharmaceutical"). The Company operates in the healthcare market, specializing
in the development, manufacture, marketing and distribution of ophthalmic
medical devices, pharmaceuticals and vascular access devices.

In February 1996, the Company acquired substantially all of the assets and
certain liabilities of Escalon Ophthalmics, Inc. ("EOI"), a developer and
distributor of ophthalmic surgical products. Prior to this acquisition, the
Company devoted substantially all of its resources to the research and
development of ultrafast laser systems designed for the treatment of ophthalmic
disorders. As a result of the EOI acquisition, Escalon changed its market focus
and is no longer developing laser technology. In October 1997, the Company
licensed its intellectual laser properties to a privately held company, in
return for an equity interest and future royalties on sales of products relating
to the laser technology. The privately held company undertook responsibility for
funding and developing the laser technology through to commercialization. The
privately held company began selling products related to the laser technology
during fiscal 2002.

To further diversify its product portfolio, in January 1999, the Company's
Vascular subsidiary acquired the vascular access product line from Radiance
Medical Systems, Inc. ("Radiance"). Vascular's products use Doppler technology
to aid medical personnel in locating arteries and veins in difficult
circumstances. Currently, this product line is concentrated in the cardiac
catheterization market; however, the Company began marketing the products in the
area of oncology during fiscal 2002. In January 2000, the Company purchased
Sonomed, a privately held manufacturer of ophthalmic ultrasound diagnostic
equipment, accounted for as an asset purchase. In April 2000, Digital formed a
joint venture, Escalon Medical Imaging, LLC ("Imaging") with MegaVision, Inc.
("MegaVision"), a privately held company, to develop and market a digital camera
back for ophthalmic photography. The Company terminated its joint venture with
MegaVision and commenced operations within its Digital business unit on January
1, 2002.

SONOMED BUSINESS

Sonomed develops, manufactures and markets ultrasound systems used for
diagnostic or biometric applications in ophthalmology. The systems are of three
types: A-scans, B-scans and pachymeters.

A-Scans

The A-scan provides information about the internal structure of the eye by
sending a beam of ultrasound along a fixed axis through the eye and displaying
the various echoes reflected from surfaces intersected by the beam. The
principal echoes occur at the cornea, both surfaces of the lens and the retina.
The system displays the position and magnitudes of the echoes on an electronic
display. This allows ophthalmologists to view structures within the eye and
differentiate between normal tissue and pathology, such as tumors and cysts. The
A-Scan also includes software for measuring distances within the eye. This
information is primarily used to calculate lens power for implants; for example,
in preparation for cataract operations.

B-Scans

The B-Scan is primarily a diagnostic tool, which supplies information to
physicians where the media within the eye are cloudy or opaque. Whereas
physicians normally use light, which cannot pass through such media, the
ultrasound beam is capable of passing through the opacity and displaying an
image of the internal

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structures of the eye. Unlike the A-scan, the B-scan transducer is not in a
fixed position; it swings through a 60 degree sector to provide a two
dimensional image of the eye.

Pachymeters

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

VASCULAR BUSINESS

Vascular develops, manufactures and markets vascular access products. These
products are Doppler-guided vascular access assemblies used to locate desired
vessels for access. Primary specialty groups which use the device are cardiac
catheter labs, interventional radiology, vascular labs, critical care units,
anesthesia and cancer centers. The Company's vascular products include the PD
Access(TM) and Smartneedle(TM) lines of monitors, Doppler-guided bare needles
and Doppler-guided infusion needles.

PD Access(TM) and Smartneedle(TM) Monitors, needles and catheter Products

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

MEDICAL/TREK BUSINESS

Medical/Trek develops, manufactures and distributes ophthalmic surgical
products under the Escalon Medical Corp. and/or Trek Medical Products names. The
products are primarily utilized by vitreoretinal ophthalmic surgeons. The
following is a summary of the business's key product lines:

Adatosil(R) 5000 Silicone Oil ("Silicone Oil")

Silicone Oil is a specialty product used in worst-case detached retina
surgery as a mechanical aid in the reattachment procedure. The Company
distributed Silicone Oil until August 13, 1999, at which time the license and
distribution rights for this product were sold to Bausch & Lomb Surgical, Inc.
The license and distribution rights were sold for $2.1 million and additional
cash consideration based on future sales to be received through August 2005 (See
Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations for additional details).

ISPAN Intraocular Gases

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

Viscous Fluid Transfer Systems

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

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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.

DIGITAL BUSINESS

Digital formed the joint venture with MegaVision to develop a digital
camera system for ophthalmic fundus photography. The Company terminated its
joint venture with MegaVision and commenced operations within its Digital
business unit on January 1, 2002.

CFA Camera Back

The images furnished by the CFA camera system furnish a very high level of
detail. The camera back is being marketed to medical institutions, educational
institutions and ophthalmologists for the purpose of photographic diagnosis of
retinal disorders.

PHARMACEUTICAL BUSINESS

The Company retains the license and distribution rights for Povidone-Iodine
2.5% Solution. The product will require further development before achieving FDA
approval. The Company has suspended further development pending the
establishment of strategic partnership arrangements. Povidone-Iodine 2.5%
Solution is a broad-spectrum anti-microbial intended to prevent opthalmia
neonatorum in newborns.

RESEARCH AND DEVELOPMENT

Escalon conducts medical device and vascular access product development at
its New Berlin, Wisconsin facility located near Milwaukee. The development of
ultrasound ophthalmic equipment is performed at the Company's Lake Success, New
York facility located on Long Island.

MANUFACTURING AND DISTRIBUTION

Escalon leases 13,500 square feet of space in New Berlin, Wisconsin for its
surgical products and vascular access operations. The facility is currently used
for engineering, product design and development, manufacturing and product
assembly. Various vendors are used to subcontract component manufacture,
assembly and sterilization. Manufacturing facilities include a class 10,000
clean room. All of the Company's ophthalmic surgical products and vascular
access products are distributed from its Wisconsin facility. The Company
designs, develops and services its ultrasound ophthalmic products at its
facility in Lake Success, New York. This facility contains 7,100 square feet.
The Company has aggressively pursued and achieved ISO9001 certification at both
of its manufacturing facilities for all medical and ultrasound devices produced.
CE certification has been obtained for disposable delivery systems, fiber optic
light probes, vascular access products and certain ultrasound models. The
manufacture, testing and marketing of each of the Company's products entails
risk of product liability. Product liability insurance is carried by Escalon to
cover the primary risk.

MARKETING AND SALES

The Medical/Trek business unit sells its ophthalmic device and instrument
products directly to end users through internal sales and marketing employees
located at the Company's Wisconsin facility. Sales are primarily to teaching
institutions, key hospitals and eye surgery centers focusing primarily on
physicians and operating room personnel performing vitreoretinal surgery.
Vascular access products are marketed domestically through internal sales and
marketing employees located in Pennsylvania, Illinois and at its Wisconsin
facility, as well as through five independent distributors and sales
representatives located in Florida, Missouri, Ohio and Washington managed by the
Company's sales team. The Sonomed product line is sold through

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internal sales employees located at the Company's New York facility to a large
network of distributors and directly to medical institutions both domestically
and abroad.

SERVICE AND SUPPORT

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

THIRD PARTY REIMBURSEMENT

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

PATENTS AND ROYALTIES

The pharmaceutical and medical device communities place considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes. The Company's policy is to protect its technology by
aggressively obtaining patent protection for all of its developments and
products, both in the United States and in selected countries outside the United
States. It is the Company's policy to file for patent protection in those
foreign countries in which the Company believes such protection is necessary to
protect its economic interests. Twenty-one United States issued patents, and
nineteen patents issued abroad cover the Company's surgical products and
pharmaceutical technology. With respect to the Company's ultrafast laser systems
(licensed to a privately held company), sixteen patents have been issued in the
United States and eleven overseas. Vascular access products are covered by
eighteen patents, which provide protection in the United States, Europe, Japan
and other countries overseas. The Company intends to vigorously defend its
patents if the need arises.

COMPETITION

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

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 composed 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. As a
result of this competition, the Company believes that many of the industry's
smaller companies will either consolidate or fail. 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 upon protecting its intellectual property through patents
and other governmental regulations. At the same time, the Company recognizes
that there are other young and innovative companies that may develop competitive
technologies.

The vascular access product line is comprised of low-price, disposable
devices, and currently it has no direct competition. However, a significantly
higher priced non-disposable device that also facilitates vascular

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access is currently marketed. There are a variety of other devices that directly
compete with Sonomed's ultrasound products and the camera back marketed by
Digital.

HUMAN RESOURCES

As of June 30, 2002, the Company employed 57 full-time employees and 3
part-time employees. Thirty-one of the Company's full-time employees are
employed in manufacturing, 15 are employed in general and administrative
positions, 6 are employed in sales and marketing and 5 are employed in research
and development. Escalon's employees are not covered by a collective bargaining
agreement, and the Company considers its relations with its employees to be
good.

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

Certain statements contained in this Annual Report on Form 10-K and other
written and oral statements made from time to time by the Company do not relate
strictly to historical or current facts. As such, they are considered
"forward-looking statements" 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," "protect," "should," "will," and similar words or
expressions. The Company's forward-looking statements include certain
information relating to general business strategy, growth strategies, financial
results, liquidity, product development, the introduction of new products, the
potential markets and uses for the Company's products, the Company's plans to
file applications with the Food and Drug Administration (the "FDA"), the
development of joint venture opportunities, the effects of competition on the
structure of the markets in which the Company competes and defending itself in
litigation matters. One 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
investors therefore should not consider any list of such factors to be an
exhaustive statement of all risks, uncertainties or potentially inaccurate
assumptions. The Company undertakes no obligation to update any forward-looking
statement. 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 most important factors include, without
limitation, the following:

FUTURE CAPITAL NEEDS AND THE UNCERTAINTY OF ADDITIONAL FUNDING

Our liquidity is affected by many factors, some of which are based on the
normal ongoing operations of our businesses and some of which arise from
fluctuations related to global markets and economies. The Company's current term
loan with PNC Bank, N.A. provides for quarterly principal payments, which
increase every six months, including a $2,000,000 final balloon payment, which
is due on June 30, 2004. We believe that cash on hand plus cash available from
our line of credit will be sufficient to satisfy our working capital, capital
expenditures and research and development until the balloon payment is due. We
may be required to secure additional debt or equity financing in order to
satisfy the balloon payment, and we cannot assure you that such financing will
be available when required on acceptable terms.

CONCENTRATION OF REVENUES

The Company realized 14.53% and 18.97% of its net revenue during the fiscal
years ended June 30, 2002 and 2001, respectively, from Bausch & Lomb's sale of
Silicone Oil. While management does not expect this revenue to decline rapidly
in the foreseeable future, any such decrease would have a significant impact on
our consolidated financial position, results of operations, cash flows and stock
price could be negatively impacted. The Company is entitled to receive
additional consideration, in varying amounts, through fiscal 2005.

6

ECONOMIC AND REGULATORY CONDITIONS AND THE COMPETITIVE NATURE OF THE INDUSTRIES
IN WHICH THE COMPANY COMPETES

It is difficult to ascertain if the current economic downturn has affected
the Company's results. Management believes any effect has been limited to our
Sonomed business unit. Any further decline in our customers' markets or further
decline in general economic conditions would likely result in reduction in
demand for our products and services and could harm our consolidated financial
position, results of operations, cash flows and stock price. Should it become
necessary due to economic climate, we cannot assure you that the Company will be
able to reduce expenditures quickly enough to maintain profitability and service
our current debt. In addition, there is a risk that cost-cutting initiatives
will impair our ability to effectively develop and market products and remain
competitive in the industries in which we compete. These measures could have
long-term effects on our business by reducing our pool of technical talent,
decreasing or slowing improvements in our products, making it more difficult for
us to respond to customers, limiting our ability to increase production quickly
if and when the demand for our products increases and limiting our ability to
hire and retain key personnel. These circumstances could cause our earnings to
be lower than they otherwise might be.

The Company could be affected by trends toward managed care, health-care
cost containment, and other changes in government and private sector
initiatives, in the United States and other countries in which the Company does
business, that are placing increased emphasis on the delivery of more
cost-effective medical therapies. Changes in governmental laws, regulations, and
accounting standards and the enforcement thereof and agency or government
actions or investigations involving the industry in general or the Company in
particular may be averse to the Company.

THE ABILITY OF THE COMPANY TO SUCCESSFULLY DEVELOP AND MARKET NEW PRODUCTS

We generally sell our products in industries that are characterized by
rapid technological changes, frequent new product introductions and changing
industry standards. Without timely introduction of new products and
enhancements, our products will become technologically obsolete over time, in
which case our revenue and operating results would suffer. The success of our
new product offerings will depend on several factors, including our ability to:
(i) properly identify customer needs, (ii) innovate and develop new
technologies, services and applications, (iii) successfully commercialize new
technologies in a timely manner, (iv) manufacture and deliver our products in
sufficient volumes on time, (v) differentiate our offerings from our
competitors' offerings, (vi) price our products competitively, and (vii)
anticipate our competitors' announcements of new products, services or
technological innovations.

DEPENDENCE ON KEY PERSONNEL

Our future success depends partly on the continued service of our key
research, engineering, sales, marketing, manufacturing, executive and
administrative personnel. If we fail to retain and hire a sufficient number of
these personnel, we will not be able to maintain or expand our business.

OUR ACQUISITIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES MAY
RESULT IN FINANCIAL RESULTS THAT ARE DIFFERENT THAN EXPECTED

In the normal course of business, we engage in discussions with third
parties relating to possible acquisitions, strategic alliances, joint ventures
and divestitures. As a result of such transactions, our financial results may
differ from the investment community's expectations in a given quarter. In
addition, acquisitions and strategic alliances may require us to integrate a
different company culture, management team and business infrastructure. We may
have difficulty developing, manufacturing and marketing the products of a
newly-acquired company in a way that enhances the performance of our combined
businesses or product lines to realize the value from expected synergies.
Depending on the size and complexity of an acquisition, our successful
integration of the entity depends on a variety of factors including: (i) the
retention of key employees, (ii) the management of facilities and employees in
separate geographic areas. All of these efforts require varying levels of
management resources, which may divert our attention from other business

7

operations. If we do not realize the expected benefits or synergies of such
transactions, our consolidated financial position, results of operations and
stock price could be negatively impacted.

THE OUTCOME OF LITIGATION MATTERS AND UNCERTAIN PROTECTION OF PATENTED AND
PROPRIETARY INFORMATION

Increased public interest in recent years in product liability claims in
the medical device industry could affect the Company should it become directly
involved. Recent events have made the investing public particularly sensitive to
listed companies reporting practices and accounting policies in general. The SEC
could make regulatory changes that could have a direct effect on the Company.
Additionally, the Company may find it necessary to enforce its legal right with
respect to patented and proprietary information. The outcome of any of these
matters and the financial impact they may have on the Company cannot be
foreseen.

VOLATILITY OF STOCK PRICE AND THE ABILITY OF THE COMPANY TO MAINTAIN OUR
LISTING ON THE NASDAQ SMALLCAP MARKET

The public stock markets have experienced significant volatility in stock
prices in recent years, which could cause, the Company's stock price to
experience severe price changes that are unrelated or disproportionate to the
operating performance of the Company. The trading price of the Company's Common
Stock could be subject to wide fluctuations in response to, among other factors,
quarter to quarter variations in operating results, announcements of
technological innovations or new products by the Company or its competitors,
announcements of new strategic relationships by the Company or its competitors,
general conditions in the healthcare industry or the global economy generally,
or market volatility unrelated to the Company's business and operating results.

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

ITEM 2. PROPERTIES

The Company leases an aggregate of approximately 22,000 square feet of
space for its (i) corporate offices in Wayne, Pennsylvania, (ii)
manufacturing/warehouse facility in New Berlin, Wisconsin, (iii) manufacturing
facility in Lake Success, New York and (iv) consultant's office/storage facility
in Turnersville, New Jersey. The corporate offices leased in Wayne, Pennsylvania
covers approximately 1,100 square feet. The Wisconsin facility lease, covering
approximately 13,500 square feet of space expires in April 2007. The New York
facility lease, covering approximately 7,100 square feet expires during fiscal
2005. Annual rent under all of the Company's lease arrangements was $338,540 for
the year ended June 30, 2002.

ITEM 3. LEGAL PROCEEDINGS

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

On June 6, 1996, the court denied a motion by Escalon and the named
officers and directors to dismiss the Kozloski complaint and, on July 22, 1996,
the Company filed an answer to the complaint denying all allegations of
wrongdoing and asserting various affirmative defenses.
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In an effort to curtail its legal expenses related to this litigation,
while continuing to deny any wrongdoing, the Company reached an agreement to
settle this action on its behalf and on the behalf of its former and present
officers and directors, for $500,000. The court approved the settlement after a
fairness hearing on September 11, 2002. The Company's directors and officers
insurance carrier has agreed to fund a significant portion of the settlement
amount. Both the Company and the insurance carrier have deposited such funds in
an escrow account.

On November 8, 2001, Digital, a wholly owned subsidiary of the Company,
initiated an action against MegaVision, Inc., Ken Boydston, Mark Maio and
Ophthalmic Imaging Services, Inc. in the United States District Court for the
Eastern District Court for the Eastern District of Pennsylvania seeking damages
and equitable relief for disputes arising between the parties and arising from
the operations of Escalon Medical Imaging, LLC. Escalon Medical Imaging, LLC is
a joint venture between Escalon Digital Vision, Inc. and MegaVision, Inc. The
action was docketed as Escalon Medical Imaging, LLC and Escalon Digital Vision,
Inc. v. MegaVision, Inc., Ken Boydston, Ophthalmic Imaging Systems and Mark
Maio, Civil Action No.: 01-CV-5669. Without admitting liability, fault or
wrongdoing and to provide and amicable resolution to the dispute, the parties
have executed agreements to settle the lawsuit. As part of the settlement
Digital is conducting all operations concerning manufacture, marketing,
distribution and support of the CFA camera system. Without admitting liability,
fault, or wrongdoing and in order to avoid the time and expense of the Lawsuit,
Digital, Escalon Medical Imaging, LLC and Mark Maio executed settlement
agreement and mutual release to settle the Lawsuit. The settlements did not have
a material financial impact on the Company. The Company received $363,536 net
assets, largely in the form of accounts receivable, inventory and fixed assets,
in lieu of cash, to reduce its balance due of $432,692 from Escalon Medical
Imaging, LLC as a condition of the settlement. The remaining balance due of
$23,434 was charged as a loss from termination of joint venture.

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

None.

PART II

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

Escalon's Common Stock trades on the Nasdaq SmallCap Market under the
symbol "ESMC." The Company's Common Stock has traded on the Nasdaq SmallCap
Market since June 7, 2000. The Common Stock previously traded on the Nasdaq
National Market. The table below sets forth, for the periods indicated, the high
and low sales prices as quoted on the Nasdaq Stock Market.

As of August 22, 2002, there were 126 holders of record of the Company's
Common Stock. On August 22, 2002, the closing sale price of Escalon's Common
Stock as reported by the Nasdaq SmallCap Stock Market was $1.83 per share.

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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. In addition, the Company is party to loan agreements that
prohibit Escalon's payment of dividends.

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

10

ITEM 6. SELECTED FINANCIAL DATA

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

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

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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.

Escalon operates primarily in four reportable business segments: Sonomed,
Vascular, Medical/Trek and Digital. Sonomed develops, manufactures and markets
ultrasound systems used for diagnostic 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. Digital manufactures, markets and distributes a digital camera system for
ophthalmic fundus photography. For a more complete description of these
businesses and their products, see Item 1 -- Business, on page one.

RESULTS OF OPERATIONS

FISCAL YEAR ENDED JUNE 30, 2002 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2001

The following tables present consolidated net revenues by business segment
as well as identifying trends in business segment net revenues for the fiscal
years ended June 30, 2002 and 2001.

Product revenues increased $194,000, or 1.63%, to $12,074,000 in fiscal
2002 as compared to $11,880,000 in fiscal 2001. Revenues in the Sonomed business
increased $83,000, or 1.39%, to $6,071,000. This increase is attributed to an
increase in international revenue of $172,000 offset by an $89,000 decrease
domestically. Revenues in the Vascular business unit increased $517,000, or
24.42%, to $2,634,000. Vascular's unit sales increased 16.42% for the fiscal
year ended June 30, 2002 as compared to the same period last fiscal year. The
unit sales increase was complemented by increases in the average unit sales
prices of the majority of Vascular's needle products, due to the Company's
strategy of eliminating underperforming distributors. Vascular discounts its
products to distributors. Vascular began taking the sales directly to end users
thereby avoiding distributor discounts. Revenues in the Medical/Trek business
unit decreased $673,000, or 17.83%, to $3,098,000. The decrease was largely due
to a $500,000 decrease in revenue earned from Bausch & Lomb in connection with
Silicone Oil. This decrease was caused by a major competitor of Bausch & Lomb
introducing an alternative Silicone Oil product line as well as a contractual
step-down in royalties provided for in the sale of the product line. Sales of
the Company's ISPAN(TM) gas products and certain OEM products decreased by
$173,000. Escalon experienced a temporary increase in the sales of its ISPAN(TM)
gas product due to the fulfillment of customers' backorders during the fiscal
year ended June 30, 2001. Revenues in the Digital business unit were $267,000
for the fiscal year ended June 30, 2002. The Company terminated its joint
venture with MegaVision and commenced operations within its Digital business
unit on January 1, 2002.

12

The following table presents consolidated cost of goods sold by reportable
business segment and as a percentage of related segment net revenues for the
fiscal years ended June 30, 2002 and 2001.

Cost of goods sold totaled $4,640,000, or 38.43% of net revenue for the
fiscal year ended June 30, 2002 as compared to $4,296,000, or 36.16% of net
revenue for the fiscal year ended June 30, 2001. Cost of goods sold in the
Sonomed business unit totaled $2,704,000, or 45.16% of net revenue for the
fiscal year ended June 30, 2002 as compared to $2,237,000, or 37.36% of net
revenue for the fiscal year ended June 30, 2001. This increase relates primarily
to lower net revenue per unit as Sonomed's revenue concentrated toward sales to
distributors to whom Sonomed discounts its products resulting in lower unit
sales prices. Cost of goods sold in the Vascular business unit totaled $988,000,
or 37.51% of net revenue for the fiscal year ended June 30, 2002 as compared to
$1,016,000 or 47.99% of net revenue for the fiscal year ended June 30, 2001.
This decrease is the result of increases in average unit sales prices across the
needle product line as well as reduced costs due to improved efficiency in the
manufacturing process. Cost of goods sold in the Medical/Trek business unit
totaled $838,000, or 22.20% of net revenue for the fiscal year ended June 30,
2002 as compared to $1,043,000 or 27.63% of net revenue for the fiscal year
ended June 30, 2001. When Silicone Oil revenue is excluded, cost of goods sold
as a percentage of net revenue was 62.35% of net revenue and 68.64% of net
revenue for the fiscal years ended June 30, 2002 and 2001, respectively. No
costs are associated with Silicone Oil. The decrease in cost of goods sold is
attributed to product mix. Cost of goods sold in the Digital business unit
totaled $110,000, or 41.20% of net revenue.

The following table presents consolidated marketing, general and
administrative expenses as well as identifying trends in business segment
marketing, general and administrative expenses for the fiscal years ended June
30, 2002 and 2001.

Marketing, general and administrative expenses decreased $334,000, or
6.15%, for the fiscal year ended June 30, 2002 as compared to the fiscal year
ended June 30, 2001. In the Sonomed business unit, marketing, general and
administrative expenses decreased $501,000, or 25.80%. Depreciation and
amortization expenses decreased $735,000, primarily due to the application of
SFAS 142 discussed in Note 3 of the Notes to Consolidated Financial Statements.
Salaries and other personnel related costs increased $168,000, primarily due to
the addition of a domestic salesperson and a salesperson for Latin America and
the Pacific Rim. Bad debts increased by $101,000 as the Company reserved for
specific international accounts receivable. In the

13

Vascular business unit, marketing, general and administrative expenses decreased
by $128,000, or 11.36%. Depreciation and amortization expenses decreased $83,000
primarily due to the application of SFAS 142. Salaries, commissions and other
personnel related expenses increased $81,000 and consulting expenses decreased
$151,000 primarily due to the addition of a sales and marketing manager and a
clinical support specialist. Marketing, general and administrative expenses in
the Medical/Trek business unit increased $162,000, or 6.90%. Executive and
administrative compensation increased primarily due to the Company's
strengthening of its management team and the centralization of the Company's
finance function to the corporate office. This increase amounted to $245,000.
Legal and accounting fees increased $135,000, primarily due to the amendment of
the Company's loans with PNC Bank, N.A., required filings with the SEC relating
to the reincorporation into Pennsylvania and the issuance of shares to Radiance
Medical Systems, Inc., and the litigation discussed in Note 16 of the Notes to
Consolidated Financial Statements. This increase was offset by a $64,000
decrease in commissions expense related to the termination of contracts with
distributors, a $57,000 decrease in travel, lodging and meals and entertainment
due to concerted cost reduction efforts in this area and a $30,000 reduction in
temporary services. Marketing, general and administrative expenses in the
Digital business unit totaled $129,000.

The following table presents consolidated research and development expenses
as well as identifying trends in business segment research and development
expenses for the fiscal years ended June 30, 2002 and 2001.

Research and development expenses increased $63,000, or 12.80%, for the
fiscal year ended June 30, 2002 as compared to the fiscal year ended June 30,
2001. In the Sonomed business unit, research and development expenses increased
$88,000. This relates largely to the redesign of one of Sonomed's product lines
and was offset by a $15,000 decrease in consulting expenses. Research and
development expenses in the Vascular business unit increased $42,000, primarily
due to a $28,000 increase in prototype and patent expenses and an $11,000
increase in consulting expenses. Research and development in the Medical/Trek
business unit decreased $81,000, primarily due to $45,000 decrease in salaries
and other personnel related costs largely due to reduced headcount, a $15,000
decrease in consulting expenses, an $8,000 decrease in ISO/CE marking expenses
and a $6,000 decrease in prototype expenses.

On December 18, 2000, the Company announced that it received 510(K)
clearance to begin marketing its high-end digital camera system for
ophthalmologists known as the CFA Digital Imaging System. As a result of the
approval, the Company began marketing the system through its joint venture with
MegaVision through December 31, 2001. The Company terminated its joint venture
with MegaVision and commenced operations within the Company's Digital business
unit on January 1, 2002. Escalon recognized a joint venture gain of $9,000 for
the fiscal year ended June 30, 2002 and a joint venture loss of $19,000 for the
fiscal year ended June 30, 2001.

Interest income remained unchanged for the fiscal year ended June 30, 2002
as compared to the fiscal year ended June 30, 2001. Interest income was $2,000
for both fiscal years.

Interest expense decreased $261,000 for the fiscal year ended June 30, 2002
as compared to the fiscal year ended June 30, 2001. These decreases resulted
from lower average balances in Escalon's term loan and line of

14

credit with PNC Bank, N.A., and from decreases in the floating interest rates
applicable to the term loan and line of credit.

There is no provision for federal income taxes for the periods presented as
a result of utilization of net operating loss carryforwards and related changes
in the deferred tax valuation allowance.

FISCAL YEAR ENDED JUNE 30, 2001 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2000

The following tables present consolidated net revenues by business segment
as well as identifying trends in business segment net revenues for the fiscal
years ended June 30, 2001 and 2000.

Product revenues increased $5,210,000, or 78.11%, to $11,880,000 in fiscal
2001 as compared to $6,670,000 in fiscal 2000. Revenues in the Sonomed business
increased $3,452,000, or 136.12%, to $5,988,000. This increase was due primarily
to the fact that Sonomed's revenues represent a full year of operation in fiscal
2001 as compared to only five and a half months of activity in fiscal 2000.
(Sonomed was acquired in January 2000, see notes to consolidated financial
statements for a discussion of the Sonomed acquisition). Product revenues in the
Vascular business decreased $228,000, or 9.72%, to $2,117,000. This decrease was
primarily due to the Company shifting its sales strategy in this business unit.
During fiscal 2001, Escalon identified underperforming distributors and
terminated the Company's relationship with them, with internal staff picking up
the territories previously covered by these distributors. Also contributing to
the overall decrease was the fact that distributors experienced a surplus of
inventory during fiscal 2001 and subsequently reduced orders to the Company. In
the Company's Medical/Trek business unit, product revenues increased $1,986,000,
or 111.01%, to $3,775,000. Revenue earned in connection with Silicone Oil was
$574,000 from July 1, 1999 through August 13, 1999. Escalon sold its rights to
the product to Bausch & Lomb on August 13, 1999, and did not recognize any
revenue from Silicone Oil for a period of one year from the date of the sale.
Beginning on August 13, 2000, Escalon is entitled to receive from Bausch & Lomb,
a percentage of their gross profit from the sales of the product through fiscal
2005. From August 13, 2000 through June 30, 2001, revenue earned from Bausch &
Lomb in connection with Silicone Oil was $2,254,000, $1,680,000 more than the
Silicone Oil revenue recognized during the fiscal year ended June 30, 2000.
Revenue from the balance of the Medical/ Trek product line increased by
$306,000. This increase was primarily due to the fulfillment of customers'
backorders for the Company's ISPAN(TM) gas product during the first quarter of
fiscal 2001.

The following table presents consolidated cost of goods sold by reportable
business segment and as a percentage of related segment net revenues for the
fiscal years ended June 30, 2001 and 2000.

15

Cost of goods sold totaled $4,296,000, or 36.16% of net revenue for fiscal
2001, as compared to $2,874,000, or 43.09% of net revenue, for fiscal 2000. Cost
of goods sold in the Sonomed business increased $1,130,000, primarily due to the
fact that Sonomed's cost of goods sold represent a full year of operation in
fiscal 2001 as compared to only five-and-a-half months of activity in fiscal
2000. Cost of goods sold in fiscal 2001 in the Vascular unit increased $6,000 to
$1,016,000, or 47.99% of net revenue, as compared to 43.07% of net revenue in
fiscal 2000. The net increase in cost of goods sold, as a percentage of net
revenue was the result of material costs increasing 0.89% and labor and other
employee-related expenses decreasing 4.03%. The reduction of cost of goods sold
as a percentage of net revenue in the Medical/Trek business unit was primarily
due to the revenues received from Bausch & Lomb related to Silicone Oil. Cost of
goods sold in this business unit in fiscal 2001 increased $107,000 to
$1,043,000, or 27.63% of net revenue. Cost of goods sold as a percent of net
revenues was 52.38% during the same period last year. This decrease was due to
the fact that Silicone Oil revenue recognized during fiscal 2001 does not have
any costs associated with the revenue. Cost of goods sold for the Medical/Trek
business unit was 68.64%of net revenue for the fiscal year ended June 30, 2001,
when Silicone Oil revenue is excluded. The increase in cost of goods sold, as a
percentage of net revenue was the result of material costs increasing 6.65% and
labor and other employee-related expenses increasing 9.61%.

The following table presents consolidated marketing, general and
administrative expenses by business segment as well as identifying changes in
these expenses for the fiscal years ended June 30, 2001 and 2000.

Marketing, general and administrative expenses increased $769,000, or
16.52%, for fiscal 2001 as compared to fiscal 2000. Marketing, general and
administrative expenses in the Sonomed business increased $991,000, primarily
due to the fact that Sonomed's expenses represent a full year of operation in
fiscal 2001 as compared to only five-and-a-half months of activity in fiscal
2000. This increase was offset by Vascular's $183,000 decrease. The main factors
contributing to this decrease were decreased salaries and employee-related
costs, which decreased by $163,000, the result of reduced headcount; and a
decrease in travel-related expenses, which resulted by $90,000, the direct
result of a concerted effort in this area. The decreases were partially offset
by an increase in consulting expense of $85,000, largely due to the retention of
a sales and marketing consultant. Marketing, general and administrative expenses
in the Medical/Trek businesses decreased by $52,000, largely due to a $51,000
decrease in royalties as a result of the Company's decision to discontinue
clinical trials of Ocufit SR(R) in December 1999.

The following table presents consolidated research and development expenses
by business segment as well as identifying trends in these expenses for the
fiscal years ended June 30, 2001 and 2000.

Research and development expenses decreased $492,000, or 50.00%, for fiscal
2001 as compared to fiscal 2000. Research and development expenses in the
Sonomed business increased $195,000, primarily due to the
16

fact that Sonomed's expenses represent a full year of operation in fiscal 2001
as compared to only five-and-a-half months of activity in fiscal 2000. Research
and development in the Vascular and Medical/Trek business units decreased
$679,000 when compared to the same period last year. This was largely due to the
fact that Escalon has suspended development of Povidone-Iodine 2.5%, and also
due to the fact that development of Ocufit SR(R) was terminated in December
1999.

In August 1999, the Company reported the sale of its license and
distribution rights for the Adatosil(R) 5000 Silicone Oil product line. The sale
resulted in a $1,864,000 gain after writing off the remaining net book value of
license and distribution rights associated with that product line.

After completing the initial Phase I human clinical trials in late December
1999, management reevaluated its Ocufit SR(R) ophthalmic drug delivery system
project. It was decided that further expenditures on this project were not in
the shareholders' best interest, and the project was discontinued. This decision
resulted in Escalon taking a non-cash charge of $418,000 in the second and third
quarter of fiscal 2000, which included a write-off of the net book value for
remaining goodwill and patent costs associated with this project.

On December 18, 2000, Escalon announced it was granted 510(K) clearance to
begin marketing its high-end digital camera system for ophthalmologists known as
the CFA Digital Imaging System. The system was marketed through Imaging, the
Company's joint venture with MegaVision. As a result of the approval, Imaging
began selling the product in December 2000. The Company recognized a $19,000
loss from the joint venture during the fiscal year ended June 30, 2001 as
compared to a $33,000 loss during the fiscal year ended June 30, 2000.

Interest income decreased by $147,000 for the fiscal year ended June 30,
2001, as compared to the fiscal year ended June 30, 2000. This decrease resulted
from the decrease in cash and cash equivalents available for investment due to
the significant changes in the Company arising from the Sonomed acquisition.

Interest expense increased by $476,000 for the fiscal year ended June 30,
2001, as compared to the fiscal year ended June 30, 2001. This was primarily the
result of corporate borrowing arrangements that did not exist until the third
quarter of fiscal 2000. In connection with the Sonomed acquisition, the Company
refinanced its existing bank debt, providing $12,000,000 of financing to the
Company.

There was no provision for federal or state income taxes for the periods
presented as a result of utilization of net operating loss carryforwards and
related changes in the deferred tax valuation allowance.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2002, Escalon had cash and cash equivalents of $221,000 as
compared to $81,000 at June 30, 2001, an increase of $140,000. This resulted
primarily from increases in cash of $2,029,000 provided by operating activities,
$204,000 net proceeds from due from joint venture and $107,000 provided by the
issuance of Common Stock, offset by $2,006,000 used to pay down the term loan
and the line of credit, $73,000 in loan finance fees, $96,000 used to purchase
fixed assets and a $25,000 payment for license and distribution rights.

On January 14, 2000, Escalon replaced its $2,000,000 credit facility
obtained in January 1999. PNC Bank, N.A. granted a new $12,000,000 credit
facility to assist with the Sonomed acquisition. This included a $7,000,000
five-year term loan, a $5,000,000 line of credit and the release of the
requirement of the company to maintain a $1,000,000 certificate of deposit with
PNC Bank, N.A. The interest rate on the term loan was based on prime plus 1.0%
and the line of credit rate was based on prime plus 0.75%. An interest rate cap
agreement is used to reduce the potential impact of increases in interest rates
on the floating-rate term loan. At June 30, 2002, Escalon was party to an
interest rate cap agreement covering the term loan through January 1, 2003. The
agreement entitles the Company to receive from PNC Bank, N.A., the counter-party
to the agreement, on a monthly basis, the amounts, if any, by which the
Company's interest payments exceed 10.0% for the period July 1, 2002 through
January 1, 2003. Escalon paid $100,000 in finance fees that offset the
outstanding balance of the term loan and are being amortized over the term of
the loans using the effective interest method. Escalon paid $122,800 in interest
rate cap protection fees that also offset the outstanding balance of the loans.
These fees are being amortized over the term of the loans using the effective
interest method.
17

On November 28, 2001, Escalon amended its loan agreement with PNC Bank,
N.A. The amendment included converting the existing balances on the term loan
and the line of credit into a $7,900,000 term loan and $2,000,000 available line
of credit. The aggregate balance of debt outstanding did not change as a result
of this refinancing. As of June 30, 2002, the amount outstanding against this
line of credit was $1,250,000. Principal payments due on the term loan have been
amended such that the balance is due within the five-year term of the original
agreement including a $2,000,000 balloon payment due on June 30, 2004. Interest
rates on the term loan and line of credit were increased to prime plus 1.75% and
prime plus 1.50, respectively. At June 30, 2002, the interest rates applicable
to the term loan and line of credit were 6.50% and 6.25%, respectively. PNC
Bank, N.A.'s prime rate as of June 30, 2002 was 4.75%. In connection with the
amended agreement, Escalon issued to PNC Bank, N.A. warrants to purchase 60,000
shares of the Company's Common Stock at an exercise price of $3.66 per share.
The warrants were valued at $4,800 using the Black-Sholes option pricing method
with the following assumptions: risk-free interest rate of 5.0%, expected
volatility of .18, expected warrant life of 42 months from vesting and expected
dividend rate of 0.0%. The Company also paid a $50,000 facility fee upon
execution of the loan agreement. Commencing March 1, 2002, the Company began
paying a 1.0% facility payable quarterly based on the aggregate principal amount
outstanding under the line of credit and term loan on January 1 of each year
until June 30, 2004. All of the Company's assets collateralize these agreements.

The term loan and the line of credit contain various covenants, including a
requirement to maintain a defined ratio of earnings before interest, taxes,
depreciation and amortization ("EBITDA") to debt. Escalon did not achieve the
EBITDA to debt ratio for the fiscal year ended June 30, 2002, resulting in a
technical default under the loan agreements. PNC Bank, N.A. has waived this
requirement of the agreement as of June 30, 2002, and for the period ending July
1, 2003.

On January 21, 1999, the Company's Vascular subsidiary and Radiance Medical
Systems, Inc. ("Radiance") entered into an Assets Sale and Purchase Agreement.
Pursuant to this agreement, Escalon acquired for cash the assets of Radiance's
vascular access business, and also agreed to pay royalties based on future sales
of the products of the vascular access business for a period of five years
following the close of the sale, with a guaranteed minimum royalty of $300,000
per year. On February 21, 2001, the parties amended the agreement to provide an
adjustment in the terms of the payment of the royalties. Pursuant to the
amendments Escalon paid $17,558 in cash to Radiance, delivered a short-term note
in the amount of $64,884 that was satisfied in January 2002, and an additional
note in the amount of $717,558, payable in eleven quarterly installments
commencing April 15, 2002, and issued 50,000 shares of Escalon Common Stock to
Radiance.

The Company believes that cash on hand plus cash available from our line of
credit will be sufficient to satisfy our working capital, capital expenditures
and research and development until the balloon payment is due on June 30, 2004.
We may be required to secure additional debt or equity financing in order to
satisfy the balloon payment, and we cannot assure you that such financing will
be available when required on acceptable terms. Additionally, the Company relies
on the revenues received from Bausch & Lomb. While management does not expect
this revenue to decline rapidly in the foreseeable future, any such decrease
would have a significant impact on our consolidated financial position, results
of operations, cash flows and stock price could be negatively impacted.

The Company's Common Stock is currently listed on the Nasdaq SmallCap
Market. In order to continue to be listed on the Nasdaq SmallCap Market, certain
listing requirements must be met. As of June 30, 2002, Escalon complied with
these requirements. If Escalon's securities were delisted, an investor would
find it more difficult to dispose of them, or obtain accurate quotations as to
the market value of the Company's securities.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported therein. The most
significant of those involve the application of SFAS No. 142, which is discussed
further in Notes 2 and 3.

The financial statements are prepared in conformity with generally accepted
accounting principles, and, as such, include amounts based on informed estimates
and judgments of management. For example, estimates
18

are used in determining valuation allowances for uncollectible receivables,
obsolete inventory, deferred income taxes and purchased intangible assets.
Actual results could differ from those estimates.

The Company used what it believes are reasonable assumptions and where
applicable, established valuation techniques in making its estimates.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

INTEREST RATE RISK

The table below provides information about Escalon's financial instruments,
consisting primarily of debt obligations that are sensitive to changes in
interest rates. For debt obligations, the table represents principal cash flows
and related interest rates by expected maturity dates. Interest rates are based
upon the prime rate at June 30, 2002 plus 1.75% on the term loan and 1.50% on
the line of credit. The Company is party to an interest rate cap agreement
covering the term loan through January 1, 2003. The interest rate cap agreement
is used to reduce the potential impact of increases on the floating-rate term
loan.

EXCHANGE RATE RISK

In fiscal 2002 approximately 20% of Escalon's net revenue was derived from
international sales. The price of all products sold overseas is denominated in
United States dollars and consequently incurs no exchange rate risk.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item 10 is incorporated by reference to
the information under the captions "Management" and "Compliance with Section
16(a) of the Securities Exchange Act of 1934" included in Escalon's proxy
statement for the Company's 2002 Annual Meeting of Stockholders to be filed with
the Securities and Exchange Commission.

19

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 is incorporated by reference to
the information under the caption "Executive Compensation" included in Escalon's
proxy statement for the Company's 2002 Annual Meeting of Stockholders' to be
filed with the Securities and Exchange Commission.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item 12 is incorporated by reference to
the information under the captions "Principal Stockholders" and "Management"
included in Escalon's proxy statement for the Company's 2002 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

PART IV

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

CONSOLIDATED FINANCIAL STATEMENTS

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

CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

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

EXHIBITS

The following is a list of exhibits filed as part of this annual report on
Form 10-K. Where so indicated by footnote, exhibits, which were previously
filed, are incorporated by reference. For exhibits incorporated by reference,
the location of the exhibit in the previous filing is indicated parenthetically,
followed by the footnote reference to the previous filing.

3.1 (a) Restated Articles of Incorporation of Registrant.(10)
(b) Agreement and Plan of Merger dated as of September 28, 2001
between Escalon Pennsylvania, Inc. and Escalon Medical
Corp.(10)
3.2 Bylaws of Registrant.(10)
4.5 (a) Warrant Agreement between Registrant and U.S. Stock Transfer
Corporation.(1)
(b) Amendment to Warrant Agreement between the Registrant and
U.S. Stock Transfer Corporation.(3)
(c) Amendment to Warrant Agreement between the Registrant and
American Stock Transfer Corporation.(4)
4.6 Securities Purchase Agreement, dated as of December 31, 1997
by and among the Company and Combination.(6)
4.7 Registration Rights Agreement, dated as of December 31, 1997
by and among the Company and Combination.(6)
4.8 Warrant to Purchase Common Stock issued December 31, 1997 to
David Stefansky.(6)
4.9 Warrant to Purchase Common Stock issued December 31, 1997 to
Combination.(6)
4.10 Warrant to Purchase Common Stock issued December 31, 1997 to
Richard Rosenblum.(6)
4.11 Warrant to Purchase Common Stock issued December 31, 1997 to
Trautman, Kramer & Company.(6)
10.5 Employment Agreement between the Registrant and Ronald L.
Hueneke dated July 1, 1999.(12)

20

10.6 Employment Agreement between the Registrant and Richard J.
DePiano dated May 12, 1998.(8)
10.7 Non-Exclusive Distributorship Agreement between Registrant
and Scott Medical Products dated October 12, 2000.(12)
10.9 Assets Sale and Purchase Agreement between the Registrant
and Radiance Medical Systems, Inc. dated January 21,
1999.(7)
10.13 Supply Agreement between the Registrant and Bausch & Lomb
Surgical, Inc., dated August 13, 1999.(7)
11.1 Stock Purchase Agreement between the Registrant and the
stockholders of Sonomed, Inc. dated January 14, 2000.(8)
11.2 Employment Agreement between the Registrant and Louis Katz
dated January 14, 2000.(8)
11.3 Registrant's 1999 Equity Incentive Plan and Registrant's
Equity Incentive Plan for Employees of Sonomed, Inc.(9)
11.4 Registrant's Amended and Restated 1999 Equity Incentive
Plan.(9)
21 Subsidiaries.(11)
23.1 Consent of Parente Randolph, LLC, independent auditors.(*)
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 -- Richard J. DePiano(*)
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 -- Harry M. Rimmer(*)

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

* Filed herewith.

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

(2) Filed as an exhibit to the Company's Registration Statement on Form S-8
dated June 13, 1994 (Registration No. 33-80162).

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

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

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

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

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

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

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

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

(11) Filed as an exhibit to the Company's Form 10-K for the year ended June 30,
2000.

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

21

SIGNATURES

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

ESCALON MEDICAL CORP.
(Registrant)

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

Dated: September 24, 2002

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

By: /s/ RICHARD J. DEPIANO Chairman and Chief Executive September 24, 2002
------------------------------------------ Officer (Principal Executive
Richard J. DePiano Officer) and Director

By: /s/ HARRY M. RIMMER Senior September 24, 2002
------------------------------------------ Vice-President -- Finance
Harry M. Rimmer (Principal Financial Officer)

By: /s/ JAY L. FEDERMAN, MD Director September 24, 2002
------------------------------------------
Jay L. Federman, MD

By: /s/ FRED G. CHOATE Director September 24, 2002
------------------------------------------
Fred G. Choate

By: /s/ JEFFREY F. O'DONNELL Director September 24, 2002
------------------------------------------
Jeffrey F. O'Donnell

By: /s/ WILLIAM KWAN Director September 24, 2002
------------------------------------------
William Kwan

By: /s/ ANTHONY COPPOLA Director September 24, 2002
------------------------------------------
Anthony Coppola

22

CERTIFICATION

I Richard J. DePiano, certify that:

1. I have reviewed this Annual Report on Form 10-K of Escalon Medical
Corp.

2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this Annual Report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this Annual Report.

/s/ RICHARD J. DEPIANO
--------------------------------------
Richard J. DePiano
Chairman and Chief Executive Officer
(Principal Executive Officer)

Date: September 24, 2002

CERTIFICATION

I, Harry M. Rimmer, certify that:

1. I have reviewed this Annual Report on Form 10-K of Escalon Medical
Corp.

2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this Annual Report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this Annual Report.

/s/ HARRY M. RIMMER
--------------------------------------
Harry M. Rimmer
Senior Vice President -- Finance
(Principal Financial and Accounting
Officer)

Date: September 24, 2002

23

ESCALON MEDICAL CORP.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Escalon Medical Corp.:

We have audited the accompanying consolidated balance sheets of Escalon
Medical Corp. and subsidiaries (the "Company") at June 30, 2002 and 2001, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended June 30, 2002. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Escalon
Medical Corp. and subsidiaries at June 30, 2002 and 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2002 in conformity with accounting principles generally accepted
in the United States of America.

As discussed in Note 3 to the Consolidated Financial Statements, the
Company adopted Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, effective July 2001.

PARENTE RANDOLPH, LLC

Philadelphia, Pennsylvania
August 16, 2002

F-2

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

ESCALON MEDICAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements
F-3

ESCALON MEDICAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements
F-4

ESCALON MEDICAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000

See notes to consolidated financial statements
F-5

ESCALON MEDICAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

F-6

ESCALON MEDICAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)

See notes to consolidated financial statements
F-7

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) ORGANIZATION AND DESCRIPTION OF BUSINESS

Escalon Medical Corp. ("Escalon") was incorporated in California in 1987 as
Intelligent Surgical Lasers, Inc. Escalon's present name was adopted in August
1996. Escalon reincorporated in Delaware in November 1999, and then
reincorporated in Pennsylvania in November 2001. Within this document, the
"Company" collectively shall mean Escalon and its wholly owned subsidiaries:
Sonomed, Inc. ("Sonomed"), Escalon Vascular Access, Inc. ("Vascular"), Escalon
Digital Vision, Inc. ("Digital") and Escalon Pharmaceutical, Inc.
("Pharmaceutical"). The Company operates in the healthcare market, specializing
in the development, manufacture, marketing and distribution of ophthalmic
medical devices, pharmaceuticals and vascular access devices.

In February 1996, the Company acquired substantially all of the assets and
certain liabilities of Escalon Ophthalmics, Inc. ("EOI"), a developer and
distributor of ophthalmic surgical products. Prior to this acquisition, the
Company devoted substantially all of its resources to the research and
development of ultrafast laser systems designed for the treatment of ophthalmic
disorders. As a result of the EOI acquisition, Escalon changed its market focus
and is no longer developing laser technology. In October 1997, the Company
licensed its intellectual laser properties to a privately held company in return
for an equity interest and future royalties on product sales. The privately held
company had responsibility for funding and developing the laser technology
through to commercialization. The privately held company began selling products
related to the laser technology during fiscal 2002.

To further diversify its product portfolio, in January 1999, the Company's
Vascular subsidiary acquired the vascular access product line from Radiance
Medical Systems, Inc. ("Radiance"). Vascular's products use Doppler technology
to aid medical personnel in locating difficult arteries and veins. Currently,
this product line is concentrated in the cardiac catheterization market;
however, the Company began marketing the products in the area of oncology during
fiscal 2002. In January 2000, the Company purchased Sonomed, a privately held
manufacturer of ophthalmic ultrasound diagnostic equipment. In April 2000,
Digital formed a joint venture, Escalon Medical Imaging, LLC ("Imaging") with
MegaVision, Inc. ("MegaVision"), a privately held company, to develop and market
a digital camera back for ophthalmic photography. The Company terminated its
joint venture with MegaVision and commenced operations within its Digital
business unit on January 1, 2002.

(2) SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

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

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

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

F-8

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts for cash and cash equivalents, accounts receivable,
line of credit, accounts payable and accrued liabilities approximate their fair
value because of their short-term maturity. Due from joint venture is valued at
cost, which approximates fair value. The carrying amounts of long-term debt
approximate fair value since the Company's interest rates approximate current
interest rates.

INVENTORIES

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

ACCOUNTS RECEIVABLE

The Company performs ongoing credit evaluations of its' customers financial
condition and does not require collateral for accounts receivable arising in the
normal course of business. The Company maintains allowances for potential credit
losses which, when realized, have been within the range of management's
expectations. Allowance for doubtful accounts was $216,836 and $67,148 at June
30, 2002 and 2001, respectively.

FURNITURE AND EQUIPMENT

Furniture and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the economic useful life of the related assets,
which are estimated to be eighteen months to ten years. Depreciation expense for
the years ended June 30, 2002, 2001 and 2000 was $163,807, $139,663 and
$103,925, respectively.

Furniture and equipment consist of the following at:

LONG-LIVED ASSETS

The Company follows Statement of Financial Accounting Standards No. 121
("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," which

F-9

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

requires impairment losses to be recorded on long-lived assets when indications
of impairment are present and undiscounted cash flows estimated to be generated
by those assets are less than the asset's carrying amount. SFAS No. 121 also
requires that long-lived assets and certain identifiable intangibles held for
sale be reported at the lower of carrying amount or fair value less cost to
sell. The Company continually evaluates whether events and circumstances have
occurred that indicate that the remaining useful life of long-lived assets may
warrant revision or that the remaining balance may not be recoverable.

INTANGIBLE ASSETS

The Company follows Statement of Financial Accounting Standards No. 142
("SFAS No. 142"), "Goodwill and Other Intangible Assets," which discontinues the
amortization of goodwill and identifiable intangible assets that have indefinite
lives.

REVENUE RECOGNITION

The Company recognizes revenue from the sales of its products at the time
of shipment when title and risk of loss transfer. With respect to additional
consideration related to the sale of the Company's Silicone Oil product line
(Note 12), revenue is recognized after notification from the customer of sales
associated with the product.

STOCK-BASED COMPENSATION

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

RESEARCH AND DEVELOPMENT

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

DEFERRED INTEREST RATE CAP FEES

Premiums paid for a purchased interest rate cap arrangement is amortized
using the effective interest method over the term of the cap. Unamortized
premiums are included as an offset to the balance of the current portion of
long-term debt. Amounts receivable under the cap agreement are recorded as a
reduction of interest expense.

ADVERTISING COSTS

Advertising costs are charged to operations as incurred. Advertising
expense for the years ended June 30, 2002, 2001 and 2000 was $37,959, $71,654
and $47,437, respectively.

F-10

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NET INCOME (LOSS) PER SHARE

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

INCOME TAXES

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

JOINT VENTURE

In April 2000, the Company through its wholly-owned subsidiary, Digital,
entered into a joint venture with MegaVision, Inc., with each entity having a 50
percent interest. Amounts due from this joint venture amounted to $-0- and
$596,758 at June 30, 2002 and 2001, respectively. Income (loss) from the joint
venture was $8,848 and ($19,164) for the years ended June 30, 2002 and 2001,
respectively. The Company terminated its joint venture with MegaVision and
commenced operations within its Digital business unit on January 1, 2002.

RECLASSIFICATIONS

Certain amounts in the 2001 and 2000 financial statements have been
reclassified to conform to the 2002 presentation.

RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"),
"Accounting for the Impairment or Disposal of Long-Lived Assets." It supercedes
SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-Lived Assets to be Disposed of." SFAS No. 144 retains the previously
existing accounting requirements related to the recognition and measurement of
the impairment of long-lived assets to be held and used, while

F-11

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

expanding the measurement requirements of long-lived assets to be disposed of by
sale to include discontinued operations. It also expands the previously existing
reporting requirements for discontinued operations to include a component of an
entity that either has been disposed of or is classified as held for sale.

SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. Management does not expect the adoption of SFAS No. 144 to have a material
impact on financial position or results of operations.

In January 2002, the SEC issued an interpretive release on disclosure
related to liquidity and capital resources, including off-balance sheet
arrangements. The Company does not have material off-balance sheet arrangements
or related party transactions and is not aware of factors that are reasonably
likely to adversely affect liquidity trends, other than those risk factors
presented in other Company filings.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the
use of the purchase method of accounting for business combinations initiated
after June 30, 2001. SFAS No. 141 also requires that certain intangible assets
in a business combination be recognized as assets separately from goodwill and
existing intangible assets and goodwill be evaluated for these new separation
requirements upon adoption of SFAS No. 142.

(3) INTANGIBLE ASSETS

ACQUIRED LICENSE AND DISTRIBUTION RIGHTS

In connection with the acquisition of EOI assets (see Company Overview in
Part I of this Form 10-K), a portion of the purchase price was allocated to
certain product license and distribution agreements. This cost allocation was
based on an independent evaluation, with such costs being amortized over an
eight-year period using the straight-line method. The values of these assets are
reevaluated periodically to determine if the estimated lives continue to be
appropriate. The sale of the Silicone Oil product line caused the Company to
write off $483,000 in cost and $214,000 in accumulated amortization in fiscal
2000.

Accumulated amortization of license and distribution rights was $205,379
and $164,754 at June 30, 2002 and 2001, respectively. Amortization expense for
the years ended June 30, 2002, 2001 and 2000 was $40,625, $38,256 and $42,558,
respectively.

PATENTS

It is the Company's practice to seek patent protection on processes and
products in various countries. Patent application costs are capitalized and
amortized over their estimated useful lives, not exceeding seventeen years, on a
straight-line basis from the date the related patents are issued. Costs
associated with patents no longer being pursued are expensed. In fiscal 2000,
the Company discontinued its Ocufit project in the Medical/Trek business unit
resulting in the write-off of $353,000 in cost and $34,000 in accumulated
amortization. Accumulated patent amortization was $100,675 and $89,943 at June
30, 2002 and 2001, respectively. Amortization expense for the years ended 2002,
2001 and 2000 was $10,733, $10,733 and 15,062, respectively.

F-12

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The aggregate amortization expense for each of the next five years for
acquired license and distribution rights and patents are as follows:

GOODWILL, TRADEMARKS AND TRADE NAMES

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

In accordance with SFAS No. 142, effective July 2001, Escalon discontinued
the amortization of goodwill and identifiable intangible assets that have
indefinite lives. Intangible assets that have finite lives will continue to be
amortized over their useful lives. Goodwill will be assessed annually for
impairment. The standard required this impairment test to be completed by
December 31, 2001. In November 2001, the Company engaged an independent
professional appraiser to assist management in evaluating whether the intangible
assets were impaired and to review the allocation of intangible assets related
to the purchase of Sonomed as of the January 2000 acquisition date, when the
purchase price was allocated based on information available at that time. The
independent appraisal concluded in December 2001 that the intangible assets
acquired with the purchase of Sonomed should be allocated as $10,547,488 to
goodwill and $665,000 to trademarks and trade names. In light of the independent
appraisal, management has decided that the original classification was
incorrect, and therefore should be restated to that of the independent
appraisal. The result of this correction is solely a reclassification of the
intangible assets among customer lists, trademarks and trade names and goodwill.
The total reported value of the intangible assets has not changed. Therefore,
this correction had no effect on reported earnings, net worth or cash flows for
any prior fiscal years.

The independent professional appraiser engaged by the Company in November
2001 evaluated whether the goodwill and other non-amortizable intangible assets
in the Sonomed and Vascular business units were impaired. The appraiser
concluded that the carrying value of goodwill and other intangible assets did
not exceed their fair values and therefore were not impaired. The Company
evaluated the carrying value of goodwill as compared to its fair value in the
Medical/Trek business unit and concluded that its carrying value did not exceed
its fair value and therefore was not impaired. The Company made this conclusion
after evaluating the discounted cash flow of the Medical/Trek business unit. In
accordance with SFAS 142, the Company's intangible assets will be assessed on an
annual basis. The professional appraisal also concluded that trademarks and
trade names had an indefinite life.

Goodwill as of June 30, 2002, as allocated by reportable segment is as
follows:

F-13

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Accumulated amortization of goodwill at June 30, 2002 and 2001 was
$1,378,292 and $1,378,292, respectively. Amortization of goodwill for the years
ended June 30, 2002, 2001 and 2000 was $-0-, $813,347 and $433,799,
respectively. Accumulated amortization of trademarks and trade names at June 30,
2002 and 2001 was $63,194 and $63,194, respectively. Amortization of trademarks
and trade names for the years ended June 30, 2002, 2001 and 2000 was $-0-,
$43,332 and $19,862, respectively.

The adjustment of previously reported net income and earnings per share
related to SFAS 142 primarily represents previous amortization of goodwill and
trademarks and trade names. The impact on net income, basic net earnings per
share and diluted net earnings per share for each of the last three fiscal years
is disclosed below:

(4) LONG-TERM RECEIVABLE

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

(5) PNC LINE OF CREDIT AND LONG-TERM DEBT

On January 14, 2000, Escalon replaced its $2,000,000 credit facility
obtained in January 1999. PNC Bank, N.A. granted a new $12,000,000 credit
facility to assist with the Sonomed acquisition. This included a $7,000,000
five-year term loan, a $5,000,000 line of credit and the release of the
requirement of the company to maintain a $1,000,000 certificate of deposit with
PNC Bank, N.A. The interest rate on the term loan was based on prime plus 1.0%
and the line of credit rate was based on prime plus 0.75%. Escalon paid $100,000
in finance fees that offset the outstanding balance of the term loan and are
being amortized over the term of the loans using the effective interest method.
An interest rate cap agreement is used to reduce the potential impact of
increases in interest rates on the floating-rate term loan. At June 30, 2002,
Escalon was party to an interest rate cap agreement covering the term loan
through January 1, 2003. The agreement entitles the Company to receive from PNC
Bank, N.A., the counter-party to the agreement, on a monthly basis, the amounts,
if any, by which the Company's interest payments exceed 10.0% for the period
July 1, 2002 through January 1, 2003. Escalon paid $122,800 in interest rate cap
protection fees that also offset the outstanding balance of the loans. These
fees are being amortized over the term of the loans using the effective interest
method.

F-14

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On November 28, 2001, Escalon amended its loan agreement with PNC Bank,
N.A. The amendment included converting the existing balances on the term loan
and the line of credit into a $7,900,000 term loan and $2,000,000 available line
of credit. The aggregate balance of debt outstanding did not change as a result
of this refinancing. As of June 30, 2002, the amount outstanding against this
line of credit is $1,250,000. Principal payments due on the term loan have been
amended such that the balance is due within the five-year term of the original
agreement including a $2,000,000 balloon payment due on June 30, 2004. Interest
rates on the term loan and line of credit were increased to prime plus 1.75% and
prime plus 1.50, respectively. At June 30, 2002, the interest rates applicable
to the term loan and line of credit were 6.50% and 6.25%, respectively. PNC
Bank, N.A.'s prime rate as of June 30, 2002 was 4.75%. In connection with the
amended agreement, Escalon issued to PNC Bank, N.A. warrants to purchase 60,000
shares of the Company's Common Stock at an exercise price of $3.66 per share.
The warrants were valued at $4,800 using the Black-Sholes option pricing method
with the following assumptions: risk-free interest rate of 5.0%, expected
volatility of .18, expected warrant life of 42 months from vesting and expected
dividend rate of 0.0%. The Company also paid a $50,000 facility fee upon
execution of the loan agreement. Commencing March 1, 2002, the Company began
paying a 1.0% facility payable quarterly based on the aggregate principle amount
outstanding under the line of credit and term loan on January 1 of each year
until June 30, 2004. All of the Company's assets collateralize these agreements.

The term loan and the line of credit contain various covenants, including a
requirement to maintain a defined ratio of historical earnings before interest,
taxes, depreciation and amortization ("EBITDA") to future debt repayments. Due
to the graduated nature of the debt repayment, Escalon did not achieve the
EBITDA to debt ratio, resulting in a technical default under the loan
agreements. PNC Bank, N.A. has waived this requirement of the agreement as of
June 30, 2002, and for the twelve-month period ending July 1, 2003.

On January 21, 1999, the Company's Vascular subsidiary and Radiance Medical
Systems, Inc. ("Radiance") entered into an Assets Sale and Purchase Agreement.
Pursuant to this agreement, Escalon acquired for cash the assets of Radiance's
vascular access business, and also agreed to pay royalties based on future sales
of the products of the vascular access business for a period of five years
following the close of the sale, with a guaranteed minimum royalty of $300,000
per year. On February 21, 2001, the parties amended the agreement to provide an
adjustment in the terms of the payment of the royalties. Pursuant to the
amendments Escalon paid $17,558 in cash to Radiance, delivered a short-term note
in the amount of $64,884 that was satisfied in January 2002, and an additional
note in the amount of $717,558, payable in eleven quarterly installments
commencing April 15, 2002, and has issued 50,000 shares of Escalon Common Stock
to Radiance.

Following are maturities of long-term debt for each of the next five years:

F-15

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) CAPITAL STOCK TRANSACTIONS

CAPITALIZATION

In November 1999, Escalon Medical Corp., a California corporation ("Escalon
California"), merged with and into one of its wholly owned subsidiaries, Escalon
Medical Corp. (Formerly Escalon Delaware, Inc.), a Delaware corporation, for the
purpose of reincorporating Escalon California in the state of Delaware. Pursuant
to the merger, the separate corporate existence of Escalon California ceased and
the Company is the surviving corporation. In November 2001, Escalon Medical
Corp., a Delaware corporation ("Escalon Delaware"), merged with and into one of
its wholly owned subsidiaries, Escalon Medical Corp. (Formerly Escalon
Pennsylvania, Inc.), a Pennsylvania corporation, for the purpose of
reincorporating Escalon Delaware in the state of Pennsylvania. Pursuant to the
merger, the separate corporate existence of Escalon Delaware ceased and the
Company is the surviving corporation.

STOCK OPTION PLANS

Escalon has in effect five employee stock option plans, which provide for
incentive and non-qualified stock options to purchase a total of 1,373,268
shares of the Company's Common Stock. Under the terms of the plans, options may
not be granted for less than the fair market value of the Common Stock at the
date of the grant. Vesting generally occurs ratably over five years and is
exercisable over a period no longer than ten years after the grant date. As of
June 30, 2002, options to purchase 1,153,458 shares of the Company's Common
Stock were granted, 976,765 were exercisable and 178,497 were reserved for
future grants.

Financial Accounting Standards Board Statement No. 123 ("SFAS No. 123")
requires pro forma information regarding net income and earnings per share as if
the Company has accounted for its employee stock options granted after December
31, 1994 under the fair value method of SFAS No. 123. The fair value of these
equity awards was estimated at the date of grant using the Black-Sholes option
pricing method. For all years presented, the expected option life of one year
from vesting and an expected dividend rate of 0.0 percent were used. The
weighted average assumptions used in fiscal 2000 were a risk-free interest rate
of 5.94 percent and an expected volatility of 1.502.

For the purposes of pro forma disclosures, the estimated fair value of the
equity awards is amortized to expense over the options' vesting period. The pro
forma net loss for fiscal 2000 would have been $1,022,768, and the basic and
diluted earnings per share of Common Stock would be ($0.32).

The following is a summary of Escalon's stock option activity and related
information for the fiscal years ended June 30, 2002, 2001 and 2000:

F-16

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Options granted during fiscal 2002 have a weighted average exercise price
of $2.674 and a remaining contractual life of 9.39 years. Those issued in fiscal
2001 have a weighted average exercise price of $2.046 and a remaining
contractual life of 8.29 years. Fiscal 2000 option grants have a weighted
average exercise price of $2.510 and a remaining contractual life of 7.49 years.
Options were exercised during fiscal 2002 between $1.5625 and $2.3750 per share.

(7) INCOME TAXES

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

At June 30, 2002, Escalon had federal income tax and state income tax net
operating loss carryforwards of approximately $25,762,000 and $2,717,000,
respectively. The difference between federal and state carryforward amounts is
primarily attributable to the Company's discontinuing its operations in
California. Federal and state operating loss carryforwards and tax credits will
expire at various dates between 2003 and 2013.

The timing and manner in which the Company will utilize net operating loss
carryforwards to reduce federal taxable income in any year, or in total, will be
limited by provisions of the Internal Revenue Code, Section 382, and related
sections, which address changes in stock ownership. The annual limitation is
$2,763,638, of which $21,069,179 is cumulatively available to reduce 2002
federal taxable income. Such limitations may have an impact on the ultimate
realization of these federal income tax carryforwards. The increase in the
deferred tax asset arising from net operating loss carryforwards and the related
valuation allowance from 2002 to 2001 is primarily attributable to the impact of
Section 382.

For the years ended June 30, 2002 and 2001, Escalon recorded valuation
allowances of $9,424,684 and $9,826,000, respectively, based on uncertainty with
respect to the ultimate realization of the net deferred tax assets. The decrease
is a result of current taxable income recognized for the fiscal year ended June
30, 2002.

In fiscal 2002 and 2001, no provision was required because of net operating
loss carryforwards. In fiscal 2000, Escalon recognized a tax benefit of
approximately $300,000, which was offset by a related valuation allowance.

Approximately $8,200,000 of the federal net operating loss carryforward at
June 30, 2002 represents amounts that were transferred to the Company as a
result of the acquisition of EOI. Use of this transferred net operating loss is
also limited under Section 382. Any tax benefit realized from such use would
first reduce acquired goodwill. Although the Company believes that the
acquisition of EOI qualified as a tax-free reorganization, there is no certainty
that the Internal Revenue Service will agree. If the acquisition were not to

F-17

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

qualify as a tax-free reorganization, the net operating loss carryforward of EOI
would be treated as a purchase of assets and the tax basis of the acquired
assets would be increased.

(8) OPERATING LEASES

Escalon leases its manufacturing, research and corporate office facilities
and certain equipment under non-cancelable operating lease arrangements. The
future minimum rentals to be paid under these leasing arrangements as of June
30, 2002 are as follows:

Rent expense charged to operations during the years ended June 30, 2002,
2001 and 2000 was $338,540, $294,050 and $210,118, respectively. Through June
30, 2000, Escalon leased its Pennsylvania facility from an entity that is 100
percent owned by the Chief Executive Officer and Chairman of the Board of the
Company. The lease was classified as an operating lease. In August 2000, the
facility was sold to a party unrelated to Escalon. Rent expense was
approximately $24,000 in fiscal 2000.

(9) RETIREMENT PLAN

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

On January 14, 2000, Escalon acquired Sonomed. Sonomed adopted a 401(K)
profit sharing plan, which became effective on January 14, 1993. This plan has
continued subsequent to the acquisition and is available only to Sonomed
employees. Under the terms of the plan, which covers all employees who qualify
under certain age and length of service requirements, the Company makes
non-elective contributions on behalf of each participant eligible to share in
matching contributions for the plan year.

The Company's matching contribution is equal to 50 percent of such
participant's voluntary employee contributions, up to a maximum of 10 percent of
each employee's compensation. Escalon's contribution for the fiscal years ended
June 30, 2002, 2001 and 2000 was $40,906, $25,615 and $10,008, respectively.

(10) LICENSE OF INTELLECTUAL LASER PROPERTIES

In October 1997, Escalon licensed its intellectual laser properties to a
privately held company in exchange for an initial 25 percent equity interest in
the privately held company. As a result of raising money from outside investors,
as of June 30, 2002, the Company's interest has been diluted to 2.48 percent.
Escalon is entitled to a 2.5 percent royalty on future product sales that are
based on the Company's patented technology; a 1.5 percent royalty on product
sales not dependent on the Company's technology and an annual license fee of
$10,000 in 2000 and $15,000 per year thereafter during the term of the license.
The license fee may be credited in full against all royalties otherwise due to
be paid to the Company. Also contributed to the venture were the Company's laser
inventory, equipment and related furniture having a net book value of $0. In
December 1999, the privately held company received its first 510(K) approval
from the FDA. The privately held company began selling its products in calendar
2002.

F-18

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(11) ACQUISITION OF RADIANCE'S VASCULAR BUSINESS UNIT

On January 21, 1999, Escalon acquired substantially all of the assets used
exclusively in Radiance's Vascular Access business unit, which uses Doppler
technology to aid medical personnel in locating difficult arteries and veins.
This business combination was accounted for as a purchase. The results of
operations for this business unit are included in the accompanying financial
statements since the date of acquisition. The total cost of the acquisition was
$2,104,442, which exceeded the fair value of the net assets of Radiance by
$1,086,110. The excess is classified as goodwill and, in accordance with SFAS
No. 142, will be assessed annually for impairment.

At the time of acquisition, the Company and Radiance entered into an Assets
Sale and Purchase Agreement. Pursuant to this Assets Sale and Purchase
Agreement, the Company agreed to pay royalties based on future sales of products
of the Vascular business unit for a period of five years following the close of
this sale, with a guaranteed minimum royalty of $300,000 per year. In lieu of
the Company paying guaranteed minimum royalties over the remaining three years,
the Company has renegotiated with Radiance a lump-sum amount of $717,558 plus
interest to be paid over three years, as set forth in the Amendment and
Supplement to Asset Sale and Purchase Agreement and Release dated February 28,
2001. In connection therewith, the Company delivered to Radiance a term note in
the amount of $717,558, with interest at the prime rate as published in the Wall
Street Journal (New York Edition) plus one percent, with interest only payable
quarterly beginning on May 31, 2001 through January 15, 2002 and principle and
interest payable in eleven quarterly installments beginning on April 15, 2002.
In addition, the Amendment also accounts for $182,442 of accrued royalties for
the period ended January 21, 2001. Pursuant to the Amendment, the Company paid
$17,558 to Radiance, delivered a Short-Term Note in the amount of $64,884, with
interest at the prime rate as published in The Wall Street Journal (New York
Edition) plus one percent, with interest only payable quarterly beginning on May
31, 2001 and principle and interest payable in full on January 15, 2002, and
issued to Radiance 50,000 shares of the Company's Common Stock valued at
$100,000. The Company used its best efforts to register the shares of the
Company's Common Stock issued to Radiance in the Amendment on Form S-3 under the
Securities Act of 1933 in a manner that, upon being declared effective,
constituted a "shelf" registration for the purposes of Rule 415 under the
Securities Act of 1933.

(12) SALE OF ADATOSIL(R) PRODUCT LINE

In the first quarter of fiscal 2000, Escalon received $2,117,000 from the
sale of its license and distribution rights for the Silicone Oil product line.
This sale resulted in a $1,864,000 gain after writing off the remaining net book
value of license and distribution rights associated with that product line. The
Company will also continue to receive additional consideration based on future
sales of Silicone Oil through August 2005.

(13) ACQUISITION OF SONOMED, INC.

On January 14, 2000, Escalon purchased all of the outstanding capital stock
of Sonomed, a privately held manufacturer and marketer of ophthalmic ultrasound
diagnostic devices. This business combination was accounted for as a purchase.
The total cost of the acquisition (net of cash acquired) was $12,212,540,
$11,212,488 was allocated to proprietary rights and intangible assets, including
$10,547,488 to goodwill and $665,000 to trademarks and trade names. In
accordance with FAS 142, these intangible assets will be assessed annually for
impairment.

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

F-19

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

PRO FORMA RESULTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
(UNAUDITED)

Revenues.................................................... $10,553,616
Net income.................................................. $ 136,164
Basic net income per share.................................. $ 0.042
Diluted net income per share................................ $ 0.042
Weighted average shares -- basic............................ 3,242,184
Weighted average shares -- diluted.......................... 3,254,250

(14) SEGMENTAL REPORTING

During the years ended June 30, 2002 and 2001, Escalon's operations were
classified into four principle reportable segments that provide different
products or services. Separate management of each segment is required because
each business unit is subject to different marketing, production and technology
strategies.

F-20

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SEGMENTAL STATEMENTS OF OPERATION -- FISCAL YEARS ENDED JUNE 30,

The Company operates in the healthcare market, specializing in the
development, manufacture marketing and distribution of ophthalmic medical
devices, pharmaceuticals and vascular access devices. The business segments
reported above are the segments for which separate financial information is
available and for which operating results are evaluated regularly by executive
management in deciding how to allocate resources and assessing performance. The
accounting policies of the business segments are the same as those described in
the summary of significant accounting policies. For the purpose of this
illustration corporate expenses, which principally consist of executive
management and administrative support functions, are allocated across the
business segments based primarily on each segment's net revenue. These expenses
are otherwise included in the Medical/Trek business unit.

During the fiscal years ended June 30, 2002, Sonomed derived its revenues
from the sale of A-scans, B-scans and pachymeters. These products are used for
diagnostic or biometric applications in ophthalmology. Vascular derived its
revenues from the sale of PD Access(TM) and SmartNeedle(TM) monitors, needles
and catheter products. These products are used by medical personnel to assist in
gaining access to arteries and veins in difficult cases. Medical/Trek derived
its revenues from the sale of ISPAN(TM) gas products, various disposable
ophthalmic surgical products, revenues derived from Bausch & Lomb's sales of
Silicone Oil.

F-21

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Commencing January 1, 2002, Digital derived its revenues from the sales of the
CFA digital imaging system and related products.

During the fiscal years ended June 30, 2002 and 2001, Escalon had one
entity, Bausch & Lomb, from which greater than 10 percent of consolidated net
revenues were derived. Revenues from Bausch & Lomb were $2,186,000, or 18.11
percent of consolidated net revenues during the fiscal year ended June 30, 2002,
and were $2,675,000, or 22.52 percent of consolidated net revenues during the
fiscal year ended June 30, 2001. This revenue is recorded in the Medical/Trek
business unit. Of the external revenues reported above, $2,240,000, $169,000,
$43,000, and $-0- were derived internationally in Sonomed, Vascular,
Medical/Trek and Digital, respectively, during the fiscal year ended June 30,
2002; and $2,068,000, $170,000, $74,000, and $-0- were derived internationally
in Sonomed, Vascular, Medical/Trek and Digital, respectively, during the fiscal
year ended June 30, 2001.

(15) DERIVATIVE FINANCIAL INSTRUMENT

The Company entered into an interest rate collar transaction with a
financial institution, which is considered a derivative financial instrument, to
hedge its variable interest rate on its term loan (Note 4). The agreement is
used to reduce the potential impact of increases in interest rates on the
Company's floating-rate debt. The Company does not utilize interest rate swap
agreements or other financial instruments for trading or other speculative
purposes. The notional amount of the interest rate cap agreement is $3,000,000
and management believes that losses related to credit risk are remote.

The fair value of the derivative financial instrument, which is the amount
the Company would receive or pay to terminate the agreement is not significant.
No carrying amount was recorded in the accompanying balance sheet and no gains
or losses were recognized in income during fiscal 2002.

(16) LITIGATION

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

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

In an effort to curtail its legal expenses related to this litigation,
while continuing to deny any wrongdoing, the Company reached an agreement to
settle this action on its behalf and on the behalf of its former and present
officers and directors, for $500,000. The court approved the settlement after a
fairness hearing on September 11, 2002. The Company's directors and officers
insurance carrier has agreed to fund a significant portion of the settlement
amount. Both the Company and the insurance carrier have deposited such funds in
an escrow account.

On November 8, 2001, Escalon Digital Vision, Inc., a wholly owned
subsidiary of the Company, initiated an action against MegaVision, Inc., Ken
Boydston, Mark Maio and Ophthalmic Imaging Services, Inc. in the
F-22

ESCALON MEDICAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

United States District Court for the Eastern District Court for the Eastern
District of Pennsylvania seeking damages and equitable relief for disputes
arising between the parties and arising from the operations of Escalon Medical
Imaging, LLC. Escalon Medical Imaging, LLC is a joint venture between Escalon
Digital Vision, Inc. and MegaVision, Inc. The action was docketed as Escalon
Medical Imaging, LLC and Escalon Digital Vision, Inc. v. MegaVision, Inc., Ken
Boydston, Ophthalmic Imaging Systems and Mark Maio, Civil Action No.: 01-CV-5669
("Lawsuit"). Without admitting liability, fault or wrongdoing and to provide an
amicable resolution to the dispute, Escalon Digital Vision, Inc., Escalon
Medical Imaging, LLC, MegaVision, Inc., Ken Boydston and Mark Maio have executed
agreements to settle the Lawsuit. As part of the settlement Digital is
conducting all operations concerning manufacture, marketing, distribution and
support of the CFA camera system. Without admitting liability, fault, or
wrongdoing and in order to avoid the time and expense of the Lawsuit, Digital,
Escalon Medical Imaging, LLC and Mark Maio executed settlement agreement and
mutual release to settle the Lawsuit. The settlements did not have a material
financial impact on the Company. The Company received $363,536 net assets,
largely in the form of accounts receivable, inventory and fixed assets, in lieu
of cash, to reduce its balance due of $432,692 from Escalon Medical Imaging, LLC
as a condition of the settlement. The remaining balance due of $23,434 was
charged as a loss from termination of joint venture.

(17) REVENUE, NET

Revenues, net include quarterly payments earned in connection with the sale
of the Adatosil(R) 5000 Silicone Oil ("Silicone Oil") product line. This revenue
totaled $1,754,000 for fiscal 2002 and $2,254,000 for the period beginning on
the commencement date of August 13, 2000 through June 30, 2001. The Company is
entitled to receive additional consideration, in varying amounts, through fiscal
2005. Included in accounts receivable as of June 30, 2002 and 2001 was $457,000
and $726,000, respectively.

F-23