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, dispositions, 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, 2012 and this Form 10-Q quarterly report to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions.

Executive Overview-Six-Months Ended December 31, 2012 and 2011.

The following highlights are discussed in further detail within this Form 10-Q. The reader is encouraged to read this
Form 10-Q in its entirety to gain a more complete understanding of factors impacting Company performance and financial condition.
• Consolidated product revenue from continuing operations increased approximately $318,000 or 5.7%, to $5,910,000 during the six-months ended December 31, 2012 as compared to same period of the last fiscal year. The increase in revenue is attributed to an increase in Sonomed's ultrasound products, EMI's digital imaging cameras and AXIS image management systems offset by slight a decrease in Trek products.

• Consolidated cost of goods sold from continuing operations totaled approximately $2,972,000, or 50.3%, of product revenue from continuing operations, for the six months ended December 31, 2012, as compared to $2,686,000, or 48.0%, of product revenue from continuing operations, for the same period of the prior fiscal year. The increase of 2.3% in cost of goods sold as a percentage of revenue is due mainly to the product mix sold during the current period.

• Total operating expenses increased approximately $81,000 or 2.4% during the six-month period ended December 31, 2012 as compared to the same period of prior fiscal year. This was due to a $100,000 or 23.3% in research and development expenses offset by decreased marketing, general and administrative expenses of $20,000 or 0.7%.

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 of 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, 2012. 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 SFAS 142, "Goodwill and Other Intangible Assets," or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. 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 tax 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 December, 31, 2012, the Company has recorded a valuation allowance against the Company's net operating losses for all of the deferred tax assets 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 anticipates having sufficient net operating loss carry-forwards to offset the net gain on the sale of Drew of $4,019,000, however, due to alternative minimum taxes, the Company has recorded a liability of $80,000 for accrued taxes which is included in the gain on discontinued operations. 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, if any, 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. Results of Operations
Three-Months Ended December 31, 2012 and 2011 The following table shows consolidated product revenue by business segment, as well as identifying trends in business segment product revenues for the three-month and six-month periods ended December 31, 2012 and 2011. Table amounts are in thousands:

                                  Three Months Ended December 31,            Six Months Ended December 31,
                                    2012          2011      % Change         2012           2011       % Change
Product Revenue:
Sonomed-Escalon                $      3,641     $ 3,186        14.3 %   $      5,910     $  5,593         5.7 %
Total                          $      3,641     $ 3,186        14.3 %   $      5,910     $  5,593         5.7 %

Consolidated product revenue from continuing operations increased approximately $455,000 or 14.3% to $3,641,000 during the three months ended December 31, 2012 as compared to same period of the last fiscal year. The increase in revenue is attributed to an increase in Sonomed's ultrasound products, EMI's digital imaging cameras and AXIS image management systems offset by a decrease in Trek products.
Consolidated product revenue from continuing operations increased approximately $317,000 or 5.7%, to $5,910,000 during the six months ended December 31, 2012 as compared to same period of the last fiscal year. The increase in revenue is attributed to an increase in Sonomed's ultrasound products and EMI's digital imaging cameras and AXIS image management systems offset by slight a decrease in Trek products.
The following table presents consolidated cost of goods sold by reportable business segment and as a percentage of related segment product revenues for the three months and six months ended December 31, 2012 and 2011. Table amounts are in thousands:

                                  Three Months Ended December 31,                    Six Months Ended December 31,
                                2012             %        2011        %           2012           %        2011         %
Cost of Goods Sold:
Sonomed-Escalon           $    1,776           48.8 %   $ 1,462     45.9 %   $   2,972         50.3 %   $ 2,686      48.0 %
Total                     $    1,776           48.8 %   $ 1,462     45.9 %   $   2,972         50.3 %   $ 2,686      48.0 %

Consolidated cost of goods sold from continuing operations totaled approximately $1,776,000 , or 48.8% of product revenue from continuing operations, for the three months ended December 31, 2012, as compared to $1,462,000, or 45.9% of product revenue from continuing operations, for the same period of the prior fiscal year. The increase of 2.9% in cost of goods sold as a percentage of revenue is due mainly to the product mix sold during the current period.

Consolidated cost of goods sold from continuing operations totaled approximately $2,972,000, or 50.3%, of product revenue from continuing operations, for the six months ended December 31, 2012, as compared to $2,686,000, or 48.0%, of product revenue from continuing operations, for the same period of the prior fiscal year. The increase of 2.3% in cost of goods sold as a percentage of revenue is due mainly to the product mix sold during the current period.

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 three months and six months ended December 31, 2012 and 2011. Table amounts are in thousands:

                                          Three Months Ended December 31,           Six Months Ended December 31,
                                           2012          2011      % Change         2012          2011      % Change
Marketing, General and Administrative:
Sonomed-Escalon                        $       790     $   820       (3.7 )%    $     1,542     $ 1,505        2.5  %
Corporate                                      699         714       (2.1 )%          1,353       1,410       (4.0 )%
Total                                  $     1,489     $ 1,534       (3.0 )%    $     2,895     $ 2,915       (0.7 )%

Consolidated marketing, general and administrative expenses from continuing operations decreased $45,000, or 3.0%, to $1,489,000 during the three months ended December 31, 2012, as compared to the same period of the prior fiscal year.
Marketing, general and administrative expenses in the Sonomed-Escalon business segment decreased $30,000, or 3.7%, to $790,000 during the three-month period ended December 31, 2012 as compared to the same period last fiscal year. The decrease is due to decreased legal expense and bad debts expenses.
Marketing, general and administrative expenses in the Corporate business segment decreased $15,000, or 2.1% to $699,000 during the three-month period ended December 31, 2012 as compared to the same period last fiscal year. The decrease is due to decreased expense in payroll and consulting offset by increased legal expenses and general insurance expenses.
Consolidated marketing, general and administrative expenses from continuing operations decreased $20,000, or 0.7%, to $2,895,000 during the six-month ended December 31, 2012, as compared to the same period of the prior fiscal year. Marketing, general and administrative expenses in the Sonomed-Escalon business segment increased $37,000, or 2.5%, to $1,542,000 during the six-month period ended December 31, 2012 as compared to the same period last fiscal year. The increase is due to an increase in sales people and related sales, marketing and advertising expenses.
Marketing, general and administrative expenses in the Corporate business segment decreased $57,000, or 4% to $1,353,000 during the six-month period ended December 31, 2102, as compared to the same period last fiscal year. The decrease is due to decreased expense in payroll and consulting offset by increased legal expenses and general insurance expenses.
The following table presents consolidated research and development expenses from continuing operations by reportable business segment and as a percentage of related segment product revenues for the three-months and six-months ended December 31, 2012 and 2011. Table amounts are in thousands:

                                      Three Months Ended December 31,          Six Months Ended December 31,
                                       2012          2011      % Change        2012         2011     % Change
Research and Development:
Sonomed Escalon                    $       266     $   211         26.1 %   $     530     $  430         23.3 %
Total                              $       266     $   211         26.1 %   $     530     $  430         23.3 %

Consolidated research and development expenses from continuing operations increased $55,000, or 26.1% of product revenue, to $266,000 during the three-month period ended December 31, 2012, as compared to the same period of the prior fiscal year. Research and development expenses were primarily expenses associated with the planned introduction of new or enhanced products in the Sonomed-Escalon business units. The increase is related to increased engineering staff and related expenses.
Consolidated research and development expenses from continuing operations increased $100,000, or 23.3% of product revenue, to $530,000 during the six-months period ended December 31, 2012, as compared to the same period of the prior fiscal year. Research and development expenses were primarily expenses associated with the planned introduction of new or enhanced products in the Sonomed-Escalon business units. The increase is related to increased engineering staff and related expenses.

For the three-month period ended December 31, 2012 and 2011, the Company had net income and net loss from discontinued operations of $3,867,000 and $3,426,000, respectively. The current year amount for income from discontinued operations is related to the income from discontinued operations of the ECD segment of $72,000 and $3,939,000 from the sale of Drew's net assets and gain on debt extinguishment net of taxes of $80,000. The prior year amount for loss from discontinued operations includes a loss from discontinued operations of BHH of $2,463,000 and loss from discontinued operations of the ECD segment of $963,000.

For the six-month period ended December 31, 2012 and 2011 the Company had net income and net loss from discontinued operations of $4,058,000 and $3,717,000, respectively. The current year amount for income from discontinued operations is related to the income from discontinued operations of the ECD segment of $119,000 and $3,939,000 from the sale of Drew's net assets and gain on debt extinguishment net of taxes of $80,000. The prior year amount for loss from discontinued operations includes a loss from discontinued operations of BHH of $2,765,000 and loss from discontinued operations of the ECD segment of $952,000. The Company recognized a gain of $4,000 and $0 related to its investment in Ocular Telehealth Management ("OTM") during the three-month periods ended December 31, 2012 and 2011, respectively, and recognized a gain of $5,000 and $1,000 for the six-month periods ended December 31, 2012 and 2011, respectively. OTM is an early stage privately held company. OTM began operations during the three-month period ended September 30, 2004. (See note 6 of the notes to the December 31, 2012 condensed consolidated financial statements.) Interest expense was $0 and $88,000 for the three-month periods ended December 31, 2012 and 2011, respectively, and $93,000 and $171,000 for the six-month periods ended December 31, 2012 and 2011, respectively. The decrease in interest expense during the three-month and six-month periods is due to the settlement of the BHH acquisition debt in October 2012 (see Note 9 of the notes to the December 31, 2012 condensed consolidated financial statements).

Liquidity and Capital Resources
The following table presents overall liquidity and capital resources as of
December 31, 2012 and June 30, 2012. Table amounts are in thousands:


                                       19
--------------------------------------------------------------------------------

                                      December 31, 2012     June 30, 2012
Current Ratio:
Current assets                       $           7,287     $       7,881
Less: Current liabilities                        2,249             8,063
Working capital                      $           5,038     $        (182 )
Current ratio                                 3.2 to 1          1.0 to 1
Debt to Total Capital Ratio:
Notes payable and current maturities $               -     $       4,450
Total debt                                           -             4,450
Total equity                                     4,746               645
Total capital                        $           4,746     $       5,095
Total debt to total capital                          - %            87.3 %

Working Capital Position
Working capital increased $5,220,000 as of December 31, 2012, and the current ratio increased to 3.2 to 1 from 1.0 to 1 when compared to June 30, 2012. Debt to Total Capital Ratio decreased to 0 as of December 31, 2012 from 87.3% when compared to June 30, 2012 as a result of the settlement of BHH debt and payment on the related party note payable during October 2012.

On October 3, 2012 the Company sold its Clinical Diagnostics Business to ERBA Diagnostics, Inc. The ECD segment consisted of Drew Scientific, Inc., and its wholly owned subsidiaries JAS and Drew Scientific Limited Co. The sales price was $6,500,000 in cash and the transaction generated a gain on sale of $2,717,000.

On October 18, 2012, the Company and its debt holder reached an agreement whereby the Company paid the balance of the seller-provided financing plus accrued interest related to the purchase of certain assets of Biocode of $4,367,604 with a one-time payment of $2,487,480 resulting in a gain on extinguishment of debt of $1,880,124. The repayment of the debt has reduced the Company's debt related to Biocode to zero. The total gain from the extinguishment of debt and the gain on the sale of assets, offset by the cumulative translation adjustment related to Drew of $578,422 was $4,019,000 before tax.

The total gain brought the Company back into compliance with the minimum $2,500,000 stockholders' equity requirement for continued listing on the NASDAQ Capital Market as set forth in Listing Rule 5550(b).

The Company expects that these transactions will provide the Company with sufficient cash to fund its operations over the next 12 months.

Cash Used In or Provided By Operating Activities During the six-month periods ended December 31, 2012 and 2011, the Company generated cash outflows from continuing operating activities of $1,105,000 and $266,000, respectively. The net increase in cash used in operating activities of approximately $839,000 for the six-month period ended December 31, 2012, as compared to the same period in the prior fiscal year is due primarily to the following factors:
For the six-month period ended December 31, 2012, the Company had a net income of $3,560,000, which includes net income from discontinued operations of $4,058,000, and experienced net cash in flows from an increase in accounts . . .