Forward Looking Statements

Certain statements contained in, or incorporated by reference in, this report are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which provide current expectations or forecasts of future events. Such statements can be identified by the use of terminology such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "intend," "may," "plan," "possible," "project," "should," "will," and similar words or expressions. The Company's forward-looking statements include certain information relating to general business strategy, growth strategies, financial results, liquidity, discontinued operations, product development, the introduction of new products, the potential markets and uses for the Company's products, the Company's regulatory filings with the FDA, acquisitions, the development of joint venture opportunities, intellectual property and patent protection and infringement, the loss of revenue due to the expiration on termination of certain agreements, the effect of competition on the structure of the markets in which the Company competes, increased legal, accounting and Sarbanes-Oxley compliance costs, compliance with Nasdaq continued listing qualifications, defending the Company in litigation matters and the Company's cost saving initiatives. The reader must carefully consider forward-looking statements and understand that such statements involve a variety of risks and uncertainties, known and unknown, and may be affected by assumptions that fail to materialize as anticipated. Consequently, no forward-looking statement can be guaranteed, and actual results may vary materially. It is not possible to foresee or identify all factors affecting the Company's forward-looking statements, and the reader therefore should not consider the list of such factors contained in its periodic report on Form 10-K for the year ended June 30, 2011 and this Form 10-Q quarterly report to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions.

Executive Overview - Nine-Month Period Ended March 31, 2012

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

• Product revenue decreased approximately 3.7% during the nine-month period ended March 31, 2012, as compared to the same period last fiscal year. The decrease was related to a decrease in ECD business segment of 7.2% during the nine-month period ended March 31, 2012 compared to the same period last fiscal year.

• There is no other revenue during the nine-month period ended March 31, 2012 as compared to $7,000 for the same period last fiscal year.

• Cost of goods sold as a percentage of product revenue decreased to 62.3% during the nine-month period ended March 31, 2012, as compared to approximately 64.7% for the same period last fiscal year mainly due to change of product mix favoring higher-margin products and the continuing process of outsourcing manufacturing and closing the Dallas facility.

• Marketing, general and administrative expenses decreased approximately 6.0% during the nine-month period ended March 31, 2012, as compared to the same period in the prior fiscal year. The decrease was primarily due to a decrease in administrative expense in the ECD business related to the planned closure of the Dallas facility.

Company Overview

The following discussion should be read in conjunction with interim condensed consolidated financial statements and the notes thereto, which are set forth in Item 1 this report.

The Company operates in the healthcare market specializing in the development, manufacture, marketing and distribution of medical devices and pharmaceuticals in the areas of ophthalmology, diabetes, and hematology. The Company and its products are subject to regulation and inspection by the FDA. The FDA requires extensive testing of new products prior to sale and has jurisdiction over the safety, efficacy and manufacture of products, as well as product labeling and marketing. The Company's Internet address is www.escalonmed.com.

Critical Accounting Policies

The preparation of financial statements requires management to make estimates and assumptions that impact amounts reported therein. The most significant of those involve the application of FASB-issued authoritative guidance concerning Revenue Recognition, Goodwill and Other Intangible Assets, discussed further in the notes to consolidated financial statements included in the Form 10-K for the year ended June 30, 2011. The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, and, as such, include amounts based on informed estimates and judgments of management. For example, estimates are used in determining valuation allowances for deferred income taxes, uncollectible receivables, obsolete inventory, sales returns and rebates, warranty liabilities and purchased intangible assets. Actual results achieved in the future could differ from current estimates. The Company used what it believes are reasonable assumptions and, where applicable, established valuation techniques in making its estimates.

Revenue Recognition

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

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

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

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

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

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

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

Valuation of Intangible Assets

The Company annually evaluates for impairment its intangible assets and goodwill in accordance with FASB ASC 350, "Goodwill and Other Intangible Assets," or whenever events or changes in circumstances indicate that the carrying value may not be recoverable, see footnote 4 to consolidated financial statements included in the Company's Form 10-K for the year ended June 30, 2011 for details on a goodwill impairment charge related to the carrying amount of EMI's goodwill. These intangible assets include goodwill, trademarks and trade names. Recoverability of these assets is measured by comparison of their carrying amounts to future discounted cash flows the assets are expected to generate. If identifiable intangibles are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair market value. The Company does not amortize intangible assets with indefinite useful lives, rather such assets are required to be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that the assets may be impaired. The Company performs its intangible asset impairment tests on or about June 30, of each year. Any such impairment charge could be significant and could have a material adverse impact on the Company's financial statements if and when an impairment charge is recorded.

Income/(Loss) Per Share

The Company computes net income/(loss) per share under the provisions of FASB issued authoritative guidance.

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

Taxes

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

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

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

Through March 31, 2012, the Company has recorded a valuation allowance against the Company's net operating losses for substantially all of the deferred tax asset due to uncertainty of their realization as a result of the Company's earnings history, the number of years the Company's net operating losses and tax credits can be carried forward, the existence of taxable temporary differences and near-term earnings expectations. The amount

of the valuation allowance could decrease if facts and circumstances change that materially increase taxable income prior to the expiration of the loss carryforwards. Any reduction would reduce (increase) the income tax expense (benefit) in the period such determination is made by the Company.

The Company has adopted FASB issued guidance related to accounting for uncertainty in income taxes, which provides a comprehensive model for the recognition, measurement, and disclosure in financial statements of uncertain income tax positions that a company has taken or expects to take on a tax return. Under the FASB guidance a company can recognize the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit can be recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Additionally, companies are required to accrue interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws. The Company has elected to recognize interest expense and penalties related to uncertain tax positions as a component of its provision for income taxes.

Stock-Based Compensation

Stock-based compensation expense for all stock-based compensation awards granted after July 1, 2006 is based on the grant-date fair value estimate in accordance with the provisions of the FASB issued guidance. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award.

Valuations are based on highly subjective assumptions about the future, including stock price volatility and exercise patterns. The fair value of share-based payment awards was estimated using the Black-Scholes option pricing model. Expected volatilities are based on the historical volatility of the Company's stock. The Company uses historical data to estimate option exercise and employee terminations. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

Three- and Nine-Month Periods Ended March 31, 2012 and 2011

The following table shows consolidated product revenue from continuing
operations by business segment as well as identifying trends in business segment
product revenues for the three- and nine-month periods ended March 31, 2012 and
2011. Table amounts are in thousands:



                                             For the Three Months Ended                  For the Nine Months Ended
                                                     March 31,                                   March 31,
                                         2012           2011        % Change          2012          2011        % Change
Product Revenue:

ECD                                    $   2,968       $ 3,395          -12.6 %    $    9,675     $ 10,423           -7.2 %
Sonomed-Escalon                            3,098         3,004            3.1 %         8,691        8,653            0.4 %


Total                                  $   6,066       $ 6,399           -5.2 %    $   18,366     $ 19,076           -3.7 %

• Product revenue decreased approximately $333,000, or 5.2%, to $6,066,000 for the three-month period ended March 31, 2012, as compared to the same period last fiscal year.

In the ECD business segment, product revenue decreased $427,000, during the three-month period ended March 31, 2012, or 12.6% to $2,968,000, as compared to the same period last fiscal year. The decrease is related to a decline in sales of instruments and reagents related to decreased availability of instruments due to the decision to outsource the manufacturing of instruments and an increase in the chemistry reagents backlog.

Drew received and sold 32 units from its outsource partner and anticipates receiving approximately 30 units per quarter for the remainder of the year. Drew is investigating outsource partners for its Drew 2280 hematology analyzer, as well as, pursuing alternative hematology instruments from other manufacturers. Drew continues to manufacture its Hemavet analyzer at is Dallas facility and expects to begin outsourcing its manufacture by the end of the current fiscal year.

In the Sonomed-Escalon business segment, product revenue increased $94,000, or 3.1% to $3,098,000 during the three-month period ended March 31, 2012, as compared to the same period last fiscal year. The increase in product revenue was primarily caused by increased sales of Digital imaging systems.

• Product revenue decreased approximately $710,000, or 3.7%, to $18,366,000 during the nine-month period ended March 31, 2012, as compared to the same period last fiscal year.

In the ECD business segment, product revenue decreased $748,000, or 7.2% to $9,675,000, as compared to the same period last fiscal year. The decrease is related to a decline in sales of diabetes instruments and reagents related to decreased availability of instruments due to the decision to outsource the manufacturing of instruments and an increase in the chemistry reagents backlog.

During the three months ended March 31, 2012, Drew's outsource partner began to supply DS5 diabetes instruments for sale. Drew received and sold 32 units from its outsource partner and anticipates receiving approximately 30 units per quarter for the remainder of the year. Drew is investigating outsource partners for its Drew 2280 hematology analyzer, as well as, pursuing alternative hematology instruments from other manufacturers. Drew continues to manufacture its Hemavet analyzer at is Dallas facility and expects to begin outsourcing its manufacture by the end of the current fiscal year.

In the Sonomed-Escalon business segment, product revenue increased $38,000, or 0.4% to $8,691,000 during the nine-month period ended March 31, 2012, as compared to the same period last fiscal year. The increase in product revenue was primarily caused by increased sales of Digital imaging systems.

The following table shows consolidated other revenue by business segment as well as identifying trends in business segment other revenues for the three- and nine-month periods ended March 31, 2012 and 2011. Table amounts are in thousands:

                        For the Three Months Ended                   For the Nine Months Ended
                                 March 31,                                   March 31,
                   2012            2011         % Change       2012        2011          % Change
Other Revenue:

ECD               $     0         $     0             0.0 %    $   0       $   7              -100.0 %
Sonomed-Escalon         0               0             0.0 %        0           0                 0.0 %


Total             $     0         $     0             0.0 %    $   0       $   7              -100.0 %

There was no other revenue during the three-month periods ended March 31, 2012 and 2011.

There was no other revenue during the nine-month period ended March 31, 2012 as compared to $7,000 during the same period last fiscal year.

The following table presents consolidated cost of goods sold from continuing operations by reportable business segment and as a percentage of related segment product revenues for the three- and nine-month periods ended March 31, 2012 and 2011. Table amounts are in thousands:

                                              For the Three Months Ended                       For the Nine Months Ended
                                                      March 31,                                        March 31,
                                       2012         %          2011         %           2012         %           2011         %
Cost of Goods Sold:

ECD                                   $ 2,094       70.6 %    $ 2,562       75.5 %    $  7,261       75.1 %    $  7,735       74.2 %
Sonomed-Escalon                         1,499       48.4 %      1,508       50.2 %       4,185       48.2 %       4,601       53.2 %


Total                                 $ 3,593       59.2 %    $ 4,070       63.6 %    $ 11,446       62.3 %    $ 12,336       64.7 %

• Cost of goods sold totaled approximately $3,593,000, or 59.2% of product revenue, for the three-month period ended March 31, 2012, as compared to $4,070,000 or 63.6%, of product revenue for the same period last fiscal year.

Cost of goods sold in the ECD business segment totaled $2,094,000, or 70.6% of product revenue, for the three-month period ended March 31, 2012, as compared to $2,562,000, or 75.5% of product revenue, for the same period last fiscal year. The decrease in cost of goods sold as a percentage of product revenue is related to the continuing process of outsourcing manufacturing and closing the Dallas facility. Drew anticipates outsourcing the remaining manufacturing activities at it Dallas facility by June 30, 2012.

Cost of goods sold in the Sonomed-Escalon business segment totaled $1,499,000, or 48.4% of product revenue, for the three-month period ended March 31, 2012, as compared to $1,508,000, or 50.2% of product revenue, for the same period last fiscal year. The decrease in Sonomed's cost of goods sold as a percentage of revenue was primarily related to the reduced labor costs and change of product mix in favor of higher margin Axis image management systems.

• Cost of goods sold totaled approximately $11,446,000, or 62.3% of product revenue, for the nine-month period ended March 31, 2012, as compared to $12,336,000, or 64.7% of product revenue, for the same period last fiscal year.

Cost of goods sold in the ECD business segment totaled $7,261,000, or 75.1% of product revenue, for the nine-month period ended March 31, 2012 as compared to $7,735,000, or 74.2% of product revenue, for the same period last fiscal year. The increase of approximately 1% is related to a write-off of slow moving inventory during the second quarter of the current fiscal year offset by decreased costs related to the continuing process of outsourcing manufacturing and closing the Dallas facility.

Cost of goods sold in the Sonomed-Escalon business segment totaled $4,185,000, or 48.2% of product revenue, for the nine-month period ended March 31, 2012 as compared to $4,601,000 or 53.2% of product revenue, for the same period last fiscal year. The decrease in Sonomed's cost of goods sold as a percentage of revenue was primarily related to the reduced labor costs and change of product mix in favor of higher margin domestic Axis and VuMax sales.

The following table presents consolidated marketing, general and administrative expenses from continuing operations as well as identifying trends in business segment marketing, general and administrative expenses for the three- and nine-month periods ended March 31, 2012 and 2011. Table amounts are in thousands:

                                              For the Three Months Ended                   For the Nine Months Ended
                                                       March 31,                                   March 31,
                                           2012           2011        % Change         2012          2011        % Change
Marketing, General and Administrative:

ECD                                     $    1,065       $ 1,286          -17.2 %    $   3,187      $ 3,844          -17.1 %
Sonomed-Escalon                                781           674           15.9 %        2,286        2,093            9.2 %
Corporate                                      775           756            2.5 %        2,196        2,220           -1.1 %


Total                                   $    2,621       $ 2,716           -3.5 %    $   7,669      $ 8,157           -6.0 %

• Marketing, general and administrative expenses decreased $95,000, or 3.5% to $2,621,000 during the three-month period ended March 31, 2012, as compared to the same period last fiscal year.

Marketing, general and administrative expenses in the ECD business segment decreased $221,000, or 17.2%, to $1,065,000 for the three-month period ended March 31, 2012, as compared to the same period last fiscal year. The decrease is related to a reduction in force and other administrative expenses related to the planned closure of the Dallas facility.

Marketing, general and administrative expenses in the Sonomed-Escalon business segment increased $107,000, or 15.9%, to $781,000 for the three-month period ended March 31, 2012, as compared to the same period last fiscal year. The increase is due to increased headcount in sales and marketing, exhibition expenses and advertising expenses.

Marketing, general and administrative expenses in the Corporate business segment increased $19,000, or 2.5%, to $775,000 for the three-month period ended March 31, 2012, as compared to the same period last fiscal year. The increase is related to increased printing and legal expense.

• Marketing, general and administrative expenses decreased $488,000 or 6.0% to $7,669,000 for the nine-month period ended March 31, 2012, as compared to the same period last fiscal year.

Marketing, general and administrative expenses in the ECD business segment decreased $657,000, or 17.1%, to $3,187,000 for the nine-month period ended March 31, 2012, as compared to the same period last fiscal year. The decrease is related to a reduction in force and other administrative expenses related to the planned closure of the Dallas facility.

Marketing, general and administrative expenses in the Sonomed-Escalon business segment increased $193,000, or 9.2%, to $2,286,000 for the nine-month period ended March 31, 2012, as compared to the same period last fiscal year. The increase headcount in sales and marketing, exhibitions expense and advertising expenses partially offset by reduction in commission, royalties and consulting expense.

Marketing, general and administrative expenses in the Corporate business segment decreased $24,000, or 1.1%, to $2,196,000 for the nine-month period ended March 31, 2012, as compared to the same period last fiscal year. The decrease is due to a decrease in accounting, investor relations, director stock option compensation expense and depreciation expense.

The following table presents consolidated research and development expenses from continuing operations as well as identifying trends in business segment research and development expenses for the three- and nine-month periods ended March 31, 2012 and 2011. Table amounts are in thousands:

                                             For the Three Months Ended                  For the Nine Months Ended
                                                     March 31,                                   March 31,
                                         2012           2011        % Change         2012          2011        % Change
Research and Development:
. . .