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

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

FORM 10-Q

|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003.

OR

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

COMMISSION FILE NUMBER 0-20127

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

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

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

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)

Indicate by check mark whether the Registrant (1) has filed all reports
required 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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES | | NO |X|

Indicate the number of shares of outstanding stock of each of the issuer's
classes of Common Stock, as of the latest practicable date.

Date: MAY 15, 2003 Shares of Common Stock, $0.001 par value: 3,355,851

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ESCALON MEDICAL CORP.
FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS



Page
----


PART I FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements 3

Condensed Consolidated Balance Sheets as of March 31,
2003 (Unaudited) and June 30, 2002 3

Condensed Consolidated Statements of Operations for the
three and nine month periods ended March 31, 2003 and
2002 (Unaudited) 4

Condensed Consolidated Statements of Cash Flows for the
nine month periods ended March 31, 2003 and 2002
(Unaudited) 5

Notes to Condensed Consolidated Financial Statements
(Unaudited) 6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17

Item 3. Quantitative and Qualitative Disclosures about Market
Risk 28

Item 4. Controls and Procedures 28

PART II OTHER INFORMATION

Item 1. Legal Proceedings 29

Item 6. Exhibits and Reports on Form 8-K 29

Signatures 29





2


ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS



March 31, June 30,
2003 2002
------------ ------------
(Unaudited) (Audited)

ASSETS
Current assets:
Cash and cash equivalents $ 132,634 $ 220,826
Accounts receivable, net 2,343,868 2,093,877
Inventory, net 1,796,552 1,572,067
Other current assets 369,628 400,820
------------ ------------
Total current assets 4,642,682 4,287,590
------------ ------------
Long-term note receivable 150,000 150,000
Furniture and equipment, net 551,404 626,377
Goodwill 10,591,795 10,591,795
Trademarks and trade names, net 616,906 601,806
License and distribution rights, net 18,769 246,988
Patents, net 185,492 193,541
Other assets 17,929 214,344
------------ ------------
Total assets $ 16,774,976 $ 16,912,441
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 1,375,000 $ 1,250,000
Current portion of long-term debt 1,452,755 2,085,963
Accounts payable 507,686 531,665
Accrued compensation 437,186 498,954
Other current liabilities 236,241 161,115
------------ ------------
Total current liabilities 4,008,868 4,527,697
Long-term debt, net of current portion 4,495,694 5,191,393
------------ ------------
Total liabilities 8,504,562 9,719,090
Shareholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized; no shares issued -- --
Common stock, $0.001 par value; 35,000,000 shares authorized; 3,355,851 and
3,345,851 shares issued and outstanding at March 31, 2003 and June 30, 2002,
respectively 3,361 3,346
Additional paid-in capital 46,243,795 46,228,710
Accumulated deficit (37,976,742) (39,038,705)
------------ ------------
Total shareholders' equity 8,270,415 7,193,351
------------ ------------
Total liabilities and shareholders' equity $ 16,774,976 $ 16,912,441
============ ============


See notes to condensed consolidated financial statements


3


ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)



Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
----------- ----------- ----------- -----------

Product revenue $ 2,776,415 $ 2,836,512 $ 8,039,301 $ 7,721,016
Other revenue 610,477 429,576 1,623,107 1,292,508
----------- ----------- ----------- -----------
Revenues, net 3,386,892 3,266,088 9,662,408 9,013,524
----------- ----------- ----------- -----------

Costs and expenses:
Cost of goods sold 1,178,377 1,298,521 3,536,340 3,519,450
Research and development 204,283 144,474 578,337 399,743
Marketing, general and administrative 1,220,007 1,310,156 3,786,148 3,750,997
Write-down of Povidone Iodine license and
distribution rights 195,950 -- 195,950 --
----------- ----------- ----------- -----------
Total costs and expenses 2,798,617 2,753,151 8,096,775 7,670,190
----------- ----------- ----------- -----------

Income from operations 588,275 512,937 1,565,633 1,343,334
----------- ----------- ----------- -----------

Other income and expenses:
Equity in income of unconsolidated joint venture (3,518) -- -- 8,848
Interest income 609 450 2,087 1,805
Interest expense (133,750) (201,898) (505,757) (586,270)
----------- ----------- ----------- -----------
Total other income and expenses (133,141) (204,966) (503,670) (575,617)
----------- ----------- ----------- -----------

Net income $ 455,134 $ 307,971 $ 1,061,963 $ 767,717
=========== =========== =========== ===========

Basic net income per share $ 0.136 $ 0.094 $ 0.316 $ 0.233
=========== =========== =========== ===========

Diluted net income per share $ 0.133 $ 0.091 $ 0.309 $ 0.230
=========== =========== =========== ===========

Weighted average shares - basic 3,355,851 3,292,184 3,355,851 3,292,184
=========== =========== =========== ===========

Weighted average shares - diluted 3,420,474 3,385,263 3,441,180 3,339,627
=========== =========== =========== ===========


See notes to condensed consolidated financial statements


4


ESCALON MEDICAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)



Nine Months Ended
March 31,
2003 2002
----------- -----------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,061,963 $ 767,717
Adjustments to reconcile net income to net cash
provided by in operating activities:
Depreciation and amortization 245,765 152,479
Equity in net income of unconsolidated joint venture -- (8,848)
Write-down of license and distribution rights 195,950
Disposal of furniture and equipment 927 --
Change in operating assets and liabilities:
Accounts receivable, net (249,991) 238,173
Inventory, net (224,485) (4,824)
Other current and long-term assets 227,608 178,869
Accounts payable, accrued and other liabilities (10,621) 131,926
----------- -----------
Net cash provided by operating activities 1,247,116 1,455,492
----------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from unconsolidated joint venture, net -- 206,828
Purchase of fixed assets (64,609) (94,487)
----------- -----------
Net cash (used in) / provided by investing activities (64,609) 112,341
----------- -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit borrowing 650,000 1,100,000
Line of credit repayment (525,000) (1,451,009)
Principal payments on term loans (1,395,699) (1,164,884)
Payments of financing fees -- (73,506)
----------- -----------
Net cash used in financing activities (1,270,699) (1,589,399)
----------- -----------

Net increase in cash and cash equivalents (88,192) (21,566)
Cash and cash equivalents, beginning of period 220,826 80,830
----------- -----------
Cash and cash equivalents, end of period $ 132,634 $ 59,264
=========== ===========

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Interest paid $ 500,127 $ 575,930
=========== ===========
Issuance of Common Stock for EMS trade name $ 15,100 $ --
=========== ===========
Transfer of title to assets in settlement of due from joint venture
Accounts receivable $ -- $ 166,937
=========== ===========
Inventory $ -- $ 139,806
=========== ===========
Fixed assets $ -- $ 79,258
=========== ===========


See notes to condensed consolidated financial statements


5


ESCALON MEDICAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of
Escalon Medical Corp. and its subsidiaries Sonomed, Inc. ("Sonomed"), Escalon
Vascular Access, Inc. ("Vascular"), Escalon Digital Vision, Inc. ("Digital"),
Sonomed EMS, Srl ("Sonomed EMS") and Escalon Pharmaceutical, Inc. (jointly
referred to as "Escalon" or the "Company") have been prepared in accordance with
the rules and regulations of the United States Securities and Exchange
Commission (the "SEC").

Certain information and footnote disclosures normally included in financial
statements presented in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the financial statements
reflect all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of financial position, results of operations
and cash flows for the interim periods presented. Operating results for interim
periods are not indicative of the results that may be expected for the fiscal
year ending June 30, 2003.

For more complete financial information, the accompanying condensed
financial statements should be read in conjunction with the audited consolidated
financial statements for the year ended June 30, 2002 included in the Company's
annual report on Form 10-K.

2. COMPANY OVERVIEW

The following discussion should be read in conjunction with interim
condensed consolidated financial statements and the notes thereto, which are set
forth elsewhere in this report on Form 10-Q.

Escalon Medical Corp. 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. 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
principal regulatory body overseeing Escalon is the FDA. The FDA is authorized,
at any time, to conduct an inspection of registered medical device facilities to
ensure compliance.

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 no longer develops 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 Endologix,
Inc. ("Endologix"), formerly Radiance Medical Systems, Inc. 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


6


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.

3. SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Sonomed, Vascular, Pharmaceutical, Digital
and Sonomed EMS. 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 presently being made.

REVENUE RECOGNITION

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

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

- Persuasive evidence of an arrangement (purchase order and sales invoice)
exists between a willing buyer (distributor) and the Company that outline
the terms of the sale (company information, quantity of goods, purchase
price and payment terms). The buyer does not have an immediate right of
return, as the Company must first consent to the return in writing and is
not required to do so.

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

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

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

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

With respect to additional consideration related to the sale of the
Company's Silicone Oil product line and the licensing of the Company's
intellectual laser property, other revenue is recognized upon notification from
the licensees of amounts earned.


7


SHIPPING AND HANDLING COSTS

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

ACCOUNTS RECEIVABLE, TRADE

Accounts receivable, trade are reported at net realizable value. The
allowance for doubtful accounts is estimated based on the Company's historical
losses and upon a periodic review of individual accounts. Accounts are written
off when they are determined to be uncollectible based on management's
assessment of individual accounts.

STOCK-BASED COMPENSATION

Effective December 31, 2002, the Company adopted the disclosure provisions
of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure." Since the Company does not plan to adopt the fair value method of
accounting of Statement No. 123, the Company does not expect any impact on
consolidated results of operations or financial condition in 2003. At March 31,
2003, the Company has five stock-based employee compensation plans. The Company
accounts for these plans under the intrinsic value recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations.



Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------

Net Income, as reported $ 455,134 $ 307,971 $1,061,963 $ 767,717
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects -- -- (145,110) (188,883)
---------- ---------- ---------- ----------
Pro forma net income $ 455,134 $ 307,971 $ 916,853 $ 578,834
========== ========== ========== ==========
Earnings per share:
Basic - as reported $ 0.136 $ 0.094 $ 0.316 $ 0.233
========== ========== ========== ==========
Basic - pro forma $ 0.136 $ 0.094 $ 0.273 $ 0.176
========== ========== ========== ==========
Diluted - as reported $ 0.133 $ 0.091 $ 0.309 $ 0.230
========== ========== ========== ==========
Diluted - pro forma $ 0.133 $ 0.091 $ 0.266 $ 0.173
========== ========== ========== ==========


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.

RECLASSIFICATIONS

Certain amounts in the 2002 financial statements have been reclassified to
conform to the 2003 presentation.


8


4. NEW 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." SFAS No. 144
superseded 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 expanding the
measurement requirements of long-lived assets to be disposed of by sale to
include discontinued operations. It also expands 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. The Company
adopted SFAS No. 144 on July 1, 2002, which did not have a material impact on
the Company's 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 this and other Company filings.

In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." This statement
updates, clarifies and simplifies existing pronouncements related primarily to
accounting for extinguishment of debt and for leases. SFAS No. 145 is effective
for fiscal years beginning after May 15, 2002. The Company is currently
evaluating the impact of applying SFAS No. 145, but does not expect it to have a
material impact on its results of operations or its financial condition.

In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS No. 146"), "Accounting for Costs Associated with Exit or Disposal
Activities." This Statement addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. The Company does not
expect the adoption of SFAS No. 146 to have a material impact on its results of
operations or its financial condition.

On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"
or the "Interpretation"). Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB
Interpretation No. 34 clarifies the requirements of FASB Statement No. 5,
Accounting for Contingencies (FAS 5), relating to the guarantor's accounting
for, and disclosure of, the issuance of certain types of guarantees. The
disclosure provisions of the Interpretation are effective for financial
statements of interim or annual periods that end after December 15, 2002. The
provisions for internal recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002, irrespective of a guarantor's year-end. The Company adopted FIN 45 as of
January 1, 2003 and it has not had a material impact on its results of
operations or financial condition.

On January 17, 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 ("FIN 46" or the "Interpretation"), Consolidation of
Variable Interest Entities, an Interpretation of ARB 51. The primary objectives
of FIN 46 are to provide guidance on the identification of entities for which
control is achieved through means other than through voting rights ("variable
interest entities" or "VIEs") and how to determine when and which business
enterprise should consolidate the VIE (the "primary beneficiary"). This new
model for consolidation applies to an entity which either (1) the equity
investors (if any) do not have a controlling financial interest or (2) the
investment at risk is insufficient to finance that entity's activities without
receiving additional subordinated financial support from other parties. In
addition, FIN 46 requires that both the primary beneficiary and all other
enterprises with a significant


9


variable interest in a VIE make additional disclosures. FIN 46 is effective
immediately, for VIE's created after January 31, 2003. FIN 46 is effective no
later than the beginning of the first interim or annual financial reporting
period beginning after June 15, 2003. The Company is currently evaluating the
impact of adopting FIN 46, but does not expect it to have a material impact on
its results of operations or its financial condition.

5. PER SHARE INFORMATION

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:



Three Months ended Nine Months ended
March 31, March 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------

Numerator:
Numerator for basic and diluted
earnings per share:
Net income $ 455,134 $ 307,971 $1,061,963 $ 767,717
---------- ---------- ---------- ----------
Denominator:
Denominator for basic earnings per
share - weighted average shares 3,355,851 3,292,184 3,355,851 3,292,184
Effect of dilutive securities:
Employee stock options 64,623 93,079 85,329 47,443
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share - weighted average and
assumed conversion 3,420,474 3,385,263 3,441,180 3,339,627
========== ========== ========== ==========
Basic earnings per share $ 0.136 $ 0.094 $ 0.316 $ 0.233
========== ========== ========== ==========
Diluted earnings per share $ 0.133 $ 0.091 $ 0.309 $ 0.230
========== ========== ========== ==========


6. INVENTORIES

Inventories, stated at lower of cost (determined on a first-in, first-out
basis) or market, consisted of the following:



March 31, June 30,
2003 2002
----------- -----------

Raw Materials/Work in Process $ 1,371,816 $ 1,273,611
Finished Goods 470,196 343,409
----------- -----------
1,842,012 1,617,020

Valuation Allowance (45,460) (44,953)
----------- -----------

Total inventory $ 1,796,552 $ 1,572,067
=========== ===========


7. GOODWILL AND OTHER INTANGIBLE ASSETS

In accordance with SFAS No. 142, effective July 1, 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


10


impairment. The standard required this impairment assessment to be completed by
December 31, 2001. In November 2001, Management evaluated whether the intangible
assets were impaired and reviewed 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.
Management 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. Management has determined that the
original classification was incorrect, and therefore should be restated. The
result of this correction was solely a reclassification of the intangible assets
among customer lists, trademarks and trade names and goodwill. The total
reported value of the intangible assets did not change. Therefore, this
correction had no affect on reported earnings, net worth or cash flows for any
prior fiscal years. In November 2001, the Company evaluated whether the goodwill
and other non-amortizable intangible assets in the Sonomed and Vascular business
units were impaired. Management concluded that the carrying value of goodwill
and other intangible assets did not exceed their fair values and therefore were
not impaired. Management 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. Management
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 continue to be assessed on an annual basis.

Goodwill and other intangible assets as of March 31, 2003, as allocated by
reportable segment are as follows:



Adjusted
Gross Gross Net
Carrying Carrying Accumulated Carrying
GOODWILL Amount Impairment Amount Amortization Amount
----------- ----------- ----------- ------------ -----------

Sonomed $10,547,488 $ -- $10,547,488 $ (1,021,938) $ 9,525,550
Vascular 1,149,813 -- 1,149,813 (208,595) 941,218
Medical/Trek 272,786 -- 272,786 (147,759) 125,027
Sonomed EMS -- -- -- -- --
----------- ----------- ----------- ------------ -----------

Balance as of March 31, 2003 $11,970,087 $ -- $11,970,087 $ (1,378,292) $10,591,795
=========== =========== =========== ============ ===========




Adjusted
Gross Gross Net
Carrying Carrying Accumulated Carrying
AMORTIZED INTANGIBLE ASSETS Amount Impairment Amount Amortization Amount
----------- ----------- ----------- ------------ -----------

PATENTS
Medical/Trek $ 257,301 $ -- $ 257,301 $ (108,724) $ 148,577
Vascular 36,915 -- 36,915 -- 36,915
Sonomed -- -- -- -- --
Sonomed EMS -- -- -- -- --
----------- ----------- ----------- ------------ -----------

Balance as of March 31, 2003 $ 294,216 $ -- $ 294,216 $ (108,724) $ 185,492
=========== =========== =========== ============ ===========


11






LICENSE AND DISTRIBUTION RIGHTS
Medical/Trek $ 180,182 $ -- $ 180,182 $ (161,413) $ 18,769
Sonomed -- -- -- -- --
Sonomed EMS -- -- -- -- --
Pharmaceutical * 272,185 (195,950) 76,235 (76,235) --
Vascular -- -- -- -- --
----------- ----------- ----------- ------------ -----------

Balance as of March 31, 2003 $ 452,367 $ (195,950) $ 256,417 $ (237,648) $ 18,769
=========== =========== =========== ============ ===========


* - Several years ago, the Company began seeking a corporate partner to fund
commercialization of the Povidone Iodine 2.5% product line. The Company
obtained the license and distribution rights from Harbor UCLA Medical
Center. Having exhausted all partnering possibilities, during the
three-month period ended March 31, 2003, it was decided that further
expenditures on this project were not in the shareholders' best interest,
and the project was abandoned. This decision resulted in the Company taking
a charge of $196,000, which included the write-off of the remaining net
book value of the license and distribution rights subsequent to normal
amortization.



Adjusted
Gross Gross Net
Carrying Carrying Accumulated Carrying
UNAMORTIZED INTANGIBLE ASSETS Amount Impairment Amount Amortization Amount
----------- ----------- ----------- ------------ -----------

TRADEMARKS AND TRADE NAMES
Sonomed $ 665,000 $ -- $ 665,000 $ (63,194) $ 601,806

Sonomed EMS 15,100 -- 15,100 -- 15,100
Medical/Trek -- -- -- -- --
Vascular -- -- -- -- --
----------- ----------- ----------- ------------ -----------

Balance as of March 31, 2003 $ 680,100 $ -- $ 680,100 $ (63,194) $ 616,906
=========== =========== =========== ============ ===========




For the nine-month period
ended March 31, 2003
-------------------------
2003 2002
---------- ----------

GOODWILL AMORTIZATION
Medical/Trek $ -- $ --
Sonomed -- --
Sonomed EMS -- --
Vascular -- --

PATENT AMORTIZATION
Medical/Trek $ 8,049 $ 8,049
Sonomed -- --
Sonomed EMS -- --
Vascular -- --




12





LICENSE AND DISTRIBUTION RIGHTS
AMORTIZATION
Medical/Trek $ 16,892 $ 16,892
Sonomed -- --
Sonomed EMS -- --
Vascular -- --

TRADEMARKS AND TRADE NAMES
AMORTIZATION
Medical/Trek $ -- $ --
Sonomed -- --
Sonomed EMS -- --
Vascular -- --

ESTIMATED ANNUAL AMORTIZATION EXPENSE

For the year ending June 30, 2003 $ 33,262
For the year ending June 30, 2004 $ 22,000
For the year ending June 30, 2005 $ 10,739


8. LINE OF CREDIT AND LONG-TERM DEBT

On January 14, 2000, Escalon replaced its $2,000,000 credit facility
obtained in January 1999. The lender 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 to
maintain a $1,000,000 certificate of deposit with the lender. The interest rate
on the term loan was based on prime plus 1.0% and the line of credit was based
on prime plus 0.75%. Escalon paid $100,000 in finance fees related to this
refinancing. The finance fees are being amortized over the life of the loans
using the effective interest method. The unamortized finance fees offset the
outstanding balance of the loans. Interest rate cap agreements were used to
reduce the potential impact of increases in interest rates on the floating-rate
term loan and line of credit. The Company incurred $122,800 in fees related to
these rate cap agreements. The rate cap agreements expired on December 31, 2002,
and the related fees have been completely amortized.

On November 28, 2001, Escalon amended its loan agreement with the lender.
The amendment included converting the existing balances on the term loan and the
line of credit into a $7,900,000 term loan and a $2,000,000 available line of
credit. The aggregate balance of debt outstanding did not change as a result of
this refinancing. Principal payments due on the term loan were amended such that
the balance remains due within the five-year term loan 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. In connection with the amended agreement,
Escalon issued to the lender 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 an expected dividend rate of
0.0%. The Company also paid a $50,000 facility fee upon execution of the loan
agreement, which is being amortized over the life of the term loan. The
unamortized finance fees offset the outstanding balance of the loans. Pursuant
to this amended agreement, on March 1, 2002, the Company began paying a 1.0%
facility fee that is payable quarterly through June 30, 2004, and is calculated
based on the aggregate principal amount outstanding under the term loan and line
of credit on January 1 of each year. All of the Company's assets collateralize
this amended agreement.


13


On December 23, 2002, Spring Street Capital, L.L.C. ("Spring Street")
acquired the Company's bank debt, which consisted of term debt of $5,850,000 and
$1,475,000 outstanding on the $2,000,000 available line of credit. On February
13, 2003, the Company entered into an Amended Agreement with Spring Street. The
primary amendments of the Amended Agreement were to reduce quarterly principal
payments and extend the term of the repayments, and to alter the covenants of
the original bank agreement to make them more reasonably attainable.
Historically, the Company failed to meet the EBITDA to current maturities ratio
covenant required under its loan agreements. The loan agreements were amended to
reduce the principal payments, significantly decreasing current maturities, and
also amended this required ratio from 1.05 to 1 to 1.00 to 1. Additionally, the
calculation of this ratio has been amended such that only "bank debt" is used in
the calculation. All subordinated debt is specifically omitted. The schedule
below presents the amortization under the Amended Agreement:



Principal amortization
----------------------

For the year ending June 30, 2003 $ 600,000
For the year ending June 30, 2004 1,300,000
For the year ending June 30, 2005 1,500,000
For the year ending June 30, 2006 2,450,000
----------------------

$ 5,850,000
======================


As of March 31, 2003, the amounts outstanding under the term loan and line of
credit were $5,550,000 and $1,375,000, respectively. At March 31, 2003, the
interest rates applicable to the term loan and the line of credit were 6.00% and
5.75%, respectively. Spring Street's prime rate at March 31, 2003 was 4.25%.

9. LITIGATION

As previously reported in reports filed with the SEC in June 1995, a
purported class action complaint captioned George Kozloski v. Intelligent
Surgical Lasers, Inc. et al., 95 Civ. 4299, was filed in the U.S. District Court
for the Southern District of New York as a "related action" to In Re Blech
Securities Litigation (a litigation matter to which the Company is no longer a
party). The plaintiff purported to represent a class of all purchasers of the
Company's stock from November 17, 1993, to and including September 21, 1994. The
complaint alleged 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 asserted claims under Section 10(b)
of the Securities Exchange Act of 1934 and common law. Actual and punitive
damages in an unspecified amount were 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 the Company 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.

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 behalf of its former and present
officers and directors, for $500,000. The Company's directors and officers
insurance carrier agreed to fund a significant portion of the settlement amount.
Both the Company and the insurance carrier deposited such funds in an escrow
account in 1996. The court approved the settlement after a fairness hearing on
September 11, 2002.


14


10. OTHER REVENUE

Other revenue includes quarterly payments earned in connection with the
sale of the Adatosil(R) 5000 Silicone Oil ("Silicone Oil") product line and
royalty payments received from a privately held entity related to licensing of
the Company's intellectual laser technology. For the three-month periods ended
March 31, 2003 and 2002, Silicone Oil revenue totaled $455,000 and $430,000,
respectively, and laser technology royalties totaled $156,000 and $0,
respectively. For the nine-month periods ended March 31, 2003 and 2002, Silicone
Oil revenue totaled $1,348,000 and $1,293,000, respectively, and laser
technology royalties totaled $275,000 and $0, respectively. Accounts receivable
related to other revenue as of March 31, 2003 and June 30, 2002 were $455,000
and $457,000, respectively.

The agreement with Bausch & Lomb, which commenced on August 13, 2000, is
structured such that the Company receives consideration from Bausch & Lomb based
on their sales of Silicone Oil on a quarterly basis. The consideration is
calculated by multiplying Bausch & Lomb's net sales of the Silicone Oil product
line by 95%, deducting cost of goods sold, and multiplying the remaining balance
by the following factors:



From 8/13/00-8/12/01 100%
From 8/13/01-8/12/02 82%
From 8/13/02-8/12/03 72%
From 8/13/03-8/12/04 64%
From 8/13/04-8/12/05 45%


The material terms of the license of the laser technology are that in
exchange for licensing the Company's laser patents, which expire in 2014, it
will receive a 2.5% royalty on future product sales that are based on the
licensed laser patents, subject to deductions for royalties payable to third
parties up to a maximum of 50% of royalties otherwise due and payable to the
Company and a 1.5% royalty on product sales that are not based on the licensed
laser patents. The Company receives a minimum annual license fee of $15,000 per
year during the term of the license. The minimum annual license fee is offset
against the royalty payments. The license was dated October 23, 1997 and Amended
and Restated in October 2000 and expires upon the latest of the following
events: (1) the last to expire of the laser patents; (2) ten years from the
effective date of the amendment and restated agreement; or (3) the fifth
anniversary date of the first commercial sale. The material termination
provisions are as follows: (1) the default in payment of any royalty; (2) the
default in the making of any required report; (3) making of any false report;
(4) the commission of any material breech of any covenant or promise under the
license agreement; or (5) Licensee may terminate at any time after ninety days
notice. If the Licensee were to terminate the agreement, it would not be
permitted to utilize the licensed technology necessary to manufacture its
current products.


15


11. SEGMENTAL INFORMATION

During the nine-month periods ended March 31, 2003 and 2002, Escalon's
operations were classified into four principal reporting segments that provided
different products or services. Each segment is subject to different marketing,
production and technology strategies.



For the nine-month periods ended March 31,
(all numbers in the table below are reported in thousands)
---------------------------------------------------------------------------------------------------
Sonomed Vascular Medical / Trek Digital Total
------------------ ------------------ -------------- -------------- -------------------
2003 2002 2003 2002 2003 2002 2003 2002 2003 2002
------- ------- ------- ------- ------ ------ ----- ----- ------- --------

Product revenue $ 4,640 $ 4,668 $ 2,031 $ 1,915 $1,056 $1,001 $ 312 $ 137 $ 8,039 $ 7,721
Other revenue -- -- -- -- 1,623 1,293 -- -- 1,623 1,293
------- ------- ------- ------- ------ ------ ----- ----- ------- -------
Revenue, net 4,640 4,668 2,031 1,915 2,679 2,294 312 137 9,662 9,014
Income from operations 531 548 22 38 1,044 766 (32) (9) 1,566 1,343
------- ------- ------- ------- ------ ------ ----- ----- ------- -------
Other income and
expenses:
Equity in loss of
unconsolidated JV -- -- -- -- -- -- -- 9 -- 9
Interest income -- -- -- -- 2 2 -- -- 2 2
Interest expense (484) (548) (22) (38) -- -- -- -- (506) (586)
------- ------- ------- ------- ------ ------ ----- ----- ------- -------
Total other income
and expenses (484) (548) (22) (38) 2 2 -- 9 (504) (576)
------- ------- ------- ------- ------ ------ ----- ----- ------- -------
Income before taxes 47 -- -- -- 1,046 768 (32) -- 1,062 768
------- ------- ------- ------- ------ ------ ----- ----- ------- -------
Income taxes -- -- -- -- -- -- -- -- -- --
------- ------- ------- ------- ------ ------ ----- ----- ------- -------
Net income (loss) 47 -- -- -- 1,046 768 (32) -- 1,062 768
------- ------- ------- ------- ------ ------ ----- ----- ------- -------
Depreciation and
amortization 13 12 31 33 183 109 18 -- 246 154
------- ------- ------- ------- ------ ------ ----- ----- ------- -------
Assets 12,229 12,151 2,260 2,504 1,915 2,204 366 324 16,770 17,183
------- ------- ------- ------- ------ ------ ----- ----- ------- -------
Expenditures for long-
lived assets 34 26 6 -- 24 68 -- -- 65 94
------- ------- ------- ------- ------ ------ ----- ----- ------- -------


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 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 disclosed on the Company's most
recently filed Form 10-K. For the purposes 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 nine-month periods ended March 31, 2003 and 2002, Sonomed
derived its revenue from the sale of A-Scans, B-Scans and pachymeters. These
products are used for diagnostic or biometric applications in ophthalmology.
Vascular derived its revenue from the sale of PD Access(TM) and SmartNeedle(TM)
monitors, needles and catheter products. These products are used by medical
personnel to assist in gaining access to arteries and veins in difficult cases.
Medical/Trek derived its revenue from the sale of ISPAN(TM) gas products,
various disposable ophthalmic surgical products, revenue derived from Bausch &
Lomb's sale of Silicone Oil and royalty revenue derived from a privately held
entity related to licensing of the Company's intellectual laser technology.
Commencing January 1, 2002, Digital derived its revenue from the sale of CFA
digital imaging systems and related products.


16


During the nine-month periods ended March 31, 2003 and 2002, there was one
entity, Bausch & Lomb, from which Escalon derived greater than 10% of its
consolidated net revenues. Revenues were $1,753,000 or 18.07% of consolidated
net revenues for the nine-month period ended March 31, 2003 and were $1,630,000
or 18.36% of consolidated net revenues for the nine-month period ended March 31,
2002. This revenue is included in the Medical/Trek business unit. Of the
consolidated net revenues reported above, $1,466,000, $118,000, $38,000 and
$32,000 were derived internationally in Sonomed, Vascular, Medical/Trek and
Digital, respectively, during the nine-month period ended March 31, 2003; and
$1,702,000, $133,000, $32,000 and $-0- were derived internationally in Sonomed,
Vascular, Medical/Trek and Digital, respectively, during the nine-month period
ended March 31, 2002.

12. FORMATION OF SUBSIDIARY AND JOINT VENTURE

The Company formed Sonomed EMS, Srl. ("Sonomed EMS") on September 26, 2002
as a wholly owned subsidiary. Sonomed EMS, based in Milan, Italy, is in the
process of completing its organization under Italian law. Sonomed EMS will
operate as a marketing division of Sonomed in Europe. The Company is forming a
joint venture with one of its Asian distributors to expand its presence in that
market. Sonoscan Holdings, Inc. ("Sonoscan") will be a British Virgin Islands
company, of which, Escalon will own fifty percent.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

Certain statements contained in this Form 10-Q Report 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 provided 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
this list of factors should not be considered 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 UNCERTAINTY OF ADDITIONAL FUNDING

Escalon's liquidity is affected by many factors, some of which arise from
fluctuations related to global markets and economies and some of which are based
on the normal ongoing operations of the company's businesses. For instance, the
Company's current term loan with Spring Street provides for quarterly principal
payments, and a $2,450,000 final balloon payment, which is due on September 1,
2005. The current rate of cash generated from operations, cash on hand and cash
available from the line of credit should be sufficient to satisfy the Company's
working capital, debt service, capital expenditures and research and development
until the balloon payment is due. The Company will be likely be required to
secure alternative debt or equity financing in order to satisfy the balloon
payment, and management cannot assure that such financing will be available when
required on acceptable terms.


17


CONCENTRATION OF REVENUES

The Company realized 15.09% and 15.07% of its net revenue during the
nine-month periods ended March 31, 2003 and 2002, respectively, from Bausch &
Lomb's sale of Silicone Oil. While management does not expect this revenue to
decline rapidly in the foreseeable future other than as is allowed for by the
step-downs in the agreement (see Footnote 10 to Condensed Consolidated Financial
Statements), any such decrease would have a significant impact on the Company's
consolidated financial position; results of operations and cash flows, and the
Company's stock price could be negatively impacted.

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

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 delivery of more cost-effective medical
therapies. Changes in governmental laws, regulations and accounting standards
and the enforcement thereof and agency or governmental actions or investigations
involving the industry in general or the Company in particular may be adverse to
the Company. The Company and its products are subject to regulation and
inspection by the United States Food and Drug Administration (FDA). The FDA
requires extensive testing of new products prior to sale and have jurisdiction
over the safety, efficacy and manufacturing of products, as well as product
labeling and marketing.

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

The Company generally sells its 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, the Company's products will become technologically obsolete over
time, in which case the Company's revenue and operating results would suffer.
The success of the Company's new product offering will depend on several
factors, including the Company's 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 Company products in sufficient volumes on time, (v)
differentiate Company offerings from competitors' offerings, (vi) price Company
products competitively, and (vii) anticipate competitors' announcements of new
products, services or technological innovations.

DEPENDENCE ON KEY PERSONNEL

The Company's future success depends partly on the continued service of key
research, engineering, sales, marketing, manufacturing, executive and
administrative personnel. If the Company fails to retain and hire a sufficient
number of these personnel, the Company will not be able to maintain or expand
its business.

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

In the normal course of business, the Company engages in discussions with
third parties relating to strategic alliances, joint ventures and divestitures.
As a result of such transactions, the Company's financial results may differ
from the investment community's expectations in a given quarter. In addition,
strategic alliances may require the Company to integrate a different company
culture, management team and business infrastructure. The Company may have
difficulty developing, manufacturing and marketing the products of a strategic
alliance or joint venture in a way that enhances the performance of the product
lines to realize the value from the expected synergies. Depending on the size
and complexity of a strategic alliance or joint venture, the Company's
successful integration of the entity depends on a variety of factors including:
(i) the retention of key employees, (ii) the management of facility employees in
separate geographical areas. These efforts require varying levels of management
resources, which may divert the Company's attention away from other business
operations. If the Company does not realize the expected


18


benefits or synergies of such transactions, the Company's 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 impact they may have on the Company cannot be foreseen.

VOLATILITY OF STOCK PRICE AND THE ABILITY OF THE COMPANY TO MAINTAIN ITS 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 in
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 the Company'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.

COMPANY OVERVIEW

The following discussion should be read in conjunction with the interim
condensed consolidated financial statements and the notes thereto, which are set
forth elsewhere in this report on Form 10-Q.

Escalon Medical Corp. 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. The Company operates in the healthcare market,
specializing in the development, marketing and distribution of ophthalmic
medical devices, vascular access devices and pharmaceuticals. The principal
regulatory body overseeing Escalon is the FDA. The FDA is authorized, at any
time, to conduct an inspection of registered medical device facilities to ensure
compliance.

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 Endologix,
Inc. ("Endologix"), formerly Radiance Medical


19


Systems, Inc. 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, Inc., a privately
held manufacturer of ophthalmic ultrasound diagnostic equipment. In April 2000,
Digital formed a joint venture, Escalon Medical Imaging, LLC ("EMI") 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 with its Digital business
unit on January 1, 2002.

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

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." SFAS No. 144
superseded 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 expanding the
measurement requirements of long-lived assets to be disposed of by sale to
include discontinued operations. It also expands 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. The Company
adopted SFAS No. 144 on July 1, 2002, which did not have a material impact on
the Company's 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 this and other Company filings.

In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." This Statement
updates, clarifies and simplifies existing pronouncements related primarily to
accounting for extinguishment of debt and for leases. SFAS No. 145 is effective
for fiscal years beginning after May 15, 2002. The Company is currently
evaluating the impact of applying SFAS No. 145, but does not expect it to have a
material impact on its results of operations or its financial condition.

In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS No. 146"), "Accounting for Costs Associated with Exit or Disposal
Activities." This Statement addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. The Company does not
expect the adoption of SFAS No. 146 to have a material impact on its results of
operations or its financial condition.

On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"
or the "Interpretation"). Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB
Interpretation No. 34 clarifies the requirements of FASB Statement No. 5,
Accounting for Contingencies (FAS 5), relating to the guarantor's accounting
for, and disclosure of, the issuance of certain types of guarantees. The
disclosure provisions of the Interpretation are effective for financial


20


statements of interim or annual periods that end after December 15, 2002. The
provisions for internal recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002, irrespective of a guarantor's year-end. The Company adopted FIN 45 as of
January 1, 2003 and it has not had a material impact on its results of
operations or physical condition.

On January 17, 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 ("FIN 46" or the "Interpretation"), Consolidation of
Variable Interest Entities, an Interpretation of ARB 51. The primary objectives
of FIN 46 are to provide guidance on the identification of entities for which
control is achieved through means other than through voting rights ("variable
interest entities" or "VIEs") and how to determine when and which business
enterprise should consolidate the VIE (the "primary beneficiary"). This new
model for consolidation applies to an entity which either (1) the equity
investors (if any) do not have a controlling financial interest or (2) the
investment at risk is insufficient to finance that entity's activities without
receiving additional subordinated financial support from other parties. In
addition, FIN 46 requires that both the primary beneficiary and all other
enterprises with a significant variable interest in a VIE make additional
disclosures. FIN 46 is effective immediately, for VIE's created after January
31, 2003. FIN 46 is effective no later than the beginning of the first interim
or annual financial reporting period beginning after June 15, 2003. The Company
is currently evaluating the impact of adopting FIN 46, but does not expect it to
have a material impact on its results of operations or its financial condition.

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, discussed above in
Note 7 to the Condensed Consolidated Financial Statements. 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 are used in determining
valuation allowances for uncollectible receivables, obsolete inventory, sales
returns and rebates, deferred income taxes and purchased intangible assets.
Actual results achieved in the future could differ from current estimates. The
Company used what it believes are reasonable assumptions and, where applicable,
established valuation techniques in making its estimates.

THREE AND NINE-MONTH PERIODS ENDED MARCH 31, 2003 AND 2002

Product revenue decreased $60,000, or 2.12%, to $2,776,000 for the
three-month period ended March 31, 2003 as compared to $2,836,000 for the same
period in the prior fiscal year. Product revenue in the Sonomed business unit
decreased $32,000, or 1.94%, to $1,621,000. This decrease is primarily
attributable to Latin America, Africa and Asia, where product revenue decreased
$92,000, $44,000 and $41,000, respectively, offset by a $124,000 increase in the
domestic market. Management believes that the weak economy in Latin America has
led to the decrease in that market, while the surge in the domestic market
primarily relates to increased demand for Sonomed's pachymeter product. Usage of
the pachymeter product has recently been expanded to include glaucoma screening.
Product revenue in the Vascular business unit increased $44,000, or 6.81%, to
$690,000. The increase primarily relates to increased usage in the marketplace.
Product revenue in the Medical/Trek business unit increased $6,000, or 1.50%, to
$406,000. Product revenue in the Digital business unit decreased $78,000, or
56.93%, to $59,000.

Product revenues increased $318,000, or 4.12%, to $8,039,000 for the
nine-month period ended March 31, 2003 as compared to $7,721,000 for the same
period last fiscal year. Product revenue in the Sonomed business unit decreased
$28,000, or 0.60%, to $4,640,000. This decrease is primarily attributed to Latin
America where product revenue decreased $178,000, offset by an increase in the
domestic market of $155,000. Management believes that the weak economy in Latin
America has led to the decrease in that market, while the surge in the domestic
market primarily relates to increased demand for Sonomed's pachymeter product.
Usage of the pachymeter product has recently been expanded to include glaucoma
screening. Product revenue in the Vascular business unit increased $122,000, or
6.37%, to $2,037,000. The increase primarily relates to increased usage in the
marketplace. During fiscal 2001, the Company identified certain underperforming
distributors within its Vascular business unit and terminated its


21


relationship with them. Subsequent to terminating these distributors, the
Company began selling in the territories once covered by the distributors.
Management believes that revenues in the territories once covered by the
distributors have remained stable or increased. Revenue in the vascular business
unit increased 26.91% during the nine-month period ended March 31, 2002 as
compared to the same period in the prior fiscal year and, this fiscal year,
revenue continues to build upon this increased base. Product revenue in the
Medical/Trek business unit increased $55,000, or 5.49%, to $1,056,000. OEM
revenue from Bausch & Lomb increased $68,000. Product revenue in the Digital
business unit increased $175,000. The Company terminated its joint venture and
commenced operations within the Digital business unit on January 1, 2002.

Other revenue increased $180,000, or 41.86%, to $610,000 for the
three-month period ended March 31, 2003 as compared to $430,000 for the same
period last fiscal year. The increase primarily relates to a $156,000 royalty
payment received from a privately held entity related to the licensing of the
Company's intellectual laser technology. Escalon licensed the technology to the
privately held company in October 1997. These royalty payments commenced during
the fourth quarter of fiscal 2002 when the privately held company began selling
product related to the Company's intellectual laser technology. The remaining
$24,000 increase in other revenue relates to revenue earned from Bausch & Lomb
in connection with Silicone Oil. The Company's contract with Bausch & Lomb calls
for annual step-downs in the calculation of Silicone Oil revenues to be received
by the Company. These step-downs occur during the first quarter of each fiscal
year through the remainder of the contract. For the three-month period ended
March 31, 2003, the step-down caused a $63,000 decrease in Silicone Oil revenue
that the Company would have otherwise received had the step-down not occurred.
The offsetting $87,000 increase in Silicone Oil revenue is due to fluctuations
in the market demand for the product. The Company does not have knowledge as to
what factors have affected Bausch & Lomb's sales of Silicone Oil.

Other revenue increased $330,000, or 25.52%, to $1,623,000 for the
nine-month period ended March 31, 2003 as compared to $1,293,000 for the same
period last fiscal year. The increase primarily relates to $275,000 royalty
payments received from a privately held entity related to the licensing of the
Company's intellectual laser technology. Escalon licensed the technology to the
privately held company in October 1997. These royalty payments commenced during
the fourth quarter of fiscal 2002 when the privately held company began selling
product related to the Company's intellectual laser technology. The remaining
$55,000 increase in other revenue relates to revenue earned from Bausch & Lomb
in connection with Silicone Oil. The Company's contract with Bausch & Lomb calls
for annual step-downs in the calculation of Silicone Oil revenues to be received
by the Company. These step-downs occur during the first quarter of each fiscal
year through the remainder of the contract. For the nine-month period ended
March 31, 2003, the step-down caused a $188,000 decrease in Silicone Oil revenue
that the Company would have otherwise received had the step-down not occurred.
The offsetting $243,000 increase in Silicone Oil revenue is due to fluctuations
in the market demand for the product. The Company does not have knowledge as to
what factors have affected Bausch & Lomb's sales of Silicone Oil.

Cost of goods sold totaled $1,178,000, or 34.78% of net revenue, for the
three-month period ended March 31, 2003 as compared to $1,299,000, or 39.77% of
net revenue, for the same period last fiscal year. Cost of goods sold in the
Sonomed business unit totaled $517,000, or 31.89% of net revenue, as compared to
$725,000 or 43.86% of net revenue, for the same period last fiscal year. Sonomed
experienced a significant shift in product mix with the increase in demand for
the pachymeter product, which has lower cost of goods sold as a percentage of
revenue than much of the remainder of the Sonomed product line. Cost of goods
sold in the Vascular business unit totaled $339,000, or 48.78% of net revenue,
as compared to $247,000, or 38.24% of net revenue, for the same period last
fiscal year. Vascular's margins have been affected by both product mix, having
experienced an increase in sales of the ONC product line, which has a higher
cost of goods sold per unit due to smaller-scale production than the remainder
of the Vascular product line, and also has been affected by a lower price per
unit, having experienced an increase in sales to distributors. Cost of goods
sold in the Medical/Trek business unit totaled $277,000, or 27.24% of net
revenue, as compared to $264,000, or 31.81% of net revenue, for the same period
last fiscal year. When other revenue is excluded (no costs are associated with
these revenue streams), cost of goods sold, as a percentage of net revenue was
68.23% and 66.00% for the three-month periods ended March 31, 2003 and 2002,
respectively. Fluctuations in Medical/Trek cost of goods sold emanates from
product mix, which


22


was primarily controlled by market demand. Cost of goods sold in the digital
business unit was $45,000, or 76.27% of net revenue, as compared to $63,000, or
45.99% of net revenue for the three-month periods ended March 31, 2003 and 2002,
respectively.

Cost of goods sold totaled $3,536,000, or 36.60% of net revenue, for the
nine-month period ended March 31, 2003 as compared to $3,519,000, or 39.04% of
net revenue, for the same period last fiscal year. Cost of goods sold in the
Sonomed business unit totaled $1,822,000, or 39.27% of net revenue, as compared
to $2,072,000 or 44.39% of net revenue, for the same period last fiscal year.
Sonomed experienced a significant shift in product mix with the increase in
demand for the pachymeter product, which has lower cost of goods sold as a
percentage of revenue than much of the remainder of the Sonomed product line.
Cost of goods sold in the Vascular business unit totaled $873,000, or 42.86% of
net revenue, as compared to $752,000, or 39.27% of net revenue, for the same
period last fiscal year. Vascular's margins have been affected by both product
mix, having experienced an increase in sales of the ONC product line, which has
higher cost of goods sold per unit due to smaller-scale production than the
remainder of the Vascular product line, and also has been affected by lower
price per unit, having experienced an increase in sales to distributors. Cost of
goods sold in the Medical/Trek business unit totaled $689,000, or 25.72% of net
revenue, as compared to $632,000, or 27.55% of net revenue, for the same period
last fiscal year. When other revenue is excluded (no costs are associated with
these revenue streams), cost of goods sold, as a percentage of net revenue was
65.25% and 63.14% for the nine-month periods ended March 31, 2003 and 2002,
respectively. Fluctuations in Medical/Trek cost of goods sold emanates from
product mix, which was primarily controlled by market demand. Cost of goods sold
in the digital business unit was $153,000, or 49.04% of net revenue, as compared
to $63,000, or 45.99% of net revenue.

Marketing, general and administrative expenses decreased $91,000, or 6.94%,
for the three-month period ended March 31, 2003 as compared to the same period
last fiscal year. In the Sonomed business unit, marketing, general and
administrative expenses decreased $173,000, or 39.59%. Salaries and other
personnel related expenses decreased $127,000, primarily the result of reduced
headcount. Bad debts decreased $53,000, primarily due to the Company reserving
for specific international accounts in the 2002 period, which did not reoccur in
the current year period. In the Vascular business unit, marketing, general and
administrative expenses increased $42,000, or 17.00%. The Company began
allocating to the Vascular business unit certain overhead expenses related to
the Wisconsin facility that previously were included in the Medical/Trek
business unit. The Company operates two of its business units from its Wisconsin
facility: Medical/Trek and Vascular. A disproportionate share of facility
overhead expenses was historically being charged to the Medical/Trek business
unit. Management undertook a quantitative study to determine the appropriate
allocation of these expenses. In the Medical/Trek business unit, marketing,
general and administrative expenses increased $56,000, or 9.93%. State tax
expenses and consulting increased $48,000 and $12,000, respectively. Corporate
insurance premiums increased $10,000 reflecting a rise in premiums being
instituted by the insurance industry in general. These increases were offset by
decreases related to the Company allocating from the Medical/Trek business unit
overhead expenses related to the Wisconsin facility to the Vascular business
unit. In the Digital business unit, marketing, general and administrative
expenses decreased $16,000, or 25.40%. The decrease primarily relates to a
$20,000 decrease in legal fees. The fees in the year ago period related to the
cessation of the Company's joint venture.

Marketing, general and administrative expenses increased $36,000, or 0.96%,
for the nine-month period ended March 31, 2003 as compared to the same period
last fiscal year. In the Sonomed business unit, marketing, general and
administrative expenses decreased $81,000, or 7.51%. Salaries and other
personnel related expenses decreased $125,000, primarily the result of reduced
headcount. Bad debts decreased $27,000, primarily due to the Company reserving
for specific international accounts in the 2002 period. Consulting expenses
increased $52,000 as a result of the Company's efforts in the international
markets. In the Vascular business unit, marketing, general and administrative
expenses increased $136,000, or 18.84%. Salaries and other personnel related
expenses increased $49,000, primarily the result of increased headcount. Sales
travel and meeting expenses increased by a combined $20,000 and samples expense
increased by $13,000. Also contributing to the increase, the Company began
allocating from the Medical/Trek business unit certain overhead expenses related
to the Wisconsin facility to the Vascular


23


business unit. In the Medical/Trek business unit, marketing, general and
administrative expenses decreased $147,000, or 7.79%. Legal expenses decreased
$64,000. Expenditures in the 2002 period were unusually high due to required
filings with the SEC related to the reincorporation into Pennsylvania, the
issuance of Escalon Common Stock shares to Endologix, Inc. and certain
litigation matters. Salaries and other personnel-related expenses decreased
$60,000, primarily the result of reduced headcount. Also contributing to the
decrease, the Company began allocating from the Medical/Trek business unit
certain overhead expenses related to the Wisconsin facility to the Vascular
business unit. Offsetting these decreases was a $79,000 increase in corporate
insurance premiums. The increase relates to an audit of prior year premiums and
premium increases being instituted by the insurance industry in general. The
insurance company undercharged premiums by $22,000. This amount was discovered
by the insurance company and corrected in the first quarter of fiscal 2003. In
the Digital business unit, marketing, general and administrative expenses
increased $128,000. The Company terminated its joint venture and commenced
operations within its Digital business unit on January 1, 2002, and therefore,
during the first six months of the previous fiscal year, these expenses were
incurred within the joint venture.

Research and development expenses increased $60,000, or 41.67%, for the
three-month period ended March 31, 2003 as compared to the same period last
fiscal year. The increase primarily relates to consulting expenses incurred in
connection with product development. The Company redesigns its products every
few years, as technology changes, to remain competitive in the market place.

Research and development expenses increased $178,000, or 44.50%, for the
nine-month period ended March 31, 2003 as compared to the same period last
fiscal year. The increase primarily relates to consulting expenses incurred in
connection with product development.

Several years ago, the Company began seeking a corporate partner to fund
commercialization of the Povidone Iodine 2.5% product line. The Company obtained
the license and distribution rights to the product from Harbor UCLA Medical
Center. Having exhausted all partnering possibilities, during the three-month
period ended March 31, 2003, it was decided that further expenditures on this
project were not in the shareholders' best interest, and the project was
abandoned. This decision resulted in the Company taking a charge of $195,000,
which included the write-off of the remaining net book value of the license and
distribution rights subsequent to normal amortization.

The Company terminated its joint venture and commenced operations within
its Digital business unit on January 1, 2002. The Company recognized a $4,000
net loss and $9,000 net income during the three and nine-month periods ended
March 31, 2002, respectively.

Interest income remained relatively unchanged for the three-month period
ended March 31, 2003 as compared to the same period last fiscal year; $600 and
$400, respectively. Interest income remained relatively unchanged for the
nine-month period ended March 31, 2003 as compared to the same period last
fiscal year, $2,000 and $1,800, respectively.

Interest expense decreased $68,000 for the three-month period ended March
31, 2003 as compared to the same period last fiscal year. Interest expense
decreased $81,000 for the nine-month period ended March 31, 2003 as compared to
the same period last fiscal year primarily due to reduced total debt levels and
lower interest rates.

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 allowances.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2003, Escalon had cash and cash equivalents of $133,000 as
compared to $221,000 at June 30, 2002, a decrease of $88,000. Cash provided from
operations was $1,247,000. These funds, in addition to $125,000 provided by
additional net borrowings on the line of credit with Spring Street were used to
pay down the Company's term loan with Spring Street as well as the Company's
note payable to


24


Endologix, Inc. by a combined $1,396,000. The Company also purchased $65,000 of
fixed assets during the nine-month period ended March 31, 2003.

On January 14, 2000, Escalon replaced its $2,000,000 credit facility
obtained in January 1999. The lender 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 to
maintain a $1,000,000 certificate of deposit with the lender. The interest rate
on the term loan was based on prime plus 1.0% and the line of credit was based
on prime plus 0.75%. Escalon paid $100,000 in finance fees related to this
refinancing. The finance fees are being amortized over the life of the loans
using the effective interest method. The unamortized finance fees offset the
outstanding balance of the loans. Interest rate cap agreements were used to
reduce the potential impact of increases in interest rates on the floating-rate
term loan and line of credit. The Company incurred $122,800 in fees related to
these rate cap agreements. The rate cap agreements expired on December 31, 2002,
and the related fees have been completely amortized.

On November 28, 2001, Escalon amended its loan agreement with the lender.
The amendment included converting the existing balances on the term loan and the
line of credit into a $7,900,000 term loan and a $2,000,000 available line of
credit. The aggregate balance of debt outstanding did not change as a result of
this refinancing. Principal payments due on the term loan were amended such that
the balance remains due within the five-year term loan 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. In connection with the amended agreement,
Escalon issued to the lender 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 an expected dividend rate of
0.0%. The Company also paid a $50,000 facility fee upon execution of the loan
agreement, which is being amortized over the life of the term loan. The
unamortized finance fees offset the outstanding balance of the loans. Pursuant
to this amended agreement, on March 1, 2002, the Company began paying a 1.0%
facility fee that is payable quarterly through June 30, 2004, and is calculated
based on the aggregate principal amount outstanding under the term loan and line
of credit on January 1 of each year. All of the Company's assets collateralize
this amended agreement.

On December 23, 2002, Spring Street Capital, L.L.C. ("Spring Street")
acquired the Company's bank debt, which consisted of term debt of $5,850,000 and
$1,475,000 outstanding on the $2,000,000 available line of credit. On February
13, 2003, the Company entered into an Amended Agreement with Spring Street. The
primary amendments of the Amended Agreement were to reduce quarterly principal
payments and extend the term of the repayments, and to alter the covenants of
the original bank agreement to make them more reasonably attainable.
Historically, the Company failed to meet the EBITDA to current maturities ratio
covenant required under its loan agreements. The loan agreements were amended to
reduce the principal payments, significantly decreasing current maturities, and
also amended this required ratio from 1.05 to 1 to 1.00 to 1. Additionally, the
calculation of this ratio has been amended such that only "bank debt" is used in
the calculation. All subordinated debt is specifically omitted. The schedule
below presents the amortization under the Amended Agreement as compared to the
superseded original bank agreement:



2/13/03 Agreement 11/28/01 Agreement
----------------- ------------------

For the year ending June 30, 2003 $ 600,000 $ 1,050,000
For the year ending June 30, 2004 1,300,000 4,800,000
For the year ending June 30, 2005 1,500,000 --
For the year ending June 30, 2006 2,450,000 --
----------------- ------------------

$ 5,850,000 $ 5,850,000
================= ==================



25


As of March 31, 2003, the amounts outstanding under the term loan and line
of credit were $5,550,000 and $1,375,000, respectively. At March 31, 2002, the
interest rates applicable to the term loan and the line of credit were 6.00% and
5.75%, respectively. Spring Street's prime rate at March 31, 2003 was 4.25%.

On January 21, 1999, the Company's Vascular subsidiary and Endologix, Inc.
entered into an Assets Sale and Purchase Agreement. Pursuant to this agreement,
Escalon acquired for cash the assets of Endologix'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 1,
2001, the parties amended the agreement to provide an adjustment in the terms of
payment of the royalties. Pursuant to the amendments, Escalon paid $17,558 in
cash to Endologix, 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 that commenced April 15, 2002, and
Escalon issued 50,000 shares of its Common Stock to Endologix.

The current rate of cash generated from operations, cash on hand and cash
available from the line of credit should be sufficient to satisfy the Company's
working capital, debt service, capital expenditures and research and development
until the balloon payment under the term loan with Spring Street is due. The
Company will likely be required to secure alternative debt or equity financing
in order to satisfy any balloon payment of the amended loan agreement, and
management cannot assure that such financing will be available when required on
acceptable terms. Additionally, the Company relies on the Silicone Oil revenue
received from Bausch & Lomb, which are expected to continue in varying amounts
through fiscal 2005. While management does not expect this revenue to decline
rapidly in the foreseeable future, any such decrease would have a significant
impact on the Company's consolidated financial position, results of operations
and cash flows. The Company's stock price could be negatively impacted as well.
The Bausch & Lomb revenues reduce on an annual basis due to a contractual
step-down. Additionally, the revenues are based on sales of the Silicone Oil
product line by Bausch & Lomb and will be dependant on their ability to maintain
their market share.

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

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

- 500,000 publicly held shares;

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

- A minimum bid price of $1;

- 300 shareholders (round lot holders);

- Two market makers; and

- Established corporate governance

As of March 31, 2003, Escalon complied with these requirements. If
Escalon's securities were delisted, a shareholder would find it more difficult
to dispose of them, or obtain accurate quotations as to the market value of the
Company's securities.


26


SEGMENTAL INFORMATION

During the nine-month periods ended March 31, 2003 and 2002, Escalon's
operations were classified into four principal reporting segments that provided
different products or services. Each segment is subject to different marketing,
production and technology strategies.



For the nine-month periods ended March 31,
(all numbers in the table below are reported in thousands)
--------------------------------------------------------------------------------------------------
Sonomed Vascular Medical / Trek Digital Total
------------------ ------------------ -------------- -------------- ------------------
2003 2002 2003 2002 2003 2002 2003 2002 2003 2002
------- ------- ------- ------- ------ ------ ----- ----- ------- -------

Product revenue $ 4,640 $ 4,668 $ 2,031 $ 1,915 $1,056 $1,001 $ 312 $ 137 $ 8,039 $ 7,721
Other revenue -- -- -- -- 1,623 1,293 -- -- 1,623 1,293
------- ------- ------- ------- ------ ------ ----- ----- ------- -------
Revenue, net 4,640 4,668 2,031 1,915 2,679 2,294 312 137 9,662 9,014
Income from operations 531 548 22 38 1,044 766 (32) (9) 1,566 1,343
------- ------- ------- ------- ------ ------ ----- ----- ------- -------
Other income and
expenses:
Equity in loss of
unconsolidated JV -- -- -- -- -- -- -- 9 -- 9
Interest income -- -- -- -- 2 2 -- -- 2 2
Interest expense (484) (548) (22) (38) -- -- -- -- (506) (586)
------- ------- ------- ------- ------ ------ ----- ----- ------- -------
Total other income
and expenses (484) (548) (22) (38) 2 2 -- 9 (504) (576)
------- ------- ------- ------- ------ ------ ----- ----- ------- -------
Income before taxes 47 -- -- -- 1,046 768 (32) -- 1,062 768
------- ------- ------- ------- ------ ------ ----- ----- ------- -------
Income taxes -- -- -- -- -- -- -- -- -- --
------- ------- ------- ------- ------ ------ ----- ----- ------- -------
Net income (loss) 47 -- -- -- 1,046 768 (32) -- 1,062 768
------- ------- ------- ------- ------ ------ ----- ----- ------- -------
Depreciation and
amortization 13 12 31 33 183 109 18 -- 246 154
------- ------- ------- ------- ------ ------ ----- ----- ------- -------
Assets 12,229 12,151 2,260 2,504 1,915 2,204 366 324 16,770 17,183
------- ------- ------- ------- ------ ------ ----- ----- ------- -------
Expenditures for long-
lived assets 34 26 6 -- 24 68 -- -- 65 94
------- ------- ------- ------- ------ ------ ----- ----- ------- -------


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 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 disclosed on the Company's most
recently filed Form 10-K. For the purposes 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 nine-month periods ended March 31, 2003 and 2002, Sonomed
derived its revenue from the sale of A-Scans, B-Scans and pachymeters. These
products are used for diagnostic or biometric applications in ophthalmology.
Vascular derived its revenue from the sale of PD Access(TM) and SmartNeedle(TM)
monitors, needles and catheter products. These products are used by medical
personnel to assist in gaining access to arteries and veins in difficult cases.
Medical/Trek derived its revenue from the sale of ISPAN(TM) gas products,
various disposable ophthalmic surgical products, revenue derived from Bausch &
Lomb's sale of Silicone Oil and royalty revenue derived from a privately held
entity related to licensing of the Company's intellectual laser technology.
Commencing January 1, 2002, Digital derived its revenue from the sale of CFA
digital imaging systems and related products.


27


During the nine-month periods ended March 31, 2003 and 2002, there was one
entity, Bausch & Lomb, from which Escalon derived greater than 10% of its
consolidated net revenues. Revenues were $1,753,000 or 18.07% of consolidated
net revenues for the nine-month period ended March 31, 2003 and were $1,630,000
or 18.36% of consolidated net revenues for the nine-month period ended March 31,
2002. This revenue is included in the Medical/Trek business unit. Of the
consolidated net revenues reported above, $1,466,000, $118,000, $38,000 and
$32,000 were derived internationally in Sonomed, Vascular, Medical/Trek and
Digital, respectively, during the nine-month period ended March 31, 2003; and
$1,702,000, $133,000, $32,000 and $-0- were derived internationally in Sonomed,
Vascular, Medical/Trek and Digital, respectively, during the nine-month period
ended March 31, 2002.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 March 31, 2003 plus 1.75% on the term loan, the prime
rate plus 1.50% on the line of credit and the prime rate plus 1.00% on the
Endologix note.



Long-term debt classified as current as of March 31,
--------------------------------------------------------------------------------
2002 2003 2004 2005 Thereafter Total
---- ---- ---- ---- ---------- -----

Term loan 1,250,000 1,450,000 2,850,000 -- -- 5,550,000
Interest rate 6.50% -- -- -- --
Line of credit 1,375,000 -- -- -- -- 1,375,000
Interest rate 6.25% -- -- -- --
Endologix note 260,932 195,699 -- -- -- 456,631
Interest rate 5.75% 5.75% -- -- --
Deferred finance fees (58,172) -- -- -- -- (58,172)
---------- ---------- ---------- ---------- ---------- ----------
Total 2,827,755 1,645,699 2,850,000 -- -- 7,323,449
========== ========== ========== ========== ========== ==========


EXCHANGE RATE RISK

During the nine-month periods ended March 31, 2003 and 2002, approximately
17.11% and 20.71% of Escalon's consolidated net revenue was derived from
international sales. The price of all product sold overseas is denominated in
United States dollars and consequently the Company incurs no exchange rate risk
on revenue. The Company's Sonomed business unit began incurring marketing
consulting expenses in the European market during fiscal 2003 that are
transacted in Euros. These expenses were $59,000 for the nine-month period ended
March 31, 2003.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management,
including our Chief Executive Officer and Senior Vice President of
Finance, we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rule 13a-14(c)
under the Exchange Act) as of a date ("the Evaluation Date") within 90
days prior to the filing date of this report. Based on that
evaluation, the Chief Executive Officer and Senior Vice President of
Finance concluded that, as of the Evaluation Date, our disclosure
controls and procedures were effective in timely alerting them to the
material information relating to the Company (or the Company's
consolidated subsidiaries) required to be included in our periodic SEC
filings.


28


(b) Changes in Internal Controls

There were no significant changes in our internal controls during the
period covered by this report or, to management's knowledge, in other
factors that could significantly affect these controls subsequent to
the date of their evaluation.

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information contained in Note 9. of the Notes to Condensed Consolidated
Financial Statements in Part I is incorporated herein by reference thereto.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

Exhibits

The following is a list of exhibits filed as part of this quarterly report
on Form 10-Q. 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.

10.14 2003 Amendment to Loan Agreement (1)

10.15 Allonge to Amended and Restated Term/Time Note (1)

10.16 Allonge to Amended and Restated Line of Credit Note (1)

99.1 Certification Pursuant to Section 1350 of Title 18 of the United States
Code - Richard J. DePiano

99.2 Certification Pursuant to Section 1350 of Title 18 of the United States
Code - Harry M. Rimmer

(1) Filed as an Exhibit to the Company's Form 10-Q for the Quarter Ended
December 31, 2002.

Reports on Form 8-K

None.

SIGNATURES

Pursuant to the requirements 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)


Date: May 15, 2003 By: /s/ Richard J. DePiano
----------------------
Richard J. DePiano
Chairman and
Chief Executive Officer


Date: May 15, 2003 By: /s/ Harry M. Rimmer
-------------------
Harry M. Rimmer
Senior Vice President - Finance


29


CERTIFICATION

I, Richard J. DePiano, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Escalon Medical
Corp.;
2. Based on my knowledge, this quarterly 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 periods covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant
and we have;
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of the Registrant's Board of Directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weakness in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.


/s/ Richard J. DePiano Date: May 14, 2003
----------------------
Richard J. DePiano
Chairman and Chief Executive Officer


30


CERTIFICATION

I, Harry M. Rimmer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Escalon Medical
Corp.;
2. Based on my knowledge, this quarterly 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 periods covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant
and we have;
a. designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
report is being prepared;
b. evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of the Registrant's Board of Directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weakness in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.


/s/ Harry M. Rimmer Date: May 14, 2003
-------------------
Harry M. Rimmer
Senior Vice President - Finance


31