The following discussion and analysis should be read together with the consolidated financial statements and notes thereto and other financial information contained elsewhere in this Form 10-K and the discussion under "Risk Factors" included in Part IA of this Form 10-K.
The Company operates primarily in five reportable business segments: Drew, Sonomed, Vascular, Medical/Trek and EMI.
Drew is a diagnostics company specializing in the design, manufacture and distribution of instruments for blood cell counting and blood analysis. Drew is focused on providing instrumentation and consumables for the physician office and veterinary office laboratories. Drew also supplies the reagent and other consumable materials needed to operate the instruments. Drew added to its reagent business with the May 29, 2008 purchase of JAS and the December 31, 2008 acquisition of certain assets of BioCode Hycel (see footnote 12).
Sonomed develops, manufactures and markets ultrasound systems used for diagnosis or biometric applications in ophthalmology.
Vascular develops, manufactures and markets vascular access products. Medical/Trek develops, manufactures and distributes ophthalmic surgical products under the Escalon Medical Corp. and/or Trek Medical Products names.
EMI manufactures and markets digital camera systems for ophthalmic fundus photography. For a more complete description of these businesses and their products, see Item 1 - Description of Business.
Executive Overview - Fiscal Years Ended June 30, 2009 and 2008 The following highlights are discussed in further detail within this Form 10-K. The reader is encouraged to read this Form 10-K in its entirety to gain a more complete understanding of factors impacting Company performance and financial condition.
• Product revenue increased approximately 14.9% during fiscal year ended June 30, 2009 as compared to the prior fiscal year. The increase is primarily related to strong sales in the Company's Drew and EMI business units which increased approximately 35.7% and 17.9%, respectively, offset by sales decreases in the Sonomed, Vascular and Trek business units of 2.1%, 6.1% and 10.5%, respectively.

• Other revenue decreased approximately $89,000 or 40.1% during the fiscal year ended June 30, 2009 as compared to the prior fiscal year. The decrease is due decreased royalties earned from the Bio-Rad royalty agreement.

• Cost of goods sold as a percentage of product revenue decreased to approximately 56.7% of revenues during the fiscal year ended June 30, 2009, as compared to approximately 57.7% of product revenue for the prior fiscal year. Gross margins in the Drew business segment have historically been lower than those in the Company's other business units. Cost of goods sold in the Drew business segment was approximately 62.0% of product revenue during the fiscal year ended June 30, 2009 as compared to approximately 67.0% in the prior fiscal year. The aggregate cost of goods sold as a percentage of product revenue of the Sonomed, Vascular, EMI and Medical/Trek business units during fiscal year ended June 30, 2009 decreased to approximately 50.9% of product revenue from approximately 52.0% in the prior fiscal year.

• Operating expenses decreased approximately .7% during the fiscal year ended June 30, 2009 as compared to the prior fiscal year. This was due to increased marketing, general and administrative expenses of 3.2% offset by a 14.4% decrease in research and development expenses related to the decision to drastically reduce Drew's research and development department in June 2008 in favor to a move to an outsourced research and development model.

• The Company concluded that all $9,526,000 of the goodwill recorded at Sonomed was impaired as of June 30, 2009 and $9,575,000 of the goodwill recorded at Drew was impaired as of June 30, 2008. As a result, the Company recorded a non-cash goodwill impairment charge to operations totaling $9,526,000 and $9,575,000 for the year ended June 30, 2009 and 2008, respectively (see footnote 4 of notes to consolidated financial statements for additional information).

Results of Operations
Fiscal Years Ended June 30, 2009 and 2008 The following table shows consolidated product revenue by business segment as well as identifying trends in business segment product revenues for the fiscal years ended June 30, 2009 and 2008. Table amounts are in thousands:

                                         Fiscal Years Ended June 30,
                                      2009           2008        % Change

                Product Revenue:

                Drew               $   18,085      $ 13,332           35.7 %
                Sonomed                 9,175         9,367           -2.1 %
                Vascular                3,868         4,119           -6.1 %
                EMI                     2,078         1,762           17.9 %
                Medical/Trek            1,262         1,410          -10.5 %


                Total              $   34,468      $ 29,990           14.9 %

Consolidated product revenue increased approximately $4,478,000, or 14.9%, to $34,468,000 during the year ended June 30, 2009 as compared to the last fiscal year.
In the Drew business unit, product revenue increased $4,753,000, or 35.7%, as compared to last fiscal year. The increase is primarily due to the acquisition of JAS on May 29, 2008 and of Biocode Hycel on December 31, 2008 which combined increased revenue by $4,405,000. The remainder of the increase is primarily due to strong sales of Drew's D3 instrument which received FDA approval on December 18, 2008.

Product revenue decreased $192,000, or 2.1%, to $9,175,000 in the Sonomed business segment as compared to the last fiscal year. This decrease in volume is related to the global economic downturn and the effect it has had on the ability of Sonomed's traditional customer base to add additional or upgraded capital equipment at this time. These troubling economic conditions have also lead to increased sales discounts to Sonomed's distributors in order to entice end users to purchase or to compete with toughening competition.. (see "Goodwill Impairment-Sonomed below and footnote 4 of notes to consolidated financial statements for further discussion).
Product revenue decreased $251,000, or 6.1%, to $3,868,000 in the Vascular business segment during the year ended June 30, 2009 as compared to last fiscal year. The decrease was primarily caused by the introduction of the VascuView instrument in February 2008 which generated a $550,000 one time sale during the prior year, however current year sales of the VascuView were not material due to certain limitations in its functionality. The VascuView is currently being enhanced and is expected to contribute to revenue during the second half of 2010. The large decrease in VascuView sales were offset by increased volume in Vascular's core needle business of approximately $274,000.
Product revenue increased $316,000, or 17.9%, in the EMI business segment when compared to the last fiscal year. The EMI product offering of digital imaging systems continues to expand and has seen increased market acceptance during the year ended June 30, 2009.
In the Medical/Trek business unit, product revenue decreased $148,000, or 10.5%, to $1,262,000 during the year ended June 30, 2009 as compared to the last fiscal year. The decrease is related to the continued aging of Medical/Trek's product offerings.
The following table presents consolidated other revenue by reportable business segment for the fiscal years ended June 30, 2009 and 2008. Table amounts are in thousands:

                                        Fiscal Years Ended June 30,
                                    2009           2008         % Change

                 Other Revenue:

                 Drew             $    133       $    222           -40.1 %
                 Sonomed                 0              0             0.0 %
                 Vascular                0              0             0.0 %
                 EMI                     0              0             0.0 %
                 Medical/Trek            0              0             0.0 %


                 Total            $    133       $    222           -40.1 %

Consolidated other revenue decreased by approximately $89,000, or 40.1%, to $133,000 during the fiscal year ended June 30, 2009 as compared to the prior fiscal year. The decrease is due to decreased royalties earned from Bio-Rad royalty agreement (see footnote 11 of notes to the consolidated financial statements).
The following table presents consolidated cost of goods sold by reportable business segment and as a percentage of related segment product revenues for the fiscal years ended June 30, 2009 and 2008. Table amounts are in thousands:

                                            Fiscal Years Ended June 30,
                                      2009         %          2008         %

              Cost of Goods Sold:

              Drew                  $ 11,207       62.0 %   $  8,928       67.0 %
              Sonomed                  4,974       54.2 %      5,029       53.7 %
              Vascular                 1,450       37.5 %      1,538       37.3 %
              EMI                      1,069       51.4 %        820       46.5 %
              Medical/Trek               848       67.2 %        995       70.6 %


              Total                 $ 19,548       56.7 %   $ 17,310       57.7 %

Consolidated cost of goods sold totaled approximately $19,548,000, or 56.7%, of product revenue, for the fiscal year ended June 30, 2009 as compared to $17,310,000, or 57.7%, of product revenue, for the prior fiscal year.
Cost of goods sold in the Drew business segment totaled $11,207,000, or 62.0%, of product revenue, for the fiscal year ended June 30, 2009 as compared to $8,928,000, or 67.0%, of product revenue, for the prior fiscal year. The decrease in the cost of goods sold as a percentage of revenue is due to the acquisitions of JAS on May 29, 2008 and certain assets of Biocode Hycel on December 31, 2008. Sales at both of these divisions consist primarily of higher margin reagent sales. These higher margin sales have been offset by margin compression related to the continued strength of the Euro against the US Dollar which negatively affects the margins on Drew's new D3 offering that is manufactured in France by an OEM partner.
Cost of goods sold in the Sonomed business segment totaled $4,974,000, or 54.2%, of product revenue, for the fiscal year ended June 30, 2009 as compared to $5,029,000, or 53.7%, of product revenue, for prior fiscal year. The increase in Sonomed's cost of goods sold as a percentage of revenue was primarily caused by an increase in sales discounts during the period as a result of sales to the more price sensitive international market combined with a decrease in overall domestic sales.
Cost of goods sold in the Vascular business segment totaled $1,450,000, or 37.5%, of product revenue, for fiscal year ended June 30, 2009 as compared to $1,538,000, or 37.3%, of product revenue, for the last fiscal year. The relatively unchanged cost of goods as a percentage of product revenue is indicative of Vascular's continued solid margins on its core needle business.
Cost of goods sold in the EMI business segment totaled $1,069,000, or 51.4%, of product revenue, for fiscal year ended June 30, 2009 as compared to $820,000, or 46.5%, of product revenue, for the last fiscal year. The increase as a percentage of product revenue was due to the need to increase discounts related to the difficult economic environment experienced during the current year.
Cost of goods sold in the Medical/Trek business segment totaled $848,000, or 67.2%, of product revenue, for the fiscal year ended June 30, 2009 as compared to $995,000, or 70.6%, of product revenue, for the last fiscal year. The decrease as a percentage of product revenue was due to price increase to its customers.
The following table presents consolidated marketing, general and administrative expenses as well as identifying trends in business segment marketing, general and administrative expenses for the fiscal years ended June 30, 2009 and 2008. Table amounts are in thousands:

Fiscal Years Ended June 30, 2009 2008 % Change

               Marketing, General and Administrative:

               Drew              $      7,090      $  5,287           34.1 %
               Sonomed                  2,485         2,219           12.0 %
               Vascular                 1,458         1,576            7.5 %
               EMI                        601           605           -0.7 %
               Medical/Trek             3,213         4,705           31.7 %


               Total             $     14,846      $ 14,392            3.2 %

Consolidated marketing, general and administrative expenses increased $454,000, or 3.2%, to $14,846,000 during the fiscal year ended June 30, 2009 as compared to the prior fiscal year.
Marketing, general and administrative expenses in the Drew business segment increased $1,803,000, or 34.1%, to $7,090,000 as compared to the same period last fiscal year. The increase is primarily due to the acquisitions of JAS on May 29, 2008 and certain assets of Biocode Hycel on December 31, 2008 offset by significantly lower legal fees during the current year and by reductions in force implemented in June 2008.
Marketing, general and administrative expenses in the Sonomed business segment increased by $266,000, or 12.0%, to $2,485,000 as compared to the prior fiscal year. The increase is due primarily to the addition of a marketing consultant in the United States and the addition of a consultant in South-east Asia and increased travel and advertising related to marketing and trade show activity during the current year.
Marketing, general and administrative expenses in the Vascular business segment decreased $118,000, or 7.5%, to $1,458,000 as compared to the same period last fiscal year. This decrease is related to a reduction in force at our Wisconsin facility and decreased participation in trade shows and advertising.
Marketing, general and administrative expenses in the EMI business segment decreased $4,000 or .7% to $601,000 as compared to last fiscal year.
The Medical/Trek business unit's marketing, general and administrative expenses decreased $1,492,000 or 31.7% to $3,213,000 as compared to the last fiscal year. The decrease was due primarily to a reduction in force, lower compensation expense for directors under SFAS No. 123(R) rules, decreased expenses for third party consultants in valuation services, information technology and accounting, and a reduction in legal fees.
The following table presents consolidated research and development expenses by reportable business segment and as a percentage of related segment product revenues for the fiscal years ended June 30, 2009 and 2008. Table amounts are in thousands:

Fiscal Years Ended June 30, 2009 2008 % Change

                 Research and Development:

                 Drew            $    1,800       $ 2,745          -34.4 %
                 Sonomed              1,085           779           39.3 %
                 Vascular               219           260          -15.8 %
                 EMI                    362           268           35.1 %
                 Medical/Trek             9             6           50.0 %


                 Total           $    3,475       $ 4,058          -14.4 %

Consolidated research and development expenses decreased $583,000, or 14.4%, to $3,475,000 during the fiscal year ended June 30, 2009 as compared to the prior fiscal year. Research and development expenses were primarily expenses associated with the planned introduction of new or enhanced products in the Drew, Sonomed, Vascular and EMI business units.
Research and development expenses in the Drew business segment decreased $945,000, or 34.4%, to $1,800,000. The decrease is related to the decision made in June 2008 to drastically reduce Drew's research and development department and move to an outsourced research and development model.
Research and development expenses in the Sonomed business segment increased $306,000 or 39.3%, to $1,085,000 as compared to the last fiscal year. The increase is primarily due to consulting expenses incurred during the year related to the development two new products, the VuMax III, and the PacScan Plus. The PacScan Plus has been completed and received FDA approval in September 2009. Additional work on the VuMax III has been suspended.
Research and development expenses in the Vascular business segment decreased $41,000 or 15.8%, to $219,000 as compared to the last fiscal year. The decrease was due to higher costs in the prior year related to the completion of the VascuViewTM, a new visual ultrasound device, which received FDA approval on January 20, 2008.
Research and development in the EMI business segment increased $94,000 or 35.1%, to $362,000 as compared to the last fiscal year. The increase was primarily due to higher expenses in the current period related to the development of the new Access product.
Research and development in the Medical/Trek business segment increased $3,000 to $9,000 as compared to the last fiscal year.
Gain on sale of assets was approximately $92,000 and $0 during the fiscal years ended June 30, 2009 and 2008, respectively due to the sale of assets at Drew related to Drew's decision to outsource future machine shop operations.
The Company recognized a loss of approximately $65,000 and $88,000 related to its investment in Ocular Telehealth Management ("OTM") during the fiscal years ended June 30, 2009 and 2008, respectively. Commencing July 1, 2005, the Company began recognizing all of the losses of OTM in its consolidated financial statements. OTM is an early stage privately held company. Prior to July 1, 2005, the share of OTM's loss recognized by the Company was in direct proportion to the Company's ownership equity in OTM. OTM began operations during the three-month period ended September 30, 2004. (See note 13 of the notes to consolidated financial statements.)
Interest income was $19,000 and $300,000 for the fiscal years ended June 30, 2009 and 2008, respectively. The increase was due to higher cash balances and effective yields on investments.

Interest expense was $216,000 and $12,000 for the fiscal years ended June 30, 2009 and 2008, respectively. The increase is related to increased debt related to the JAS and Biocode acquisitions. Goodwill Impairment-Sonomed
During the last six months of the fiscal year ended June 30, 2009 Sonomed experienced a significant decrease in demand for its product offering. The Company believes that this decrease in volume is related to the global economic downturn and the effect it has had on the ability of Sonomed's traditional customer base to add additional or upgraded capital equipment at this time. These troubling economic conditions have also lead to increased sales discounts to Sonomed's distributors in order to entice end users to purchase or to compete with toughening competition. These uncertainties in the market along with increased competition from existing competitors and emerging technologies have made it difficult for Sonomed to project future revenue and cash flow. The effect these conditions had on fiscal 2009's actual performance as compared to budgeted performance was significant with actual profitability approximately 65% lower than anticipated. The Company believes that these negative sales and profitability trends will continue for the foreseeable future and thus will have a significant negative effect on Sonomed's estimated future operating results and cash flow. Sonomed reduced its work force by 13% during the fourth quarter of the year ended June 30, 2009 in response to these uncertainties. Sonomed believes that these events negatively affected the evaluation of the future operating results and cash flows of Sonomed.
The Company tests goodwill for possible impairment on an annual basis and at any other time events occur or circumstances indicate that the carrying amount of goodwill may be impaired.
The first step of the SFAS No. 142 impairment analysis consists of a comparison of the fair value of the reporting segment with its carrying amount, including the goodwill. The fair value was determined based on the income approach, which estimates the fair value based on the future discounted cash flows. Under the income approach, the Company assumed, with respect to Sonomed, a forecasted cash flow period of five years, long-term annual growth rates of 3% and a discount rate of 19%.
Based on the annual income approach analysis that was separately performed for each operating segment, it was determined that in the Sonomed segment the carrying amount of the goodwill was in excess of its respective fair value. As such, the Company was required to perform the second step analysis for Sonomed in order to determine the amount of the goodwill impairment. The second step analysis consisted of comparing the implied fair value of the goodwill with the carrying amount of the goodwill, with an impairment charge resulting from any excess of the carrying value of the goodwill over the implied fair value of the goodwill. Based on the second step analysis, the Company concluded that all $9,525,550 of the goodwill recorded at Sonomed was impaired. As a result, the Company recorded a non-cash goodwill impairment charge to operations totaling $9,525,550 for the year ended June 30, 2009.
The determination as to whether a write-down of goodwill is necessary involves significant judgment based on short-term and long-term projections of the Company. The assumptions supporting the estimated future cash flows of the reporting segment, including profit margins, long-term forecasts, discount rates and terminal growth rates, reflect the Company's best estimates. Goodwill Impairment-Drew
Drew encountered a series of events during the third and fourth quarters of the fiscal year ended June 30, 2008 that had a material effect on the valuation of our goodwill related to the purchase of Drew. These events include a development delay of Drew's DS-360 instrument that Drew had previously anticipated would be completed by the fourth quarter of the fiscal year ending June 30, 2008, and a contract dispute with Point Care Technologies ("PCT") that has delayed the development of Drew's 2280 HT HIV instrument (see footnote 8 "Commitments and Contingencies" in the notes to the financial statements in the Company's Form 10-K annual report for the fiscal year ended June 30, 2008).

The development of Drew's proposed new diabetes instrument, the DS-360, is indefinitely delayed because of difficulties related to the final phase of its development. The DS-360 is intended as Drew's next generation diabetes instrument, which is a key line of business for Drew. The uncertainty of the DS-360's completion combined with the continued aging of Drew's existing diabetes instrument offerings has had a negative impact on Drew's estimated future operating results and cash flow. Drew, in consultation with independent consultants, continues to evaluate the development status of the DS-360 project. Until the evaluation is completed, Drew cannot estimate the timing of the 510(k) application submission for the instrument to the FDA or whether the submission will be made.
Also, Drew had anticipated that the joint development project it had undertaken with PCT of Drew's 2280 HT HIV instrument would be completed during the fiscal year ended June 30, 2008. In December 2008 Drew settled a contract dispute with PCT relating to this project (see footnote 8 "Commitments and Contingencies" in the Company's Form 10-K annual report for the fiscal year ended June 30, 2008 for details on the dispute). As part of the settlement, dated November 3, 2008 Drew and PCT are no longer jointly developing the 2280 HT HIV instrument, and Drew is unable to estimate when or if the 2280 HT HIV instrument will be completed. Drew undertook the development effort at considerable cost because it believed that the 2280 HT HIV instrument had significant potential in monitoring the status of HIV patients. The uncertainty whether the 2280 HT HIV will be completed has had a negative impact on Drew's estimated future operating results and cash flow.
Because of these developments and the continued diminished operating results of Drew's aging legacy projects, the Company reduced its work force during the fourth quarter of the year ended June 30, 2008 by 23 positions and restructured certain management responsibilities. These events negatively affected the evaluation by the Company of the future operating results and cash flows of Drew.
The Company tests goodwill for possible impairment on an annual basis and at any other time events occur or circumstances indicate that the carrying amount of goodwill may be impaired.
The first step of the SFAS No. 142 impairment analysis consists of a comparison of the fair value of the reporting segment with its carrying amount, including the goodwill. The fair value was determined based on the income approach, which estimates the fair value based on the future discounted cash flows. Under the income approach, the Company assumed, with respect to Drew, a forecasted cash flow period of five years, long-term annual growth rates of 5% and a discount rate of 14%.
Based on the annual income approach analysis that was separately performed for each operating segment, it was determined that in the Drew segment the carrying amount of the goodwill was in excess of its respective fair value. As such, the Company was required to perform the second step analysis for Drew in order to determine the amount of the goodwill impairment. The second step analysis consisted of comparing the implied fair value of the goodwill with the carrying amount of the goodwill, with an impairment charge resulting from any excess of the carrying value of the goodwill over the implied fair value of the goodwill. Based on the second step analysis, the Company concluded that all $9,574,655 of the goodwill recorded at Drew was impaired. As a result, the Company recorded a non-cash goodwill impairment charge to operations totaling $9,574,655 for the year ended June 30, 2008.
The determination as to whether a write-down of goodwill is necessary involves significant judgment based on short-term and long-term projections of the Company. The assumptions supporting the estimated future cash flows of the reporting segment, including profit margins, long-term forecasts, discount rates and terminal growth rates, reflect the Company's best estimates. Results of Operations
Fiscal Years Ended June 30, 2008 and 2007 The following table shows consolidated product revenue by business segment as well as identifying trends in business segment product revenues for the fiscal years ended June 30, 2008 and 2007. Table amounts are in thousands:

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