-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
 MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
 TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
 P8LgH/v05fGJQw3VeSgbotJvm1EuYPUvCU8Sy/e5zLA6Kp7euzBjOJHmd/V3O+LW
 JlthNB6KCOLHE3X51rt/fA==

<SEC-DOCUMENT>/in/edgar/work/20000913/0001021408-00-002832/0001021408-00-002832.txt : 20000922
<SEC-HEADER>0001021408-00-002832.hdr.sgml : 20000922
ACCESSION NUMBER:		0001021408-00-002832
CONFORMED SUBMISSION TYPE:	10KSB40
PUBLIC DOCUMENT COUNT:		4
CONFORMED PERIOD OF REPORT:	20000531
FILED AS OF DATE:		20000913

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			BIOMERICA INC
		CENTRAL INDEX KEY:			0000073290
		STANDARD INDUSTRIAL CLASSIFICATION:	 [3843
]		IRS NUMBER:				952645573
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			0531
</COMPANY-DATA>

		FILING VALUES:
			FORM TYPE:		10KSB40
			SEC ACT:		
			SEC FILE NUMBER:	000-08765
			FILM NUMBER:		722495
</FILING-VALUES>

			BUSINESS ADDRESS:	
				STREET 1:		1533 MONROVIA AVENUE
				CITY:			NEWPORT BEACH
				STATE:			CA
				ZIP:			92663
				BUSINESS PHONE:		9496452111
</BUSINESS-ADDRESS>

				MAIL ADDRESS:	
					STREET 1:		1533 MONROVIA AVENUE
					CITY:			NEWPORT BEACH
					STATE:			CA
					ZIP:			92663
</MAIL-ADDRESS>

					FORMER COMPANY:	
						FORMER CONFORMED NAME:	NMS PHARMACEUTICALS INC
						DATE OF NAME CHANGE:	19871130
</FORMER-COMPANY>

						FORMER COMPANY:	
							FORMER CONFORMED NAME:	NUCLEAR MEDICAL SYSTEMS INC
							DATE OF NAME CHANGE:	19830216
</FORMER-COMPANY>

							FORMER COMPANY:	
								FORMER CONFORMED NAME:	NUCLEAR INSTRUMENTS INC
								DATE OF NAME CHANGE:	19720508
</FORMER-COMPANY>
</FILER>
</SEC-HEADER>
<DOCUMENT>
<TYPE>10KSB40
<SEQUENCE>1
<FILENAME>0001.txt
<DESCRIPTION>BIOMERICA COMMON STOCK
<TEXT>

<PAGE>

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

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

                                  FORM 10-KSB

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

FOR THE FISCAL YEAR ENDED MAY 31, 2000            COMMISSION FILE NUMBER: 0-8765
- --------------------------------------            ------------------------------

                                BIOMERICA, INC.
                    ------------------------------------
                    (Small Business Issuer in its Charter)

          DELAWARE                                                95-2645573
- -------------------------------                              -------------------
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)


1533 MONROVIA AVENUE, NEWPORT BEACH, CA                             92663
- ---------------------------------------                            --------
(Address of principal executive offices)                          (Zip Code)

         Issuer's Telephone Number:                            (949) 645-2111
         --------------------------                             -------------

         Securities registered under Section 12(b) of the Exchange Act:
(Title of each class)              (Name of each exchange on which registered)
 -------------------                -----------------------------------------
        NONE                                          NASDAQ

         Securities registered under Section 12(g) of the Exchange Act:
                             (Title of each class)
                         -----------------------------
                         COMMON STOCK, PAR VALUE $0.08

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES[x] NO[_]
                                                          ------------

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained herein, and will not be contained, to the best of issuer's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[X]
- ---

State issuer's revenues for its most recent fiscal year:  $8,033,708.

State the aggregate market value of the voting and non-voting stock held by non-
affiliates of the issuer (based upon 3,896,865 shares held by non-affiliates and
the closing price of $1.3125 per share for Common Stock in the over-the-counter
market as of August 21, 2000): $5,114,635.

Number of shares of the issuer's common stock, par value $0.08, outstanding as
of August 21, 2000: 4,578,623 shares.

DOCUMENTS INCORPORATED BY REFERENCE: The issuer's proxy statement for its 2000
Annual Meeting of Stockholders is incorporated into Part III hereof. Also
incorporated by reference are the Annual Reports on Form 10-KSB for the fiscal
year ended May 31, 2000, for Lancer Orthodontics, Inc.

Transitional Small Business Disclosure Format                 YES [_]   NO [X]
- ------------------------------------------------------------------------------
<PAGE>

                                    PART I*

  ITEM 1.   DESCRIPTION OF BUSINESS
            -----------------------

  THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A "SAFE HARBOR"
  FOR FORWARD-LOOKING STATEMENTS. CERTAIN INFORMATION CONTAINED HEREIN (AS WELL
  AS INFORMATION INCLUDED IN ORAL STATEMENTS OR OTHER WRITTEN STATEMENTS MADE OR
  TO BE MADE BY BIOMERICA) CONTAINS STATEMENTS THAT ARE FORWARD-LOOKING, SUCH AS
  STATEMENTS RELATING TO ANTICIPATED FUTURE REVENUES OF THE COMPANY AND
  SUCCESS OF CURRENT PRODUCT OFFERINGS. SUCH FORWARD-LOOKING INFORMATION
  INVOLVES IMPORTANT RISKS AND UNCERTAINTIES THAT COULD SIGNIFICANTLY AFFECT
  ANTICIPATED RESULTS IN THE FUTURE, AND ACCORDINGLY, SUCH RESULTS MAY DIFFER
  MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY OR
  ON BEHALF OF BIOMERICA. THE POTENTIAL RISKS AND UNCERTAINTIES INCLUDE, AMONG
  OTHERS, FLUCTUATIONS IN THE COMPANY'S OPERATING RESULTS DUE TO ITS NEW
  BUSINESS MODEL AND EXPANSION PLANS AND THE COMPETITIVE ENVIRONMENT IN WHICH
  THE COMPANY WILL BE COMPETING. THESE RISKS AND UNCERTAINTIES ALSO INCLUDE THE
  SUCCESS OF THE COMPANY IN RAISING NEEDED CAPITAL, THE CONTINUAL DEMAND FOR THE
  COMPANY'S PRODUCTS, COMPETITIVE AND ECONOMIC FACTORS OF THE MARKETPLACE,
  AVAILABILITY OF RAW MATERIALS, YEAR 2000 ISSUES, HEALTH CARE REGULATIONS AND
  THE STATE OF THE ECONOMY. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
  THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF, AND
  THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE THESE FORWARD-LOOKING
  STATEMENTS.

                                   BUSINESS

                                   OVERVIEW

THE COMPANY

     Biomerica, Inc. ("Biomerica", the "Company", "we" or "our") was
incorporated in Delaware in September 1971 as Nuclear Medical Systems, Inc. We
changed our corporate name in February 1983 to NMS Pharmaceuticals, Inc., and in
November 1987 to Biomerica, Inc. We have three subsidiaries, Lancer
Orthodontics, Inc. ("Lancer"), an international manufacturer of orthodontics
products, Allergy Immuno Technologies, Inc.("AIT"), which is engaged in
providing specialized laboratory testing services and ReadyScript, Inc.
("ReadyScript"), which is a development stage company which that was created to
provide wireless handheld point of care systems to physicians. Both Lancer and
AIT are majority-controlled subsidiaries, while ReadyScript is a wholly owned
subsidiary of Biomerica. Our business is focused in two separate areas, our
diagnostic business and our proposed point-of-care wireless handheld technology
solutions. We also continue to develop products for the diagnostics business.

     We conduct our medical device business through Biomerica, Lancer and AIT.
We operate as a global medical technology company primarily engaged in
developing, manufacturing and distributing medical diagnostic products for early
detection and monitoring of chronic diseases to facilitate prevention and cure.
We use our expertise to manufacture products in the areas of diabetes, allergy,
cancer, gastroenterology, cardiology and endocrinology. Our customers include
medical schools and universities, pharmaceutical companies, health maintenance
organizations, hospitals, clinics, commercial laboratories, physician's offices,
drugstores and individual customers.

     We intend to conduct our proposed wireless point-of-care business through
ReadyScript. In June 1999, we raised $2 million in equity to develop the
infrastructure of our e-health business, now incorporated as ReadyScript, Inc.
Since that time we have used proceeds for developing an on-line drugstore and
ReadyScript's infrastructure (a wireless medication management system that
enable physicians to wirelessly transmit legible, pre-qualified formulary-
compliant prescription orders directly to the patient's choice of pharmacy).

In order to focus our efforts on the point of care portion of our e-health
business, we have closed our former online drugstore, the bigrx.com

                                      -1-
<PAGE>

                          OUR MEDICAL DEVICE BUSINESS

     Our existing medical device business is conducted through three companies:
(1) Biomerica, Inc., engaged in the diagnostic products field; (2) Lancer
Orthodontics, Inc., engaged in orthodontic products; and (3) Allergy Immuno
Technologies, Inc., engaged in allergy-related testing services.

BIOMERICA - DIAGNOSTIC PRODUCTS

     Biomerica develops, manufactures, and markets medical diagnostic products
designed to detect certain medical conditions and diseases, such as, certain
cancers, heart attack, fertility, gastritis and ulcers, diabetes and candida.

     Since 1971, our immunoassay diagnostic test kits have been used by
hospitals, clinical laboratories and medical researchers to analyze blood or
urine from patients in the diagnosis of various diseases and other medical
complications, or to measure the level of specific hormones, antibodies,
antigens or other substances which may exist in the human body in extremely
small concentrations. Our over-the-counter products such as EZDetect and Fortel
are rapid diagnostic test products that are used in the physician's office and
by the patient at home.

     Our clinical laboratory diagnostic products include tests for thyroid
conditions, yeast infections, H. pylori, and others. These diagnostic test kits
utilize enzyme immunoassay or radioimmunoassay technology. Some of these
products have not yet been submitted for clearance by the FDA for diagnostic
use, but can be sold in various foreign countries.

     Our over-the-counter and professional rapid diagnostic products help to
manage existing medical conditions and may save lives through prompt diagnosis
and early detection. Technological advances in medical diagnostics have made it
possible to perform diagnostic tests within the home and the physician's office,
rather than in the clinical laboratory. Our objective has been to develop rapid
diagnostic tests that are accurate, employ easily obtained specimens, and are
simple to perform without instrumentation.

     Until recently, tests of this kind required the services of medical
technologists and sophisticated instrumentation. Frequently, results were not
available until at least the following day. The majority of our over-the-counter
tests are FDA cleared. We believe that such tests are as accurate as laboratory
tests when used properly, require no instrumentation, give reliable results in
minutes and can be performed with confidence in the home or the physician's
office.

LANCER ORTHODONTICS, INC. -- ORTHODONTIC PRODUCTS

     Lancer is engaged in developing, manufacturing, and selling orthodontic
products including, among others, ceramic brackets and wires. Lancer is
established in the field of orthodontics and its products are sold worldwide
through a direct sales force and distributors.

     Lancer's product line includes preformed bands, direct bonding pads,
various brackets, buccal tubes, arch wires, lingual attachments and related
accessories. The foregoing are assembled to the orthodontists' prescriptions or
the specifications of private label customers. Lancer also markets products
which are purchased and resold to orthodontists, including sealants, adhesives,
elastomerics, headgear cases, retainer cases, orthodontic wire, and preformed
arches.

     Most of Lancer's manufacturing and shipping operations are located in
Mexicali, Mexico, in order to reduce the cost of manufacturing and compete more
effectively worldwide. Lancer maintains its headquarters in San Marcos,
California where it houses administration, engineering, sales and marketing, and
customer services.

                                      -2-
<PAGE>

ALLERGY IMMUNO TECHNOLOGIES, INC. -- ALLERGY SERVICES

     AIT has been providing clinical testing services to doctors, clinics and
drug firms in specialized areas of allergy and immunology determinations. AIT
also owns four patents covering several inventions relating to the therapeutic
treatment of allergy.

AIT employs one medical technologist and one technician, and receives
substantial assistance from Biomerica whose laboratory is contiguous to that of
AIT.

PRODUCTION

     All of our diagnostic test kits are processed and assembled at our
facilities in Newport Beach, California. Production of diagnostic tests involve
formulating component antibodies and antigens in specified concentrations,
attaching a tracer to the antigen, filling components into vials, packaging and
labeling. We continually engage in quality control procedures to assure the
consistency and quality of our products and to comply with applicable FDA
regulations.

     All manufacturing production is regulated by the FDA Good Manufacturing
Practices for medical devices. We have an internal quality control unit that
monitors and evaluates product quality and output. In addition, we employ a
qualified external quality assurance consultant who monitors procedures and
provides guidance in conforming with the Good Manufacturing Practices
regulations. We either produce our own antibodies and antigens or purchase these
materials from qualified vendors. We have alternate, approved sources for raw
materials procurement and we believe that material availability in the
foreseeable future does not pose a primary constraint for us in our relevant
ranges of production.

     Lancer currently utilizes a manufacturing subcontractor to provide
manufacturing services to Lancer through its affiliated entities located in
Mexicali, B.C., Mexico. The current agreement allows for the pass through of
actual costs plus a weekly administrative fee. This gives Lancer greater control
over all costs associated with the manufacturing operation. During 1999, Lancer
extended the Manufacturing Agreement through December, 2003. Lancer has retained
an option to convert the manufacturing operation to a wholly owned subsidiary at
any time without penalty. Should Lancer discontinue operations in Mexico, it is
responsible for accumulated employee seniority obligations as prescribed by
Mexican law. At May 31, 2000, this obligation was approximately $256,000. Such
obligation is contingent in nature and accordingly has not been accrued in the
financial statements.

RESEARCH AND DEVELOPMENT

     Biomerica is engaged in research and development to broaden its diagnostic
product line in specific areas. Research and development expenses include the
costs of materials, supplies, personnel, facilities and equipment. Lancer is
engaged in development programs to improve and expand its orthodontic products
and production techniques. Lancer consults frequently with practicing
orthodontists.

     Research and development expenses incurred by Biomerica for the years ended
May 31, 2000 and 1999 aggregated $898,000 and $459,000, respectively. These
expenses included approximately $184,000 and $165,000 for fiscal 2000 and 1999,
respectively, for Lancer's product development.

     In fiscal 1999, development costs of $47,000 and equipment and leasehold
costs of $32,000 were incurred by Lancer in the development of PARAGON(TM), a
dental amalgam.

                                      -3-
<PAGE>

MARKETS AND METHODS OF DISTRIBUTION

     Biomerica has approximately 320 current customers for its diagnostic
business, of which approximately 60 are distributors and the balance are
hospital and clinical laboratories, medical research institutions, medical
schools, pharmaceutical companies, chain drugstores, wholesalers and physicians'
offices.

     We rely on unaffiliated distributors, advertising in medical and trade
journals, exhibitions at trade conventions, direct mailings and an internal
sales staff to market our diagnostic products. We target three main markets: (a)
clinical laboratories, (b) physicians' offices, and (c) over-the-counter drug
stores. Separate marketing plans are utilized in targeting each of the three
markets.

     Lancer sells its products directly to orthodontists through company-paid
sales representatives in the United States. At the end of its fiscal year,
Lancer had five sales representatives, all in the United States, all of whom are
employees of Lancer.

     In selected foreign countries, Lancer sells its products directly to
orthodontists through its international marketing division. Lancer also sells
its products through distributors in certain foreign countries and to other
companies on a private label basis. Lancer has entered into a number of
distributor agreements whereby it granted the marketing rights to its products
in certain sales territories in Mexico, Central America, South America, Europe,
Canada, Australia, and Japan. The distributors complement the international
marketing department which was established in 1982 and currently employs three
people.

     The loss of any one or a few customers would not have a material adverse
effect upon our revenues.

BACKLOG

     At May 31, 2000 and 1999 Biomerica and Allergy Immuno Technologies, Inc.
had no backlog of product orders. As of May 31, 2000 and 1999, Lancer had a
backlog of $146,000 and $213,000, respectively.

RAW MATERIALS

     The principal raw materials utilized by us consist of various chemicals,
serums, reagents, radioactive isotopes and packaging supplies. Almost all of our
raw materials are available from several sources, and we are not dependent upon
any single source of supply or a few suppliers. Many antibodies used in our
immunoassay products are produced by us by injecting antigens into animals which
are maintained by us.

     We maintain inventories of antibodies and antigens as components for our
diagnostic test kits. Due to a limited shelf life on some products such as the
RIA kits, which averages 60 days, finished kits are prepared as required for
immediate delivery of pending and anticipated orders. Sales orders are normally
processed on the day of receipt.

     The principal raw materials used by Lancer in the manufacture of its
products include: stainless steel, which is available from several commercial
sources; nickel titanium, which is available from three sources; and lucolux
translucent ceramic, which is currently only available from one source, General
Electric, and is purchased on open account. Ceramic material similar to General
Electric's lucolux translucent ceramic is available from other sources. Lancer
had no difficulty in obtaining an adequate supply of raw materials during its
1999 fiscal year, and does not anticipate that there will be any interruption or
cessation of supply in the future.


COMPETITION

     Immunodiagnostic products are currently produced by more than 100
companies, a majority of which are located within the United States. Biomerica
and its subsidiaries are not a significant factor in the market. Allergy
diagnostic products are currently produced by over ten competitors, and there
are
<PAGE>

approximately the same number producing allergy therapeutics.

     Our competitors vary greatly in size. Many are divisions or subsidiaries of
well-established medical and pharmaceutical concerns which are much larger than
Biomerica and expend substantially greater amounts than we do for research and
development, manufacturing, advertising and marketing.

     The primary competitive factors affecting the sale of diagnostic products
are uniqueness, quality of product performance, price, service and marketing.
The prices for our products compare favorably with those charged by most of our
competitors.

     We believe we compete primarily on the basis of our reputation for the
quality of our products, the speed of our test results, the unique niches we
fill in the market, our patent position, and our prompt shipment of orders. We
offer a broader range of products than many competitors of comparable size, but
to date have had limited marketing capability. We are working on expanding this
capability through strategic cooperations with larger companies and
distributors.

     Lancer encounters intense competition in the sale of orthodontic products.
Lancer's management believes that Lancer's seven major competitors are: Unitek,
a subsidiary or division of 3M; "A" Company, a private company; Ormco, a
subsidiary or division of Sybron; RMO Inc., a private company; American
Orthodontics, a private company; GAC, a foreign company; and Dentaurum, a
foreign company. Lancer estimates that these seven competitors account for
approximately 80% of the orthodontic products manufactured and sold in the
United States. Lancer's management also believes that each of these seven
competitors is larger than Lancer, have more diversified product lines and have
financial resources exceeding those of Lancer. While there is no assurance that
Lancer will be successful in meeting the competition of these seven major
competitors or other competitors, Lancer has, in the past, successfully competed
in the orthodontic market and has achieved recognition of both its name and its
products.

     With respect to AIT, the independent clinical laboratory industry in the
U.S. and in California is highly competitive and fragmented. According to one
industry source, there are approximately 4,500 independent clinical laboratories
in the U.S. These independent clinical laboratories fall into two separate
categories: (1) smaller, local laboratories that generally offer fewer tests and
services and (2) larger laboratories. The Company is a small laboratory.


GOVERNMENT REGULATION OF OUR DIAGNOSTIC BUSINESS

     As part of our diagnostic business, we sell products that are legally
defined to be medical devices. As a result, we are considered to be a medical
device manufacturer, and as such are subject to the regulations of numerous
governmental entities. These agencies include the Food and Drug Administration
(the "FDA"), the United States Drug Enforcement Agency (the "DEA"),
Environmental Protection Agency, Federal Trade Commission, Occupational Safety
and Health Administration, U.S. Department of Agriculture ("USDA"), and Consumer
Product Safety Commission. These activities are also regulated by various
agencies of the states and localities in which our products are sold. These
regulations govern the introduction of new medical devices, the observance of
certain standards with respect to the manufacture and labeling of medical
devices, the maintenance of certain records and the reporting of potential
product problems and other matters.

     The Food, Drug & Cosmetic Act of 1938 (the "FDCA") regulates medical
devices in the United States by classifying them into one of three classes based
on the extent of regulation believed necessary to ensure safety and
effectiveness. Class I devices are those devices for which safety and
effectiveness can reasonably be ensured through general controls, such as device
listing, adequate labeling, pre-market notification and adherence to the Quality
System Regulation ("QSR") as well as Medical Device Reporting (MDR), labeling
and other regulatory requirements. Some Class I medical devices are exempt from
the requirement of Pre-Market Approval ("PMA") or clearance. Class II devices
are those devices for which safety and effectiveness can reasonably be ensured
through the use of
<PAGE>

special controls, such as performance standards, post-market surveillance and
patient registries, as well as adherence to the general controls provisions
applicable to Class I devices. Class III devices are devices that generally must
receive pre-market approval by the FDA pursuant to a pre-market approval
application to ensure their safety and effectiveness. Generally, Class III
devices are limited to life-sustaining, life-supporting or implantable devices.
However, this classification can also apply to novel technology or new intended
uses or applications for existing devices.

     If the FDA finds that the device is not substantially equivalent to a
predicate device, the device is deemed a Class III device, and a manufacturer or
seller is required to file a PMA application. Approval of a PMA application for
a new medical device usually requires, among other things, extensive clinical
data on the safety and effectiveness of the device. PMA applications may take
years to be approved after they are filed. In addition to requiring clearance or
approval for new medical devices, FDA rules also require a new 510(k) filing and
review period, prior to marketing a changed or modified version of an existing
legally marketed device, if such changes or modifications could significantly
affect the safety or effectiveness of that device. The FDA prohibits the
advertisement or promotion or any approved or cleared device for uses other than
those that are stated in the device's approved or cleared application.

     Pursuant to FDCA requirement, we have registered our manufacturing facility
with the FDA as a medical device manufacturer, and listed the medical devices we
manufacture. We are also subject to inspection on a routine basis for compliance
with FDA regulations. This includes the QSR, which, unless the device is a Class
I exempt device, requires that we manufacture our products and maintain our
documents in a prescribed manner with respect to issues such as design controls,
manufacturing, testing and validation activities. Further, we are required to
comply with other FDA requirements with respect to labeling, and the MDR
regulation which requires that we provide information to the FDA on deaths or
serious injuries alleged to have been associated with the use of our products,
as well as product malfunctions that are likely to cause or contribute to death
or serious injury if the malfunction were to recur. We believe that we are
currently in material compliance with all relevant QSR and MDR requirements.

     In addition, our facility is required to have a California Medical Device
Manufacturing License. The license is not transferable and must be renewed
annually. Approval of the license requires that we be in compliance with QSR,
labeling and MDR regulations. Our license expires on March 16, 2001. We are also
registered with the Department of Health and Human Services, Public Health
Service of the FDA as a Device establishment. This registration expires on
February 28, 2001. We also hold two radioactive materials licenses from the
State of California (both expiring on June 20, 2001), and two permits from the
USDA, one expiring on January 28, 2001 and the other expiring on June 30, 2001.
These licenses are renewed periodically, and to date we have never failed to
obtain a renewal.

     Through compliance with FDA and California regulations, we can market our
medical devices throughout the United States. International sales of medical
devices are also subject to the regulatory requirements of each country. In
Europe, the regulations of the European Union require that a device have a "CE
Mark" in order to be sold in EU countries. The directive goes into effect
beginning March 2003. The Company has already started the application process
and believes it will be compliant by the time the "CE Mark" directive becomes
effective. At present the regulatory international review process varies from
country to country. We, in general, rely upon our distributors and sales
representatives in the foreign countries in which we market our products to
ensure that we comply with the regulatory laws of such countries. We believe
that our international sales to date have been in compliance with the laws of
the foreign countries in which we have made sales. Exports of most medical
devices are also subject to certain FDA regulatory controls.

     Lancer is licensed to design, manufacture, and sell orthodontic appliances
and is subject to the Code of Federal Regulations, Section 21, parts 800-1299.
The FDA is the governing body that assesses and issues Lancer's license to
assure that it complies with these regulations. Lancer is currently licensed,
and its last assessment was in November 1997. Also, Lancer is registered and
licensed with the state of California's Department of Health Services.
<PAGE>

     Effective June 18, 1998, fifteen major European countries are requiring a
CE (European Community) certification to sell products within their countries.
In order to obtain this CE certification Lancer retained British Standards
Institution (BSI) to evaluate Lancer's quality system. Lancer's quality system
is imaged under International Standards Organization (ISO) 9002. ISO 9002 is an
internationally recognized standard in which companies establish their methods
of operation and commitment to quality. There are 20 clauses for which Lancer
has developed standard operating procedures in accordance with these ISO 9002
requirements.

     EN 46002 is the medical device directive (MDD) for the European Community.
Strict standards and clauses within the MDD are required to be implemented to
sell within the European Community. In order for Lancer's medical devices to be
sold within the European Community with the CE Mark, Lancer must fully comply
with the EN 46002 requirements. Lancer has also constructed a technical file
that gives all certifications and risk assessments for Lancer's products as a
medical device (the "Product Technical Files").

     With ISO 9002, EN 46002, and the Product Technical Files, Lancer applied
for and was granted certification under ISO 9002, EN 46002, and CE. With the CE
certification, Lancer is now permitted to sell its products within the European
Community.

     AIT currently holds an annually renewed clinical laboratory license with
the Department of Health Services, State of California. The current license
expires December 31, 2000. The Company also holds a clinical laboratory license
from the state of Florida. This current license expires November 11, 2000 and is
renewed every two years. The Company holds a CLIA Certificate of Compliance,
which is a requirement of the Federal government for clinical laboratories. This
certificate expires in February 2001 and is renewed every two years. Although
the Company has never failed to obtain renewals, its business operations would
be materially and adversely affected if it were unable to do so.

                             OUR E-HEALTH BUSINESS

   Our e-health business is conducted through ReadyScript.

READYSCRIPT - E-HEALTH TECHNOLOGY

     Our e-health division was established in November 1998 to capitalize on the
emerging market for healthcare technology. We have fortified the ReadyScript
management with a team of executives possessing extensive healthcare industry
and technology-based experience.

     ReadyScript is engaged in developing point-of-care, wireless handheld
technology solutions for the healthcare industry. The Company's first product
offering is invested to be ReadyScript-Rx, a wireless medication management
system that has been designed to enable physicians to provide legible, pre-
qualified, formulary-compliant prescription orders directly to the patient's
choice of pharmacy. The ReadyScript point-of-care technology system is being
designed to automate today's inefficient and manual processes, substantially
reduce healthcare and administrative costs, increase efficiency and enhance
patient satisfaction. The Company plans to complement ReadyScript-Rx with other
point-of-care applications such as ReadyScript-lab, ReadyScript-Imaging,
ReadyScript-Encounter/Billing, ReadyScript-Vitals and ReadyScript-referral
currently under development.

     The Company's proprietary solution utilizes an embedded relational database
installed directly on a wireless handheld computer that is small enough to fit
into the pocket of a physician's lab coat. The system will be supported by a
wireless local area network (LAN) in the physician's office that is controlled
and maintained by ReadyScript. The Company believes that wireless LANs offer (i)
stronger in-building coverage and thus enhanced reliability and performance;
(ii) greater bandwidth to support additional point-of-care applications; (iii)
greater speed and (iv) higher security.

     ReadyScript's strategy is to forge strategic relationships with large and
mid-size physician groups to rapidly achieve high physician adoption of the
ReadyScript-Rx system in strategic markets throughout the nation. To date, the
Company has signed agreements with four highly respected and leading medical
groups: Facey Medical Group, HealthCare Partners Medical Group, Talbert Medical
group and another major medical group on the West Coast. These groups represent
more than 4,000 physicians and provide care to over 600,000 managed care lives.
Three of these groups have signed exclusive 5-year agreements.
<PAGE>

     The First ReadyScript-Rx application is currently being tested in two of
the four medical groups. The Company plans to beta test six (6) new software
applications outlined above with the Company's leading physician group partner
beginning in September/October 2000.

     The First ReadyScript-Rx system, with future applications being developed,
is offered to medical group practices at a nominal monthly subscription fee per
physician. However, the Company plans to derive the majority of its revenue from
transaction fees and data management fees collected from health plans, pharmacy
benefit managers (PBMs), mail order pharmacies and retail pharmacy chains.

     In order to focus our efforts we have closed operations of our former
online drugstore, the BigRx.com. The operations were shut down in August 2000
due to insignificant revenue and non-performance by the other party of a third
party backend processing agreement.

HEALTHCARE INFORMATION TECHNOLOGY

     Though traditional desktop and laptop computers can bring enhanced
efficiencies to physician offices, the Company believes that handheld computers
are much better for use at the point-of-care, since they are lightweight, fit
easily into a lab coat, turn on instantly, and have long battery lives. Early
corporate users of handheld computers integrated into network environments, such
as FedEx and UPS, have seen tremendous benefits from this form of computing.
Only recently has handheld technology become advanced enough to support the
complex information needs of physician practices, and begun to experience wider
physician acceptance. Harvard Medical School, for example, began acclimating
physicians to handheld technology in 1995 by requiring its students to have a
handheld computer. With technology becoming more powerful and more affordable,
we believe physicians will increasingly use these tools in their practices.

MEETING THE NEEDS OF THREE KEY AUDIENCES

THE PHYSICIAN

     We are developing our ReadyScript technology to streamline the prescribing
of pharmaceuticals through automation and provide physicians immediate access to
critical information. We believe ReadyScript's benefits to physicians include:

       . PROMOTING RATIONAL, COST-EFFECTIVE AND OPTIMAL DRUG THERAPIES. We can
         provide physicians immediate access to up-to-date best practice
         guidelines for medications and formulary preferred drug information
         when making their prescribing decisions. We believe this will save
         physicians and insurers money on overall healthcare costs, and save
         patients money spent out-of-pocket for non-preferred drugs.

       . STREAMLINING THE PRESCRIBING PROCESS. Electronically transmitted
         prescriptions do not need to be handwritten, phoned or faxed into the
         pharmacy. Likewise, pharmacists do not need to phone physician offices
         to verify prescriptions. We believe this will save time and increase
         productivity for physicians and pharmacies alike.

       . EMPOWERS PHYSICIANS. We believe our ReadyScript technology will
         provide physicians greater confidence in their patient management
         decisions, as they will have immediate access to pertinent patient
         information and current best practice standards. We believe they will
         also be able to reference up-to-date chronic disease management
         information amassed from various health information sources to help
         educate their patients and increase patient compliance.

       . INCREASING PATIENT SATISFACTION. Physicians should be able to build
         patient satisfaction by providing patients the convenience of having
         prescriptions ready for pick up or mailed directly to them.

     Facing increasing economic pressures, physicians are seeking tools to help
them save time, increase productivity, lower the cost of service delivery,
manage pharmacy risk, and improve their practice of medicine. We believe our

<PAGE>

technology solutions will help physicians achieve these benefits and maximize
their practice revenues.

THE INSURER

     The benefits of our ReadyScript technology to the insurer overlap with many
of the same benefits for physicians. We believe additional benefits to insurers
include:

     .  IMPROVED FORMULARY COMPLIANCE. We believe physicians can make more
        compliant prescribing decisions with the benefit of immediate online
        access to the insurer's formulary preferences.

     .  REDUCED ADMINISTRATIVE BURDEN AND IMPROVED CUSTOMER SATISFACTION. We
        expect insurers will realize a reduction in phone calls to their
        customer service departments regarding formulary guidelines and
        prescription approvals. We believe this should result in increased
        physician and patient satisfaction, which can help reduce the number of
        patients who may consider changing insurance plans.

     .  INCREASED MAIL-ORDER PHARMACEUTICAL FULFILLMENT. Electronic
        prescriptions routed directly to the insurer's designated mail-order
        pharmacy should contribute to lower overall pharmacy costs.

     .  IMPROVED CLINICAL OUTCOMES. We expect insurers will benefit from lower
        overall healthcare costs associated with following best practice
        guidelines for medication, improving clinical outcomes, and minimizing
        adverse drug reactions.

     We anticipate insurers will support our technology to address their
escalating healthcare and pharmacy costs, improve their medical-loss ratios, and
improve their financial viability.


THE PATIENT

 For patients, ReadyScript provides many value-added services and benefits,
including:

     .  IMPROVED CLINICAL OUTCOMES. We expect patients will benefit from the
        improved health and reduced adverse reactions resulting from their
        physicians' appropriate and optimal drug prescribing practices.

     .  Convenience

     .  Possible reduction of medication errors as a result of 1) poor
        handwriting and transcription errors and 2) adverse drug interactions.
        We also expect that ReadyScript will help reduce these errors at the
        point of care.


     We anticipate that patients will be empowered to be more active in managing
their health, and be more secure in the care they are receiving.

OPERATIONS AND TECHNOLOGY

     We believe our ReadyScript product is easy to use. It is was designed to
operate on the various Microsoft platforms including desktop and handheld
operating system environments. Built-in state-of-the-art security features are
planned to prevent unauthorized access to the ReadyScript system.

COMPETITION

     There are many competitors for the ReadyScript system, however we believe
there are only two other competitors that use a wireless LAN. We believe that
the unique features of ReadyScript offer substantial benefits to users. However,
our competitors vary greatly in size. Some are divisions of larger, well
established medical companies which are much larger than Biomerica and can
expend substantially greater resources then ReadyScript.
<PAGE>

GOVERNMENT REGULATION OF OUR READYSCRIPT BUSINESS

     Automated prescribing and the electronic routing of prescriptions to
pharmacies are governed by state and federal law. States have varying
prescription format requirements, which will be incorporated into ReadyScript.
Many states permit electronic, and/or faxed prescriptions. Many existing laws
and regulations when enacted, did not contemplate the methods of e-commerce now
being developed. The laws of several states and the DEA, which governs
controlled substances, neither specifically permit nor specifically prohibit
electronic transmission of prescription orders. Given the rapid growth of the
Internet, it is anticipated that many states, as well as the DEA, will directly
address these areas with regulation in the near future.

     Until recently, Health Care Financing Administration guidelines prohibited
transmission of Medicare eligibility information over the Internet. We are also
subject to extensive regulation relating to the confidentiality and release of
patient records. Additional legislation governing the distribution of medical
records exists or has been proposed at both the state and federal level.

SEASONALITY OF BUSINESS

     The business of the Company and its subsidiaries has not been subject to
significant seasonal fluctuations.

FOREIGN BUSINESS

     All of our fixed assets, excluding some of Lancer, are located within
southern California. The following table sets forth the dollar volume of revenue
attributable to sales to domestic customers and foreign customers during the
last two fiscal years for the Biomerica and its consolidated subsidiaries:

<TABLE>
<CAPTION>
                                                                                 YEAR ENDED MAY 31,
                                                              ----------------------------------------------------
                                                                    2000                                   1999
                                                              ------------------------         -------------------
<S>                                                           <C>                              <C>
Revenues from sales to:
 United States customers................................           $   4,451,000/55.4%         $  4,638,000/53.4%
 Asia...................................................                 349,000/ 4.3%              426,000/ 4.9%
 Europe.................................................               1,683,000/21.0%            1,710,000/19.7%
 South America..........................................                 543,000/ 6.8%              749,000/ 8.6%
 Other foreign..........................................               1,008,000/12.6%            1,165,000/13.4%
                                                                   -------------------        -------------------
  Total revenues........................................           $   8,034,000/ 100%        $   8,688,000/ 100%
                                                                   ===================        ===================
</TABLE>


     We recognize that our foreign sales could be subject to some special or
unusual risks which are not present in the ordinary course of business in the
United States. Changes in economic factors, government regulations and import
restrictions all could impact sales within certain foreign countries. Foreign
countries have licensing requirements applicable to the sale of diagnostic
products which vary substantially from domestic requirements; depending upon the
product and the foreign country, these may be more or less restrictive than
requirements within the United States. We cannot predict the impact that
conversion to the Euro in the European countries may have on Biomerica, if any.

     Foreign sales are made primarily through a network of over 60 independent
distributors in approximately 40 countries.

INTELLECTUAL PROPERTY

     We regard the protection of our copyrights, service marks, trademarks and
trade secrets as critical to our future success. We rely on a combination of
<PAGE>

copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect our proprietary rights in products and
services. We have entered into confidentiality and invention assignment
agreements with our employees and contractors, and nondisclosure agreements with
our vendors, fulfillment partners and strategic partners to limit access to and
disclosure of proprietary information. We cannot be certain that these
contractual arrangements or the other steps taken by us to protect our
intellectual property will prevent misappropriation of our technology. We have
licensed in the past, and expect that we may license in the future, certain of
our proprietary rights, such as trademarks or copyrighted material, to third
parties. While we attempt to ensure that the quality of our products brand is
maintained by such licensees, we cannot be certain that such licensees will not
take actions that might hurt the value of our proprietary rights or reputation.
We also rely on technologies that we license from third-parties, such as Sybase
and Microsoft, the suppliers of key database technology, the operating system
and specific hardware components for our service. We cannot be certain that
these third-party technology licenses will continue to be available to us on
commercially reasonable terms. The loss of such technology could require us to
obtain substitute technology of lower quality or performance standards or at
greater cost.

BRANDS, TRADEMARKS, PATENTS

     We use the trademark "ReadyScript" as identification of our automated
medication management prescribing system and have received approval from the
United States Department of Commerce, Patent and Trademark Office to use that
trademark.

     We registered the tradenames "Fortel," "Isletest," "Nimbus" and "GAP" with
the Office of Patents and Trademarks on December 31, 1985. Our unregistered
tradenames are "EZDetect," "CAST," "COT," "EquistiK," "FelistiK," "Tri-Level
Controls," "Tru-Level Controls," "T-Marker Controls," "AllerHalt," "Candiquant,"
"Candigen," "EZ-H.P." and "EZ-PSA."

     Allergy Immuno Technologies, Inc. has four patents pertaining to its
discoveries for allergy treatment. These are:

     1.  Immunotherapy agents for treatment of IgE mediated allergies; U.S.
         Patent #5,116,612, issued May 6, 1992.

     2.  Liposome containing immunotherapy agents for treatment of IgE medicated
         allergies, U.S. Patent #5,049,390, issued September 17, 1991.

     3.  Immunotherapy agents for treatment of IgE mediated allergies, U.S.
         Patent #4,946,945, issued August 7, 1990.

     4.  Allergen-thymic hormone conjugates for treatment of IgE mediated
         allergies, U.S. Patent #5,275,814, issued January 4, 1994.

     On April 4, 1989, Lancer was granted a patent on its CounterForce design of
a nickel titanium orthodontic archwire. On August 1, 1989, Lancer was granted a
patent on its bracket design used in the manufacturing of Sinterline and
Intrigue orthodontic brackets. On September 17, 1996, Lancer was granted a
patent on its method of laser annealing marking of orthodontic appliances. On
March 4, 1997, Lancer was granted a patent on an orthodontic bracket and method
of mounting. All of the patents are for a duration of 17 years. Lancer has
entered into license agreements expiring in 2006 whereby, for cash
consideration, the counter party has obtained the rights to manufacture and
market certain products patented by Lancer. Lancer has also entered into a
number of license and/or royalty agreements pursuant to which it has obtained
rights to certain of the products which it manufactures and/or markets. The
patents and agreements have had a favorable effect on Lancer's image in the
orthodontic marketplace and Lancer's sales.
<PAGE>

The laws of some foreign countries do not protect our proprietary rights to the
same extent as do the laws of the U.S. Effective copyright, trademark and trade
secret protection may not be available in such jurisdictions. Our efforts to
protect our intellectual property rights may not prevent misappropriation of our
content.

                              RECENT DEVELOPMENTS

     Our e-health division was incorporated in California in May 2000, as
ReadyScript, Inc. In connection with the organization of ReadyScript as our
wholly owned subsidiary, we have transferred employees and property (both
physical and intellectual) to ReadyScript. As of August 2000, ReadyScript has
raised $715,000 through issuance of convertible notes at an interest rate of 8%.
The notes can be converted into ReadyScript common stock based on a pre-
determined valuation. Further, upon a qualified financing or corporate
transaction defined within the note, the principal amount of the notes will
automatically convert to ReadyScript common stock in an amount that is equal to
the principal amount of the note divided by 60% of the per share purchase price
of the conversion stock in the financing or corporate transaction, as defined.
If no financing occurs prior to July 31, 2001, the principal amount of the
notes, plus accrued interest will become due and payable.

                                   EMPLOYEES

     As of August 31, 2000, the Company and its subsidiaries employed 89 full-
time employees. Lancer, through its Mexican subcontractor, utilizes the services
of approximately 100 people in Mexico. We also engage the services of various
outside Ph.D. and M.D. consultants as well as medical institutions for technical
support on a regular basis. We are not a party to any collective bargaining
agreement and have never experienced a work stoppage. We consider our employee
relations to be good.

ITEM 2.  DESCRIPTION OF PROPERTY
         -----------------------

     During fiscal 1998 we leased approximately 21,000 square feet of space in
Newport Beach, California for a term which expired May 31, 1998 (and which was
renewed until May 31, 1999) and is currently being renegotiated. Pursuant to the
lease and the current month-to-month tenancy, we pay an annual base rent, set
initially at $143,880 and adjusted annually to reflect cost of living increases,
plus all real estate taxes and insurance costs. In fiscal 1999 a portion of the
rent was paid through the issuance of shares of our restricted common stock to
JSJ Management and another individual. During fiscal 1999, an aggregate of
31,793 shares of our restricted common stock were issued at quoted market prices
in satisfaction of accrued rent totaling $38,000. During fiscal 2000 the Company
paid a total of $172,640 in rent for approximately 24,500 square feet of space.
These facilities are used for diagnostic test kit research and development,
manufacturing, marketing, administration, and our ReadyScript operations.

     The facilities are leased from Mrs. Ilse Sultanian and JSJ Management. Ms.
Janet Moore, an officer, director and shareholder of our Company, is a partner
in JSJ Management.

     AIT currently leases approximately 1,600 square feet at the above facility
for $1,400 per month. These properties are leased by AIT on a month-to-month
basis from Mrs. Sultanian and JSJ Management.

     Lancer leases a 9,240-square-foot manufacturing building in San Marcos,
California. The term of the initial lease was for five years commencing January
1, 1994. In 1998, Lancer renegotiated the lease and extended the terms to
December 31, 2003. The Mexicali facility consists of a 16,000-square-foot
manufacturing and office building. The lease expires in October 2003 and
requires monthly rentals of approximately $5,200. Our management believes that
the properties are currently suitable and adequate for Lancer's operations.

     We maintain animals at a ranch in Vista, California, which are treated
biologically to produce antibodies used in certain of our immunodiagnostic
products. These facilities are utilized on a month-to-month basis at a charge
based on the number of animals maintained at the facility.
<PAGE>

     We believe that our facilities and equipment are in suitable condition and
are adequate to satisfy the current requirements of our Company and our
subsidiaries.

ITEM 3.  LEGAL PROCEEDINGS
         -----------------

  Inapplicable.

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

  Inapplicable.


                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
         --------------------------------------------------------

     Biomerica's common stock is traded on the NASDAQ SmallCap Stock Market
under the symbol "BMRA".

     The following table shows the high and low bid prices for Biomerica's
common stock over the last two years based upon data reported by NASDAQ. Prices
shown represent quotations by dealers, and do not reflect markups, markdowns or
commissions.
                                                         Bid Prices
                                             -----------------------------------
                                                  High             Low
                                             --------------  -------------------
Quarter ended:

 May 31, 2000 . . . . . . . ..............         $4.375           $1.438
 February 29, 2000........................         $4.563           $2.031
 November 30, 1999........................         $4.25            $2.00
 August 31, 1999..........................         $3.75            $1.875
 May 31, 1999.............................         $5.00            $0.969
 February 28, 1999........................         $1.75            $0.9375
 November 30, 1998........................         $2.25            $0.875
 August 31, 1998..........................         $2.125           $1.125

     As of August 21, 2000, the number of holders of record of Biomerica's
common stock was approximately 1,641, excluding stock held in street name.

     No dividends have been declared or paid by Biomerica. We intend to employ
all available funds for development of our business and, accordingly, do not
intend to pay cash dividends in the foreseeable future.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS
         ------------------------------------

     The following discussion of our financial condition and results of
operations should be read in conjunction with our Consolidated Financial
Statements and related notes contained elsewhere in this report. This report
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ significantly from the results discussed in the
forward-looking statements.

     Operations for fiscal 1999 relate to our historic diagnostic, orthodontic
and allergy product businesses. Operations for the ReadyScript division began
after we raised $1,965,557 in equity in June 1999.
<PAGE>

RESULTS OF OPERATIONS

     We currently have three subsidiaries, Lancer Orthodontics, Inc. ("Lancer"),
which is engaged in manufacturing, sales and development of orthodontic
products, Allergy Immuno Technologies, Inc. ("AIT"), which is engaged in
providing specialized testing services to pharmaceutical companies and
physicians and has obtained four patents related to allergy treatment therapies,
and ReadyScript, which is engaged in developing innovative point-of-care,
wireless handheld technology solutions for the healthcare industry. We own
approximately 30.78% of the outstanding stock of Lancer and 74.6% of the
outstanding stock of AIT. We exercise effective control of 53.23% over Lancer
via voting agreements with certain shareholders. ReadyScript is a wholly owned
subsidiary of Biomerica. As a result of our control and ownership, our financial
statements are consolidated with those of Lancer and AIT. Both Lancer and AIT
are public companies. The common stock of Lancer is traded on the Nasdaq
SmallCap market under the symbol "LANZ," and the common stock of AIT is traded
in the pink sheets under the symbol "ALIM."

Fiscal 2000 Compared to Fiscal 1999

     Our consolidated net sales were $8,033,708 for fiscal 2000 compared to
$8,688,106 for fiscal 1999. This represents a decrease of $654,398, or 7.5% for
fiscal 2000. Of the total consolidated net sales for fiscal 2000, $5,650,512 is
attributable to Lancer, $79,976 to AIT, $2,283,433 to Biomerica and $19,787 to
ReadyScript. Lancer's sales decreased by $508,984, Biomerica showed a sales
decrease of $174,004, AIT had an increase of $9,625 and ReadyScript had an
increase of $18,965. The decrease at Lancer was attributable to increased
discounting due to competitive pressures and lower foreign sales as a result of
economic conditions in Europe and South America. While the trend in increased
discounting at Lancer continues, it has slowed, partially the result of
orthodontic industry consolidation. Lancer continues to search for new sales
representatives, distributors, private label customers, products, and product
ideas, any of which, if successful, could result in increased sales. The
decrease in sales at Biomerica was in large part due to a decrease of sales to
foreign distributors as well as in domestic sales at, in particular to a
domestic distributor which sells the products internationally. ReadyScript had
some sales from the on-line pharmacy this fiscal year which increased sales over
the prior fiscal year.

     Cost of sales in fiscal 2000 as compared to fiscal 1999 increased by
$207,910 or (3.7%). Lancer's cost of sales as a percentage of sales increased
from 61.4% to 68.4% in fiscal 2000 as compared to fiscal 1999. The increase was
primarily attributable to fixed costs of the Mexicali location not producing at
full capacity. Biomerica had an decrease in cost of goods as a percentage of
sales from 63.1% to 72.1% in fiscal 2000 as compared to fiscal 1999 due to
higher labor and other costs as well as a write-down for obsolete inventory of
approximately $80,000. AIT had a decrease in cost of goods as a percentage of
sales of 127% to 115% primarily due to lower material costs.

     Selling, general and administrative costs increased in fiscal 2000 as
compared to fiscal 1999 by $2,577,223 (82.5%). Lancer had a decrease of $85,222
in these costs due to decreases in commissions and bad debt expense, partially
offset by increases in show expenses and other expenses. Biomerica and
ReadyScript had an increase in fiscal 2000 as compared to fiscal 1999 of
$2,445,580. This increase was a result of the ReadyScript operation, which has
had minor revenues to date, but high start-up costs. AIT had increased costs of
$46,421 due to higher legal and accounting costs related to new SEC filing
requirements.

     Research and development expense increased in fiscal 2000 as compared to
fiscal 1999 by $439,512 (95.8%). Of this, Lancer had an increase of $19,211, as
a result of increased payroll and development costs of new products. Biomerica
and ReadyScript had an increase in research and development expenses of
$367,701, primarily due to the expenses related to the development of
ReadyScript. AIT had an increase of $52,300 as a result of research on a new
project.

     Interest expense, which was incurred by Lancer, increased in fiscal 2000 as
compared to fiscal 1999 by $3,955 (25.3%) due to borrowings against the line of
credit to finance development costs and an increase in the interest rate.

     Other income net, decreased by $174,269 (59.6%) in fiscal 2000 as compared
to fiscal 1999. An increase of $220,000 is attributable to Lancer due to payment
<PAGE>

from an insurance claim for inventory theft and the reversal of an accrual for
taxes assessed by a subcontractor in the prior year which was determined by
legal counsel in fiscal 2000 not to be owed, a decrease of $125,126 was
attributable to Biomerica due to a decrease in the sale of available-for-sale
securities, a decrease of $100,000 was attributable to AIT due to a non-
recurring consulting fee paid to AIT in fiscal 1999 and a decrease of 251,574
due to the write-off of offering expenses.

     As of May 31, 2000, Biomerica had net tax operating loss carryforwards of
approximately $6,648,158 and investment tax and research and development credits
of approximately $23,000, which are available to offset future federal tax
liabilities. As of May 31, 2000, Lancer had net operating loss carryforwards of
approximately $2,101,000 and business tax credits of approximately $115,000
available to offset future Federal tax liabilities. As of May 31, 2000, AIT had
net tax operating loss carryforwards of $1,866,000 and business tax credits of
approximately $29,000 to offset future Federal tax liabilities. The
carryforwards expire at varying dates from 2000 to 2012. The Company's effective
tax rates for fiscal 2000 and fiscal 1999 were 0% and 8%, respectively. These
differ from the statutory tax rates primarily as a result of changes in the
Company's valuation allowance.

Liquidity and Capital Resources

     As of May 31, 2000, we had cash and available for sale securities of
$732,984 (see Note 1 of Notes to Consolidated Financial Statements) and current
working capital of $3,981,161. The Company's fiscal 2000 losses were
substantially the result of its investment in ReadyScript. ReadyScript
subsidiary is a development-stage enterprise and will require the of a
significant amount of capital to fund its short-term and longer-term working
capital needs until it can support itself through its planned operations. The
Board of Directors of the Company have decided that the ReadyScript subsidiary
will no longer be funded in any way by Biomerica, Inc. or its other
subsidiaries. ReadyScript currently is trying to raise additional capital
through a private placement memorandum and through the issuance of convertible
debt. ReadyScript has raised $715,000 in convertible debt since May 31, 2000
(See Note 11). Management of the Company expects these funds to sustain
ReadyScript through October 31, 2000. There can be no assurances that
ReadyScript will be successful in its plans to raise additional capital to meet
its short-term and/or future working capital needs. Biomerica, Inc. and its
subsidiaries, with the exception of ReadyScript, are expected to fund their
operations for at least the next twelve months through their existing available
financing, working capital, and its shareholder line of credit (See Note 11).

     During 2000, the Company used cash in operations of $2,563,803, primarily
as a result of increased losses at the ReadyScript subsidiary. During 1999, the
Company used cash flows from operations of $358,366, primarily due to increased
in inventories. Cash used in investing activities increased during fiscal 2000
as a result of increased Investments in capital equipment and other assets.
During 1999, the Company invested in capital equipment but this was offset by
cash obtained by the sale of available-for-sale securities. The Company
generated cash flow from financing activities of $1,889,295 during fiscal 2000,
primarily due to the sale of common stock (net of offering costs) of $1,965,557.
This compares to cash provided by financing activities of $230,282 in 1999, as a
result of exercise of stock options, repayment of shareholder loan and an
increase in the credit line at Lancer.

     During fiscal 2000, Lancer's management negotiated a renewal of Lancer's
line of credit through November 3, 2000. The line of credit allows for borrowing
up to $500,000 and is limited to specified percentages of eligible accounts
receivable. The unused portion available under the line of credit at May 31,
2000, was approximately $173,000. Borrowings bear interest at prime plus 1.25%
per annum (10.75% at May 31, 2000).

     On June 11, 1999, we sold 400,000 shares of our common stock in a private
placement for $5 per share to management and an outside investor. This increased
our cash position by $1,965,557 (net of offering costs) which was primarily used
for launching of the on line drugstore, theBigRx and development of ReadyScript.

     Biomerica, Inc. entered into an agreement, in substance, for a line of
credit on September 12, 2000 with a shareholder whereby the shareholder will
loan to the Company, as needed, up to $500,000 for working capital needs. The
line of credit bears interest at 8%, is secured by Biomerica accounts receivable
and inventory and expires September 12, 2001. Biomerica and the shareholder are
in the process of formalizing this line of credit.

ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
         -------------------------------------------

     Exhibit 99.1, "Biomerica, Inc. and Subsidiaries Consolidated Financial
Statements" is incorporated herein by this reference.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.
         ---------------------------------------------------------------

 Inapplicable.
<PAGE>

                                   PART III

ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
          REGISTRANT; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
          -------------------------------------------------------------------

     This information is incorporated by reference to the Company's proxy
statement for its 2000 Annual Meeting of Stockholders which will be filed not
later than 120 days after the end of the Company's fiscal year ended May 31,
2000.

ITEM 10.  EXECUTIVE COMPENSATION
          ----------------------

      This information is incorporated by reference to the Company's proxy
statement for its 2000 Annual Meeting of Stockholders which will be filed not
later than 120 days after the end of the Company's fiscal year ended May 31,
2000.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
          --------------------------------------------------------------

     This information is incorporated by reference to the Company's proxy
statement for its 2000 Annual Meeting of Stockholders which will be filed not
later than 120 days after the end of the Company's fiscal year ended May 31,
2000.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
          ----------------------------------------------

     This information is incorporated by reference to the Company's proxy
statement for its 2000 Annual Meeting of Stockholders which will be filed not
later than 120 days after the end of the Company's fiscal year ended May 31,
2000.
<PAGE>

ITEM 13.  EXHIBITS LIST AND REPORTS ON FORM 8-K
          -------------------------------------

(a)  EXHIBITS
     --------


  EXHIBIT NO.    DESCRIPTION

   3.1           Certificate of Incorporation of Registrant filed with the
                 Secretary of the State of Delaware on September 22, 1971
                 (incorporated by reference to Exhibit 3.1 filed with Amendment
                 No. 1 to Registration Statement on Form S-1, Commission File
                 No. 2-83308).

   3.2           Certificate of Amendment to Certificate of Incorporation of
                 Registrant filed with the Secretary of the State of Delaware on
                 February 6, 1978 (incorporated by reference to Exhibit 3.1
                 filed with Amendment No. 1 to Registration Statement on Form S-
                 1, Commission File No. 2-83308).

   3.3           Certificate of Amendment to Certificate of Incorporation of
                 Registrant filed with the Secretary of the State of Delaware on
                 February 4, 1983 (incorporated by reference to Exhibit 3.1
                 filed with Amendment No. 1 to Registration Statement on Form S-
                 1, Commission File No. 2-83308).

   3.4           Certificate of Amendment to Certificate of Incorporation of
                 Registrant filed with the Secretary of the State of Delaware on
                 January 19, 1987 (incorporated by reference to Exhibit 3.4
                 filed with Form 8 Amendment No. 1 to the Registrant's Annual
                 Report on Form 10-K for the fiscal year ended May 31, 1987).

   3.5           Certificate of Amendment of Certificate of Incorporation of
                 Registrant filed with the Secretary of the State of Delaware on
                 November 4, 1987 (incorporated by reference to Exhibit 3.1
                 filed with Amendment No. 1 to Registration Statement on Form S-
                 1, Commission File No. 2-83308).

   3.6           Bylaws of the Registrant (incorporated by reference to Exhibit
                 3.2 filed with Amendment No. 1 to Registration Statement on
                 Form S-1, Commission File No. 2-83308).

   3.7           Certificate of Amendment of Certificate of Incorporation of
                 Registrant filed with the Secretary of the State of Delaware on
                 December 20, 1994 (incorporated by reference to Exhibit 3.7
                 filed with Registrant's Annual Report or Form 10-KSB for the
                 fiscal year ended May 31, 1995).

   3.8           First Amended and Restated Certificate of Incorporation Of
                 Biomerica, Inc. filed with the Secretary of State of Delaware
                 on August 1, 2000.

   4.1           Specimen Stock Certificate of Common Stock of Registrant
                 (incorporated by reference to Exhibit 4.1 filed with
                 Registrant's Registration Statement on Form SB-2, Commission
                 No. 333-87231 filed on September 16, 1999).

  10.1           Office lease dated June 1, 1988 between Registrant and
                 Redington Company covering Registrant's lease of premises at
                 1531/1533 Monrovia Avenue, Newport Beach, California
                 (incorporated by reference to Exhibit 10.1 filed with
                 Registrant's Annual Report on Form 10-K for the fiscal year
                 ended May 31, 1989).
<PAGE>

  10.2           Lancer purchase agreement and warrants (incorporated by
                 reference to Exhibit 10.10 filed with Registrant's Annual
                 Report on Form 10-K for the fiscal year ended May 31, 1989).

  10.3           1999 Stock Incentive Plan of Registrant (incorporated by
                 reference to Exhibit 10.1 to Registration Statement on Form S-8
                 filed with the Securities and Exchange Commission on March 29,
                 2000).

  10.4           1995 Stock Option and Common Stock Plan of Registrant
                 (incorporated by reference to Exhibit 4.3 to Registration
                 Statement on Form S-8 filed with the Securities and Exchange
                 Commission on January 20, 1996).

  10.5           1991 Stock Option and Restricted Stock Plan of Registrant
                 (incorporated by reference to Exhibit 4.1 to Registration
                 Statement on Form S-8 filed with the Securities and Exchange
                 Commission on April 6, 1992).

  10.6           Stock Purchase Agreement by and between Biomerica, Inc.,
                 RidgeRose Capital Partners, LLC and Zackary Irani and Janet
                 Moore dated June 11, 1999 (incorporated by reference to Exhibit
                 10.10 filed with Form 8-K on July 7, 1999).

  10.7           Stock Purchase Agreement by and between Biomerica, Inc. and
                 Zackary Irani and Janet Moore dated June 11, 1999 (incorporated
                 by reference to Exhibit 10.11 filed with Form 8-K on July 7,
                 1999).

  10.8           Back-end Processing Agreement by and between TheBigStore.com,
                 Inc. and Biomerica, Inc. and dated June 11, 1999 (incorporated
                 by reference to Exhibit 10.12 filed with Form 8-K on July 7,
                 1999).

  10.9           Common Stock Purchase Warrant granted to TheBigStore.com, Inc.
                 dated June 11, 1999 (incorporated by reference to Exhibit 10.13
                 filed with Form 8-K on July 7, 1999).

  10.10          Common Stock Purchase Warrant granted to RJM Consulting, LLC
                 dated June 11, 1999 (incorporated by reference to Exhibit 10.14
                 filed with Form 8-K on July 7, 1999).

  10.11          Non-Qualified Option Agreement by and between Zackary Irani and
                 the Company dated June 10, 1999 (incorporated by reference to
                 Exhibit 10.15 filed with Form 8-K on July 7, 1999).

  10.12          Non-Qualified Option Agreement by and between Janet Moore and
                 the Company dated June 10, 1999 (incorporated by reference to
                 Exhibit 10.16 filed with Form 8-K on July 7, 1999).

  10.13          Non-Qualified Option Agreement by and between Philip Kaplan,
                 M.D. and the Company dated June 10, 1999 (incorporated by
                 reference to Exhibit 10.17 filed with Form 8-K on July 7,
                 1999).

  10.14          Non-Qualified Option Agreement by and between Robert A.
                 Orlando, M.D., Ph.D. and the Company dated June 10, 1999
                 (incorporated by reference to Exhibit 10.18 filed Form 8-K on
                 July 7, 1999).

  10.15          Strategic Marketing Agreement entered into as of the 2nd day of
                 September, 1999 by and between TheBigHub.com, Inc., a Florida
                 corporation and Biomerica, Inc. (incorporated by reference to
                 Exhibit 10.16 filed with Registrant's Registration Statement on
                 Form SB-2, Commission No. 333-87231 filed on September 16,
                 1999).
<PAGE>

  10.16          First Amendment to Back-End Processing Agreement entered into
                 as of September 2, 1999 whereby TheBigStore.com, Inc., a
                 Delaware corporation and Biomerica amend the Back-End Agreement
                 dated June 11, 1999 (incorporated by reference to Exhibit 10.17
                 filed with Registrant's Registration Statement on Form SB-2,
                 Commission No. 333-87231 filed on September 16, 1999).

  10.17          Private Placement Memorandum of Biomerica, Inc. dated June 9,
                 1999 offering 400,000 shares of its Common Stock at $5.00 per
                 share (incorporated by reference to Exhibit 10.18 filed with
                 Registrant's Registration Statement on Form SB-2, Commission
                 No. 333-87231 filed on September 16, 1999).

  10.18          Employment Agreement entered into as of August 30, 1999 by and
                 between the Internet division of Biomerica, Inc. and Steven J.
                 Goto (incorporated by reference to Exhibit 10.19 filed with
                 Registrant's Registration Statement on Form SB-2, Commission
                 No. 333-87231 filed on September 16, 1999).

  10.19          Employment Offer Letter dated August 12, 1999 from Biomerica,
                 Inc. to Pete McKinley to join the Internet division of
                 Biomerica, Inc. (incorporated by reference to Exhibit 10.20
                 filed with Registrant's Registration Statement on Form SB-2,
                 Commission No. 333-87231 filed on September 16, 1999).

  10.20          Employment Offer Letter dated August 12, 1999 from Biomerica,
                 Inc. to Richard Jay, Pharm.D. to join the Internet division of
                 Biomerica, Inc. (incorporated by reference to Exhibit 10.21
                 filed with Registrant's Registration Statement on Form SB-2,
                 Commission No. 333-87231 filed on September 16, 1999).

  10.21          Amendment to Lease Extension/Lease Term effective January 1,
                 1999, whereby Lancer Orthodontics, Inc. and L&T Corporation, a
                 California corporation entered into an amendment and extension
                 to the terms of that certain lease agreement dated November 4,
                 1993 for the premises located at 253 Pawnee Street, Suite A,
                 San Marcos, California 92069 (incorporated by reference to
                 Exhibit 10.22 filed with Registrant's Registration Statement on
                 Form SB-2, Commission No. 333-87231 filed on September 16,
                 1999).

  10.22          Sublease Agreement entered into by and between Eagleson de
                 California S.A. de C.V. and Lancer Orthodontics, Inc.
                 commencing on November 1, 1998 covering approximately 16,000
                 square feet located in the Industrial Park at Ave. Saturno No.
                 20 and of certain improvements constructed on the land as
                 detailed in that certain sublease between the parties dated
                 April 1, 1996 (incorporated by reference to Exhibit 10.23 filed
                 with Registrant's Registration Statement on Form SB-2,
                 Commission No. 333-87231 filed on September 16, 1999).


  10.23          Fifth Revision to Manufacturing Shelter Agreement effective
                 November 1, 1998, whereby Lancer Orthodontics, Inc. and
                 Eagleson Industries, Inc. revised and amended that certain
                 Manufacturing Shelter Agreement entered into on May 11, 1990,
                 revised on June 20, 1991, December 2, 1992, July 1, 1994 and
                 April 1, 1996 (incorporated by reference to Exhibit 10.24 filed
                 with Registrant's Registration Statement on Form SB-2,
                 Commission No.
<PAGE>

                 333-87231 filed on September 16, 1999).

  10.24          Technical Skills Consulting Agreement entered into on January
                 1, 1999 by and between Lancer Orthodontics, Inc. and Alejandro
                 Carnero, a non-resident alien, independent contractor and
                 citizen of the Republic of Mexico (incorporated by reference to
                 Exhibit 10.25 filed with Registrant's Registration Statement on
                 Form SB-2, Commission No. 333-87231 filed on September 16,
                 1999).

  10.25          Product Development and Marketing Agreement entered into as of
                 August 3, 1998 by and between Lancer Orthodontics, Inc. and AG
                 Metals, Inc., a Nevada corporation (incorporated by reference
                 to Exhibit 10.26 filed with Registrant's Registration Statement
                 on Form SB-2, Commission No. 333-87231 filed on September 16,
                 1999).

  10.26          Agreement between Lancer Orthodontics, Inc. and Gary Weikel, an
                 individual, incorporating by reference that certain Product
                 Development and Marketing Agreement of even date between Lancer
                 Orthodontics, Inc. and AG Metals, Inc. (incorporated by
                 reference to Exhibit 10.27 filed with Registrant's Registration
                 Statement on Form SB-2, Commission No. 333-87231 filed on
                 September 16, 1999).

  16.1           Letter on Change of Certifying Accountant (incorporated by
                 reference to Exhibit A to Form 8-K filed with the Securities
                 and Exchange Commission on May 24, 1993).

  16.2           Letter on change of certifying accountant (incorporated by
                 reference to Exhibit A to Form 10-QSB/A filed with the
                 Securities and Exchange Commission on April 14, 1999).

  21.1           Subsidiaries of Registrant (incorporated by reference to
                 Exhibit 21.1 to Form 10-KSB filed with the Securities and
                 Exchange Commission on September 14, 1999).

  27.1           Financial Data Schedule.

  99.1           Biomerica, Inc. and Subsidiaries Consolidated Financial
                 Statements For The Years Ended May 31, 2000 and 1999 and
                 Independent Auditors' Report.


(b)  Reports on Form 8-K
     -------------------

     Biomerica filed a report on Form 8-K with the Securities and Exchange
Commission on July 7, 1999.
<PAGE>

                                  SIGNATURES

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


                                       BIOMERICA, INC.
                                       Registrant


                                       By   /s/ Zackary S. Irani
                                            -----------------------------
                                            Zackary S. Irani, Chief Executive
                                            Officer

                                       Dated:  9/12/00
                                               -------

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated:


     Signature and Capacity


/s/ Zackary S. Irani                                            Date: 9/12/00
- ------------------------------------
Zackary S. Irani
President, Director, Chief Executive
Officer


/s/ Janet Moore                                                 Date: 9/12/00
- ------------------------------------
Janet Moore, Secretary
Director, Chief Financial Officer


                                                                Date: 9/12/00


/s/ Robert Orlando                                              Date: 9/12/00
- ------------------------------------
Robert Orlando, M.D., Ph.D.
Director


/s/ Carlos St. Aubyn Beharie                                    Date: 9/12/00
- ------------------------------------
Carlos St. Aubyn Beharie
Director


/s/ David Burrows                                               Date: 9/12/00
- ------------------------------------
David Burrows
Director
<PAGE>

/s/ Francis R. Cano
- ------------------------------------            Date: 9/12/00
Francis R. Cano
Director

/s/ Allen Barbieri                              Date: 9/12/00
- ------------------------------------
Allen Barbieri
Director
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.8
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>FIRST AMENDED RESTATED CERTIFICATE
<TEXT>

<PAGE>

                          FIRST AMENDED AND RESTATED
                         CERTIFICATE OF INCORPORATION
                                       OF
                                BIOMERICA, INC.

                                                                     EXHIBIT 3.8

          Biomerica, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation") does hereby certify as follows:

          1.  The Corporation filed its original Certificate of Incorporation
with the Secretary of State of the State of Delaware on September 22, 1971 under
the name of Nuclear Medical Systems, Inc.

          2.  At a duly called meeting of the Board of Directors of the
Corporation at which a quorum was present at all times, a resolution was duly
adopted, pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware ("General Corporation Law"), setting forth the First Amended
and Restated Certificate of Incorporation of the Corporation, declaring said
First Amended and Restated Certificate of Incorporation advisable and directing
that said First Amended and Restated Certificate of Incorporation be considered
at the next annual meeting of the stockholders. The stockholders of the
Corporation duly approved said proposed First Amended and Restated Certificate
of Incorporation at such annual meeting of the stockholders in accordance with
Sections 222, 242 and 245 of the General Corporation Law.

          3.  The text of the Certificate of Incorporation of the Corporation,
as amended, is hereby further amended and restated in its entirety as follows:

                                   ARTICLE I
                                     NAME

                The name of this Corporation is Biomerica, Inc.


                                  ARTICLE II
                REGISTERED OFFICE IN STATE AND REGISTERED AGENT

          The address of the registered office of this Corporation in the State
of Delaware is 1013 Centre Road, City of Wilmington, County of New Castle. The
name of this Corporation's registered agent at such registered office is The
Prentice-Hall Corporation System, Inc.


                                  ARTICLE III
                                    PURPOSE

          The purpose for which this Corporation is organized is to engage in
any lawful act or activity for which corporations may be organized under the
General Corporation Law.

                                      A-1
<PAGE>

                                  ARTICLE IV
                                 CAPITAL STOCK

          This Corporation is authorized to issue two classes of shares
designated respectively "Common Stock" and "Preferred Stock" and referred to
herein as Common Stock or Common Shares and Preferred Stock or Preferred Shares,
respectively. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 30,000,000 shares, par value $.08,
consisting of:

          (a)  25,000,000 shares of Common Stock; and

          (b)  5,000,000 shares of Preferred Stock. The Preferred Shares may be
          issued from time to time in one or more series. The board of directors
          is authorized to fix the number of shares of any series of Preferred
          Stock and to determine the designation of any such series. The board
          of directors is also authorized to determine or alter the rights,
          preferences, privileges and restrictions granted to or imposed upon
          any wholly unissued series of Preferred Shares and, within the limits
          and restrictions stated in any resolution or resolutions of the board
          of directors originally fixing the number of shares constituting any
          series, to increase or decrease (but not below the number of shares of
          any such series then outstanding) the number of shares of any series
          subsequent to the issue of shares of that series.


                                   ARTICLE V
                     PROVISIONS FOR DEFINING, LIMITING AND
                       REGULATING CERTAIN POWERS OF THIS
               CORPORATION AND OF THE DIRECTORS AND STOCKHOLDERS

          Section 1.   Number of Directors. The number of directors which shall
                       -------------------
comprise the full Board of Directors of this Corporation shall be fixed by, or
in the manner provided in, the Bylaws of this Corporation.

          Section 2.   Power to Authorize Issuance of Stock. The Board of
                       ------------------------------------
Directors of this Corporation is hereby empowered to authorize the issuance from
time to time of shares of capital stock, whether now or hereafter authorized,
for such consideration as the Board of Directors may deem advisable, subject to
such limitations as may be set forth in this Certificate of Incorporation or in
the Bylaws of this Corporation or in the General Corporation Law.

          Section 3.   Limitation on Liability of Directors. A director of this
                       ------------------------------------
Corporation shall not be personally liable to this Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
this Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law as
now in effect, or any successor provision thereto, (iii) under Section 174 of
the General Corporation Law, or (iv) for any transaction from which the director
derived any improper personal benefit. If the General Corporation Law is

                                      A-2
<PAGE>

amended after approval by the stockholders of this Article V to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the General Corporation
Law, as so amended.

     Any repeal or modification of this Section 3 of Article V by the
stockholders of this Corporation shall not adversely affect any right or
protection of a director of this Corporation existing at the time of such repeal
or modification.

     Section 4.  Indemnification. Each director, officer and employee of this
                 ---------------
Corporation shall be indemnified by this Corporation to the fullest extent
permitted by the General Corporation Law as now or hereafter in force.

     Section 5.  Bylaws. In furtherance and not in limitation of the powers
                 ------
conferred by the laws of the State of Delaware, the board of directors of this
Corporation is expressly authorized and empowered to make, alter, amend and
repeal the Bylaws of this Corporation, subject to the power of the stockholders
of this Corporation to alter or repeal any Bylaw made by the board of directors.


                                  ARTICLE VI
                                  AMENDMENTS

     This Corporation reserves the right at any time, and from time to time, to
amend, alter, change or repeal any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by statute.

     IN WITNESS WHEREOF, this Corporation has caused this First Amended and
Restated Certificate of Incorporation to be signed by its President and attested
by its Secretary this 26th day of July, 2000.

                                         BIOMERICA, INC.


                                         By: /s/ Zackary Irani
                                            -----------------------------
                                            Zackary Irani, President

ATTEST:


By:  /s/ Janet Moore
   ---------------------------
    Janet Moore, Secretary

                                      A-3
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27
<SEQUENCE>3
<FILENAME>0003.txt
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<FLAWED>
<TEXT>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<TABLE> <S> <C>

<PAGE>

<ARTICLE> 5

<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          MAY-31-2000
<PERIOD-END>                               MAY-31-2000
<CASH>                                         634,210
<SECURITIES>                                    98,774
<RECEIVABLE>                                 1,898,729
<ALLOWANCES>                                   196,794
<INVENTORY>                                  2,860,284
<CURRENT-ASSETS>                             5,808,723
<PP&E>                                       3,396,560
<DEPRECIATION>                               2,926,110
<TOTAL-ASSETS>                               6,735,309
<CURRENT-LIABILITIES>                        1,827,562
<BONDS>                                              0
<COMMON>                                       366,005
<PREFERRED>                                          0
<PREFERRED-MANDATORY>                                0
<OTHER-SE>                                   2,429,574
<TOTAL-LIABILITY-AND-EQUITY>                 6,735,309
<SALES>                                      8,033,708
<TOTAL-REVENUES>                             8,033,708
<CGS>                                        5,624,630
<TOTAL-COSTS>                                5,624,630
<OTHER-EXPENSES>                             6,599,085
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              19,562
<INCOME-PRETAX>                            (3,888,449)
<INCOME-TAX>                                     2,400
<INCOME-CONTINUING>                        (3,890,849)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                               (3,890,849)
<EPS-BASIC>                                      (.86)
<EPS-DILUTED>                                    (.86)


</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>BIOMERICA FINANCIAL STATEMENTS
<TEXT>

<PAGE>

                       Biomerica, Inc. and Subsidiaries

                                                                    EXHIBIT 99.1

                                   Contents



          Report of Independent Certified Public Accountants,
           BDO Seidman, LLP                                             FS-2


          Consolidated Financial Statements

            Consolidated Balance Sheet as of May 31, 2000           FS-3 - FS-4

            Consolidated Statements of Operations and
             Comprehensive (Loss) Income for the Years Ended
             May 31, 2000 and 1999, respectively                 FS-5 - FS-6

            Consolidated Statements of Shareholders' Equity
             for the Years Ended May 31, 2000 and 1999           FS-7 - FS-8

            Consolidated Statements of Cash Flows for the
             Years Ended May 31, 2000 and 1999                   FS-9 - FS-10


            Notes to Consolidated Financial Statements         FS-11 - FS-43
<PAGE>

Report of Independent Certified Public Accountants


Board of Directors
Biomerica, Inc. and Subsidiaries


We have audited the accompanying consolidated balance sheet of Biomerica, Inc.
and Subsidiaries (the "Company") as of May 31, 2000, and the related
consolidated statements of operations and comprehensive loss, shareholders'
equity and cash flows for the years ended May 31, 2000 and 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Biomerica, Inc. and
subsidiaries as of May 31, 2000, and the results of their operations and their
cash flows for the years ended May 31, 2000 and 1999, in conformity with
generally accepted accounting principles.

                                                                BDO SEIDMAN, LLP


Costa Mesa, California
August 11, 2000, except as
  to Note 11, which is
  as of September 12, 2000

                                     FS-2
<PAGE>


May 31,                                                               2000
- ---------------------------------------------------------------------------

Assets

Current assets
 Cash and cash equivalents                                      $   634,210
 Available for-sale securities                                       98,774
 Accounts receivable, less allowance for doubtful accounts
  and sales returns of $196,794                                   1,701,935
 Inventories                                                      2,860,284
 Notes receivable                                                    34,994
 Prepaid expenses and other                                         478,526
- ---------------------------------------------------------------------------

Total current assets                                              5,808,723
- ---------------------------------------------------------------------------

Inventories, non-current                                             21,405
- ---------------------------------------------------------------------------

Land held for investment                                             46,000
- ---------------------------------------------------------------------------

Property and equipment, at cost
 Equipment                                                        2,876,604
 Furniture, fixtures and leasehold improvements                     519,956
- ---------------------------------------------------------------------------

                                                                  3,396,560

Accumulated depreciation and amortization                        (2,926,110)
- ---------------------------------------------------------------------------

Net property and equipment                                          470,450

Intangible assets, net of accumulated amortization                  366,814

Other assets                                                         21,917
- ---------------------------------------------------------------------------

                                                                $ 6,735,309
===========================================================================

                                     FS-3
<PAGE>

                                            Biomerica, Inc. and Subsidiaries

                                                  Consolidated Balance Sheet

May 31,                                                                2000
- ----------------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities
 Line of credit                                                 $    160,000
 Accounts payable and accrued expenses                             1,314,047
 Accrued compensation                                                353,515
- ----------------------------------------------------------------------------

Total current liabilities                                          1,827,562
- ----------------------------------------------------------------------------




Minority interests                                                 2,112,168




Shareholders' equity
 Common stock, $.08 par value; 10,000,000 shares authorized;
  4,575,070 shares issued and outstanding                            366,005
 Additional paid in capital                                       15,529,421
 Accumulated other comprehensive loss                                 (4,323)
 Accumulated deficit                                             (13,095,524)
- ----------------------------------------------------------------------------

Total shareholders' equity                                         2,795,579
- ----------------------------------------------------------------------------

                                                                $  6,735,309
============================================================================

                See accompanying notes to consolidated financial statements.

                                     FS-4
<PAGE>

                                        Biomerica, Inc. and Subsidiaries

                               Consolidated Statements of Operations and
                                                      Comprehensive Loss


Years Ended May 31,                                           2000        1999
- ------------------------------------------------------------------------------

Net sales                                              $ 8,033,708  $8,688,106


Cost of sales                                            5,624,630   5,416,720
- ------------------------------------------------------------------------------

Gross profit                                             2,409,078   3,271,386
- ------------------------------------------------------------------------------

Operating expenses
 Selling, general and administrative                     5,700,963   3,123,740
 Research and development                                  898,122     458,610
- ------------------------------------------------------------------------------

Total operating expenses                                 6,599,085   3,582,350
- ------------------------------------------------------------------------------

Operating loss                                          (4,190,007)   (310,964)


Other income (expense)
 Interest expense                                          (19,562)    (15,607)
 Other income, net                                         118,398     292,667
- ------------------------------------------------------------------------------

Loss, before minority interest in net loss (profits) of
 consolidated subsidiaries and income taxes             (4,091,171)    (33,904)


Minority interest in net loss (profits) of consolidated
 subsidiaries                                              202,722     (33,240)
- ------------------------------------------------------------------------------

Loss, before income taxes                               (3,888,449)    (67,144)


Income tax expense                                           2,400       5,404
- ------------------------------------------------------------------------------

Net loss                                                (3,890,849)    (72,548)
- ------------------------------------------------------------------------------

                                     FS-5
<PAGE>

                                        Biomerica, Inc. and Subsidiaries

                               Consolidated Statements of Operations and
                                                      Comprehensive Loss


Years Ended May 31,                                            2000        1999
- -------------------------------------------------------------------------------

Other comprehensive income (loss), net of tax
 Unrealized gain (loss) on available-for-sale securities      4,456     (66,681)
- -------------------------------------------------------------------------------


Comprehensive loss                                      $(3,886,393) $ (139,229)
===============================================================================

Per share data:
 Net loss (basic)                                       $     (0.86) $    (0.02)
 Net loss (diluted)                                     $     (0.86) $    (0.02)
===============================================================================

Weighted average number of common and common
 equivalent shares
 Basic                                                    4,542,820   4,001,755
===============================================================================

 Diluted                                                  4,542,820   4,001,755
===============================================================================

                   See accompanying notes to consolidates financial statements.

                                     FS-6
<PAGE>

<TABLE>
<CAPTION>
                                                                              Biomerica, Inc. and Subsidiaries

                                                               Consolidated Statements of Shareholders' Equity


                                 Common Stock           Additional Accumulated Other
                            -----------------------      Paid-in    Comprehensive   Shareholder    Accumulated
                                Shares     Amount        Capital    Income (Loss)     Loan           Deficit             Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>           <C>          <C>         <C>              <C>          <C>                <C>
Balance, May 31, 1998       3,978,302     $ 318,264    $ 12,513,000    $ 57,902     $ (71,000)   $  (9,132,127)     $  3,686,039

Change in unrealized gain
  (loss) on available-for
  sale securities                   -             -               -     (66,681)            -                -           (66,681)

Payment received on
  shareholder loan                  -             -               -           -        70,000                -            70,000

Exercise of stock options     115,800         9,264         144,602           -             -                -           153,866

Stock repurchase              (15,450)       (1,236)        (19,340)          -             -                -           (20,576)

Common stock issued in
  satisfaction of payables     31,793         2,543          35,457           -             -                -            38,000

Compensation expense in
  connection with options
  granted                           -             -           4,581           -             -                -             4,581

Tax benefit from exercise
  of stock options                  -             -          25,039           -             -                -            25,039

Net loss                            -             -               -           -             -          (72,548)          (72,548)
- ------------------------------------------------------------------------------------------------------------------------------------

Balance, May 31, 1999       4,110,445       328,835      12,703,339      (8,779)       (1,000)      (9,204,675)        3,817,720
</TABLE>

                                     FS-7
<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                     Consolidated Statements of Shareholders' Equity - Continued
================================================================================

<TABLE>
<CAPTION>
                                                                Additional  Accumulated Other

                                         Common Stock             Paid-in    Comprehensive     Shareholder  Accumulated
                               ---------------------------
                                  Shares         Amount           Capital    Income (Loss)        Loan       Deficit      Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>           <C>            <C>           <C>                <C>          <C>         <C>
Private placement, net of
   offering costs of $34,443      400,000        32,000        1,933,557            --               --            --     1,965,557

Change in unrealized gain
  (loss) on available-for-
  sale securities                      --            --               --          4,456              --            --         4,456

Payment received on
  shareholder loan                     --            --               --             --           1,000            --         1,000

Exercise of stock options          56,625         4,530           56,122             --              --            --        60,652

Shares issued for services
   rendered                         8,000           640           15,360             --              --            --        16,000

Compensation expense in
   connection with options
   and warrants granted                --            --          821,043             --              --            --       821,043

Net loss                                                                                                   (3,890,849)   (3,890,849)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 2000           4,575,070    $  366,005    $  15,529,421   $     (4,323)    $        --  $(13,095,524)  $ 2,795,579
====================================================================================================================================
</TABLE>

                    See accompanying notes to consolidated financial statements.

                                     FS-8
<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                                           Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
For the Years Ended May 31,                                                         2000                    1999
- ----------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>                    <C>
Cash flows from operating activities
   Net loss                                                              $     (3,890,849)      $        (72,548)
   Adjustments to reconcile net loss to net cash
    used in operating activities:
     Depreciation and amortization                                                222,325                250,596
     Provision for losses on accounts receivable                                   (2,834)                55,569
     Loss on disposal of assets                                                         -                  2,309
     Realized loss (gain) on sale of available-for-sale securities                 13,241               (111,885)
     Warrants and options issued for services rendered                            821,043                  4,581
     Common stock of subsidiary issued for services                                50,631                      -
     Gain on conversion of subsidiary preferred stock                             (55,487)                     -
     Common stock issued for rent                                                       -                 38,000
     Common stock issued for services rendered                                     16,000
     Minority interest in net profits of consolidated subsidiaries               (202,722)                33,240
     Changes in current liabilities and assets
       Accounts receivable                                                        (95,844)               (52,138)
       Inventories                                                                198,406               (521,543)
       Prepaid expenses and other                                                 108,912               (147,204)
       Accounts payable and other accrued liabilities                             299,196                208,367
       Accrued compensation                                                       (45,821)               (45,710)
- ----------------------------------------------------------------------------------------------------------------
Net cash used in operating activities                                          (2,563,803)              (358,366)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
   Sales of available-for-sale securities                                          18,191                254,313
   Decrease (increase) in notes receivable                                          9,491                (16,000)
   Purchases of property and equipment                                           (206,383)              (100,824)
   Increase in intangible assets                                                        -                (73,860)
   Other assets                                                                  (181,786)              (106,915)
- ----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities                                            (360,487)               (43,286)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
   Net (decrease) increase under line of credit agreement                         (20,000)                80,000
   Repurchase of minority interests                                              (117,914)               (53,008)
   Decrease in shareholder receivable                                               1,000                 70,000
   Exercise of stock options                                                       60,652                153,866
   Sale of common stock, net of offering expenses                               1,965,557                      -
   Stock repurchase                                                                     -                (20,576)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                       1,889,295                230,282
- ----------------------------------------------------------------------------------------------------------------
</TABLE>

                                     FS-9
<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                                           Consolidated Statements of Cash Flows
                                                                   (continued) 6


<TABLE>
<CAPTION>
For the Years Ended May 31,                                                          2000                   1999
- -----------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>                     <C>
Net change in cash and cash equivalents                                        (1,034,995)               (171,370)

Cash and cash equivalents, beginning of year                                    1,669,205               1,840,575
- -----------------------------------------------------------------------------------------------------------------

Cash and cash equivalents, end of year                                   $        634,210        $      1,669,205
=================================================================================================================

Supplemental disclosure of cash-flow information

   Cash paid during the year for:

     Interest                                                            $         19,562        $         15,607
=================================================================================================================

     Income taxes                                                        $          2,400        $          2,400
=================================================================================================================

Supplemental disclosure of non-cash investing and
  financing activities

   Change in unrealized holding gain on available-for-sale
     securities                                                          $          4,456        $        (66,681)
=================================================================================================================

   Reduction in taxes payable and increase in additional
     paid-in capital for exercise of non-qualified stock
     options                                                             $              -        $         25,039
=================================================================================================================
</TABLE>

                    See accompanying notes to consolidated financial statements.

                                     FS-10
<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                                               Years Ended May 31, 2000 and 1999

================================================================================

1.  Organization               Biomerica, Inc. and subsidiaries (collectively
                               "the Company") are primarily engaged in: the
                               development, manufacture and marketing of medical
                               diagnostic kits, the design, manufacture and
                               distribution of various orthodontic products, the
                               performance of specialized diagnostic testing
                               services and the development of wireless handheld
                               point-of-care systems for physicians.

                               Liquidity

                               The Company's fiscal 2000 losses were
                               substantially the result of its investment in
                               ReadyScript. The Company's ReadyScript subsidiary
                               is a development-stage enterprise and will
                               require the raising of a significant amount of
                               capital to fund its short-term and longer-term
                               working capital needs until it can support itself
                               through its planned operations. The Board of
                               Directors of the Company have decided that the
                               ReadyScript subsidiary will no longer be funded
                               in any way by Biomerica, Inc. or its other
                               subsidiaries. ReadyScript currently is trying to
                               raise additional capital through a private
                               placement memorandum and through the issuance of
                               convertible debt. ReadyScript has raised $715,000
                               in convertible debt since May 31, 2000 (See Note
                               11). Management of the Company expects these
                               funds to sustain ReadyScript through October 31,
                               2000. There can be no assurances that ReadyScript
                               will be successful in its plans to raise
                               additional capital to meet its short-term and/or
                               future working capital needs. Biomerica, Inc. and
                               its subsidiaries, with the exception of
                               ReadyScript, are expected to fund their
                               operations for at least the next twelve months
                               through their existing available financing,
                               working capital, and its shareholder line of
                               credit (See Note 11).

2.  Summary of                 Principles of Consolidation
    Significant
    Accounting                 The consolidated financial statements for the
    Policies                   years ended May 31, 2000 and 1999 Policies (see
                               Note 3) include the accounts of Biomerica, Inc.
                               ("Biomerica"), Lancer Orthodontics, Inc.
                               ("Lancer"), Allergy Immuno Technologies, Inc.
                               ("AIT") and ReadyScript, Inc. All significant
                               intercompany accounts and transactions have been
                               eliminated in consolidation.

                               Accounting Estimates

                               The preparation of financial statements in
                               conformity with generally accepted accounting
                               principles requires management to make estimates
                               and assumptions that affect the reported amounts
                               of assets and liabilities and disclosure of
                               contingent assets and liabilities at the date of
                               the financial statements, and the reported
                               amounts of revenues and expenses during the
                               reported period. Actual results could materially
                               differ from those estimates.

                               Fair Value of Financial Instruments

                               The Company has financial instruments whereby the
                               fair market value of the financial instruments
                               could be different than that recorded on a
                               historical basis. The Company's financial
                               instruments consist of its cash and cash
                               equivalents, accounts receivable, notes
                               receivable, line of credit and accounts payable.
                               The carrying amounts of the Company's financial
                               instruments approximate their fair values at May
                               31, 2000.

                               Concentration of Credit Risk

                               The Company, on occasion, maintains cash balances
                               at certain financial institutions in excess of
                               amounts insured by federal agencies.

                                     FS-11

<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                                               Years Ended May 31, 2000 and 1999

================================================================================

2.  Summary of Significant     The Company provides credit in the normal course
    Accounting                 of business to customers throughout the United
    Policies                   States and foreign markets. The Company's sales
    (Continued)                are not materially dependent on a single customer
                               or a small group of customers. The Company
                               performs ongoing credit evaluations of its
                               customers. The Company does not obtain collateral
                               with which to secure its accounts receivable. The
                               Company maintains reserves for potential credit
                               losses based upon the Company's historical
                               experience related to credit losses. At May 31,
                               2000 no one customer accounted for more than 10%
                               of accounts receivable.

                               Cash Equivalents

                               Cash and cash equivalents consists of demand
                               deposits, money market accounts and mutual funds
                               with remaining maturities of three months or less
                               when purchased.

                               Available-for-Sale Securities

                               The Company accounts for investments in
                               accordance with Statement of Financial Accounting
                               Standards No. 115 (SFAS 115), "Accounting for
                               Certain Investments in Debt and Equity
                               Securities." This statement addresses the
                               accounting and reporting for investments in
                               equity securities which have readily determinable
                               fair values and all investments in debt
                               securities. The Company's marketable equity
                               securities are classified as available-for-sale
                               under SFAS 115 and reported at fair value, with
                               changes in the unrealized holding gain or loss
                               included in shareholders' equity. Available-for-
                               sale securities consist of common stock of
                               unrelated publicly-traded companies and are
                               stated at market value in accordance with SFAS
                               115. Cost for purposes of computing realized
                               gains and losses is computed on a specific
                               identification basis. The proceeds from the sale
                               of available-for-sale securities during fiscal
                               2000 and 1999 totaled $18,191 and $254,313,
                               respectively (see Note 8). The change in the net
                               unrealized holding gain (loss) on available-for-
                               sale securities that has been included as a
                               separate component of shareholders' equity
                               totaled $4,456 and $(66,681) for the years ended
                               May 31, 2000 and 1999, respectively.

                                     FS-12
<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                                               Years Ended May 31, 2000 and 1999

================================================================================

2.  Summary of                 Inventories
    Significant
    Accounting                 Inventories are stated at the lower of cost
    Policies                   (first-in, first-out method) or market and
    (Continued)                consist primarily of orthodontic products and
                               biological chemicals. Cost includes raw
                               materials, labor, manufacturing overhead and
                               purchased products. Market is determined by
                               comparison with recent purchases or net
                               realizable value. Such net realizable value is
                               based on forecasts for sales of the Company's
                               products in the ensuing years. The industries in
                               which the Company operates are characterized by
                               technological advancement and change. Should
                               demand for the Company's products prove to be
                               significantly less than anticipated, the ultimate
                               realizable value of the Company's inventories
                               could be substantially less than the amount shown
                               on the accompanying consolidated balance sheet.

                               Inventories consist of the following:

<TABLE>
<CAPTION>
                               May 31,                                                                2000
                               --------------------------------------------------------------------------------
                               <S>                                                          <C>
                               Raw materials                                                $        935,903
                               Work in progress                                                      425,557
                               Finished products                                                   1,715,626
                               Inventory reserve                                                    (195,397)
                               --------------------------------------------------------------------------------

                                                                                               $   2,881,689
                               ================================================================================
</TABLE>

                               Approximately $1,510,000 of Lancer's inventory is
                               located at its manufacturing facility in Mexico
                               as of May 31, 2000.

                               Land Held For Investment

                               Land held for investment consists of a parcel of
                               land located in the state of Utah, and is stated
                               at the lower of cost or fair value less costs to
                               sell.

                                     FS-13
<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                                               Years Ended May 31, 2000 and 1999

================================================================================

2.  Summary of                 Property and Equipment
    Significant
    Accounting                 Property and equipment are stated at cost.
    Policies                   Expenditures for additions and major improvements
    (Continued)                are capitalized. Repairs and maintenance costs
                               are charged to operations as incurred. When
                               property and equipment are retired or otherwise
                               disposed of, the related cost and accumulated
                               depreciation are removed from the accounts, and
                               gains or losses from retirements and dispositions
                               are credited or charged to income.

                               Depreciation and amortization are provided over
                               the estimated useful lives of the related assets,
                               ranging from 3 to 12 years, using straight-line
                               and declining-balance methods. Leasehold
                               improvements are amortized over the lesser of the
                               estimated useful life of the asset or the term of
                               the lease. Depreciation expense amounted to
                               $140,472 and $170,803 for the years ended May 31,
                               2000 and 1999, respectively. At May 31, 2000,
                               approximately $70,000 of property and equipment,
                               net of accumulated depreciation and amortization,
                               is located at Lancer's manufacturing facility in
                               Mexico.

                               Management of the Company assesses the
                               recoverability of property and equipment by
                               determining whether the depreciation and
                               amortization of such assets over their remaining
                               lives can be recovered through projected
                               undiscounted cash flows. The amount of
                               impairment, if any, is measured based on fair
                               value (projected discounted cash flows) and is
                               charged to operations in the period in which such
                               impairment is determined by management.
                               Management has determined that there is no
                               impairment of property and equipment at May 31,
                               2000.

                               Intangible Assets

                               Intangible assets are being amortized using the
                               straight-line method over 18 years for marketing
                               and distribution rights and purchased technology
                               use rights, and over 17 years for patents.
                               Marketing and distribution rights include
                               repurchased sales territories. Technology use
                               rights consists of the 1985 purchase

                                     FS-14
<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                                               Years Ended May 31, 2000 and 1999

================================================================================

2.  Summary of                 (the "Purchase") by Lancer of the manufacturing
    Significant                assets and technology of Titan Research
    Accounting                 Associates, Ltd. ("Titan"). Prior to the
    Policies                   Purchase, certain former officers of Lancer and
    (Continued)                shareholders of Lancer owned 29% of Titan. Prior
                               to the Purchase, the Company paid royalties
                               ranging from 15% to 20% of gross sales, as
                               defined, to license such technology. Amortization
                               amounted to $81,853 and $79,793 for the years
                               ended May 31, 2000 and 1999, respectively (see
                               Note 4).

                               The Company assesses the recoverability of these
                               intangible assets by determining whether the
                               amortization of the asset's balance over its
                               remaining life can be recovered through projected
                               undiscounted future cash flows. The amount of
                               impairment, if any, is measured based on fair
                               value and charged to operations in the period in
                               which the impairment is determined by management.
                               Management has determined that there was no
                               impairment of intangible assets as of May 31,
                               2000.

                               Risks and Uncertainties

                               Licenses - Certain of the Company's sales of
                               products are governed by license agreements with
                               outside third parties. All of such license
                               agreements to which the Company currently is a
                               party are for fixed terms which will expire after
                               ten years or upon the expiration of the
                               underlying patents. After the expiration of the
                               agreements or the patents, the Company is free to
                               use the technology that had been licensed. There
                               can be no assurance that the Company will be able
                               to obtain future license agreements as deemed
                               necessary by management. The loss of some of the
                               current licenses or the inability to obtain
                               future licenses could have an adverse affect on
                               the Company's financial position and operations.
                               Historically, the Company has successfully
                               obtained all the licenses it believed necessary
                               to conduct its business.

                               Government Regulation - Biomerica's
                               immunodiagnostic products are regulated in the
                               United States as medical devices primarily by the
                               FDA and as such, require regulatory clearance or
                               approval prior to commercialization in the United
                               States. Pursuant to the

                                     FS-15
<PAGE>


                                                Biomerica, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                                               Years Ended May 31, 2000 and 1999

================================================================================

2.  Summary of                 Federal Food, Drug and Cosmetic Act, and the
    Significant                regulations promulgated thereunder, the FDA
    Accounting                 regulates, among other things, the clinical
    Policies                   testing, manufacture, labeling, promotion,
    (Continued)                distribution, sale and use of medical devices in
                               the United States. Failure of Biomerica to comply
                               with applicable regulatory requirements can
                               result in, among other things, warning letters,
                               fines, injunctions, civil penalties, recall or
                               seizure of products, total or partial suspension
                               of production, the government's refusal to grant
                               premarket clearance or premarket approval of
                               devices, withdrawal of marketing approvals, and
                               criminal prosecution.

                               Sales of medical devices outside the United
                               States are subject to foreign regulatory
                               requirements that vary widely from country to
                               country. The time required to obtain
                               registrations or approvals required by foreign
                               countries may be longer or shorter than that
                               required for FDA clearance or approval, and
                               requirements for licensing may differ
                               significantly from FDA requirements. There can be
                               no assurance that Biomerica will be able to
                               obtain regulatory clearances for its current or
                               any future products in the United States or in
                               foreign markets.

                               Lancer's products are subject to regulation by
                               the FDA under the Medical Device Amendments of
                               1976 (the "Amendments"). Lancer has registered
                               with the FDA as required by the Amendments. There
                               can be no assurance that Lancer will be able to
                               obtain regulatory clearances for its current or
                               any future products in the United States or in
                               foreign markets.

                               Risk of Product Liability - Testing,
                               manufacturing and marketing of Biomerica's
                               products entail risk of product liability.
                               Biomerica currently has product liability
                               insurance. There can be no assurance, however,
                               that Biomerica will be able to maintain such
                               insurance at a reasonable cost or in sufficient
                               amounts to protect Biomerica against losses due
                               to product liability. An inability could prevent
                               or inhibit the commercialization of Biomerica's
                               products. In addition, a product liability claim
                               or recall could have a material adverse effect on
                               the business or financial condition of the
                               Company.

                                     FS-16
<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                                               Years Ended May 31, 2000 and 1999

================================================================================

2.  Summary of                 Lancer is subject to the same risks of product
    Significant                liability. Lancer currently has product liability
    Accounting                 insurance. Lancer also is subject to the risk of
    Policies                   loss of its product liability insurance and the
    (Continued)                consequent exposure to liability.

                               Hazardous Materials - Biomerica's research and
                               development involves the controlled use of
                               hazardous materials and chemicals. Although
                               Biomerica believes that safety procedures for
                               handling and disposing of such materials comply
                               with the standards prescribed by state and
                               Federal regulations, the risk of accidental
                               contamination or injury from these materials
                               cannot be completely eliminated. In the event of
                               such an accident, the Company could be held
                               liable for any damages that result and any such
                               liability could exceed the resources of the
                               Company. The Company may incur substantial costs
                               to comply with environmental regulations.

                               Stock-Based Compensation

                               During 1995, the Financial Accounting Standards
                               Board issued Statement of Financial Accounting
                               Standards No. 123 ("SFAS 123"), "Accounting for
                               Stock-Based Compensation," which defines a fair
                               value based method of accounting for stock-based
                               compensation. However, SFAS 123 allows an entity
                               to continue to measure compensation cost related
                               to stock and stock options issued to employees
                               using the intrinsic method of accounting
                               prescribed by Accounting Principles Board Opinion
                               No. 25 ("APB 25"), "Accounting for Stock Issued
                               to Employees." Entities electing to remain with
                               the accounting method of APB 25 must make pro
                               forma disclosures of net (loss) income and (loss)
                               earnings per share, as if the fair value method
                               of accounting defined in SFAS 123 had been
                               applied (see Note 6). The Company has elected to
                               account for its stock-based compensation to
                               employees under APB 25.

                               Minority Interest

                               Minority interest represents the minority
                               shareholders' proportionate share of the equity
                               of Lancer and AIT. At May 31, 2000, Biomerica
                               owned 30.78% of Lancer (see Note 3), 74.6% of AIT
                               and 100% of Readyscript (see Note 3).

                                     FS-17

<PAGE>

                                               Biomerica, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                                               Years Ended May 31, 2000 and 1999

================================================================================


2.  Summary of         Revenue Recognition
    Significant
    Accounting         Revenues from product sales are recognized at the time
    Policies           the product is shipped. Revenues from specialized
    (Continued)        diagnostic testing service are recognized when the
                       related services are performed.

                       Income Taxes

                       The Company accounts for income taxes in accordance with
                       Statement of Financial Accounting Standards No. 109,
                       "Accounting for Income Taxes." Under the asset and
                       liability method of Statement No. 109, deferred tax
                       assets and liabilities are recognized for the future tax
                       consequences attributable to differences between the
                       financial statement carrying amounts of existing assets
                       and liabilities and their respective tax bases. Deferred
                       tax assets and liabilities are measured using enacted tax
                       rates expected to apply to taxable income in the years in
                       which those temporary differences are expected to be
                       recovered or settled. Under Statement No. 109, the effect
                       on deferred tax assets and liabilities of a change in tax
                       rates is recognized in income in the period that includes
                       the enactment date. A valuation allowance is provided for
                       certain deferred tax assets if it is more likely than not
                       that the Company will not realize tax assets through
                       future operations.

                       Biomerica, Lancer and AIT file separate income tax
                       returns for Federal and state income tax purposes.

                       Advertising Costs

                       The Company reports the cost of all advertising as
                       expense in the period in which those costs are incurred.
                       Advertising costs were approximately $69,000 and $105,000
                       for the years ended May 31, 2000 and 1999, respectively.

                                     FS-18
<PAGE>

                                                Biomerica, Inc. and Subsidiaries


                                      Notes to Consolidated Financial Statements
                                               Years Ended May 31, 2000 and 1999

================================================================================

2.  Summary of        (Loss) Earnings Per Share
    Significant
    Accounting
    Policies          In February 1997, the Financial Accounting Standards Board
    (Continued)       ("FASB") issued Statement of Financial Accounting
                      Standards No. 128 ("SFAS 128"), "Earnings Per Share"
                      ("EPS"). SFAS 128 requires dual presentation of basic EPS
                      and diluted EPS on the face of all income statements
                      issued after December 15, 1997 for all entities with
                      complex capital structures. Basic EPS is computed as net
                      (loss) income divided by the weighted average number of
                      common shares outstanding for the period. Diluted EPS
                      reflects the potential dilution that could occur from
                      common shares issuable through stock options, warrants and
                      other convertible securities.

                      The following table illustrates the required disclosure of
                      the reconciliation of the numerators and denominators of
                      the basic and diluted EPS computations.

<TABLE>
<CAPTION>
                                                 For the Year Ended May 31, 2000
                                           ---------------------------------------------
                                                Loss             Shares        Per Share
                                             (Numerator)      (Denominator)       Amount
                      -------------------------------------------------------------------
                      <S>                  <C>                <C>              <C>
                      Basic EPS -

                       Loss available
                        to common
                        shareholders          $ (3,890,849)     4,542,820  $  (0.86)
                      ===================================================================

                      Effect of dilutive
                      securities -

                      Options and Warrants               -              -        --
                      --------------------------------------------------------------------

                      Diluted EPS -

                      Loss available
                       to common
                       shareholders plus
                       assumed conversions    $ (3,890,849)     4,542,820  $  (0.86)
                      ===================================================================
</TABLE>

                                     FS-19
<PAGE>

2.      Summary of
        Significant
        Accounting
        Policies
        (Continued)

<TABLE>
<CAPTION>
                                                          For the Year Ended May 31, 1999
                                                   ---------------------------------------------
                                                       Loss           Shares          Per Share
                                                    (Numerator)    (Denominator)        Amount
                        ------------------------------------------------------------------------
                        <S>                        <C>             <C>                <C>
                        Basic EPS-

                         Loss available to
                          common
                          shareholders            $  (72,548)       4,001,755         $  (0.02)
                        ========================================================================

                         Effect of dilutive
                          securities -

                          Options and Warrants             -
                        ------------------------------------------------------------------------

                         Diluted EPS -
                         Loss available to
                           common
                           shareholders plus
                           assumed conversions    $  (72,548)       4,001,755         $  (0.02)
                        ===========================================================================
</TABLE>
                        The computation of diluted loss per share excludes the
                        effect of incremental common shares attributable to the
                        exercise of outstanding common stock options and
                        warrants because their effect was antidilutive due to
                        losses incurred by the Company. See summary of
                        outstanding stock options and warrants in Note 10.

                        As of May 31, 2000, there was a total of 3,557,300
                        potential dilutive shares of common stock.

                        Segment Reporting

                        The Financial Accounting Standards Board has issued
                        Statement of Financial Accounting Standards No. 131
                        "Disclosures about Segments of an Enterprise and Related
                        Information" ("SFAS 131"). SFAS 131 requires public
                        companies to report information about segments of their
                        business in their annual financial statements and

                                     FS-20
<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                                               Years Ended May 31, 2000 and 1999

================================================================================

2.    Summary of     requires them to report selected segment information in
      Significant    their quarterly reports issued to shareholders. It also
      Accounting     requires entity-wide disclosures about the product,
      Policies       services an entity provides, the material countries in
      (Continued)    which it holds assets and reports revenues, and its major
                     customers. The Company adopted the provisions of this
                     statement for 1999 annual reporting. These disclosure
                     requirements had no impact on the Company's financial
                     position or results of operations, or the Company's
                     existing segment disclosures.

                     Reporting Comprehensive Income

                     In June 1997, the FASB issued Statement of Financial
                     Accounting Standards ("SFAS") No. 130, "Reporting
                     Comprehensive Income." This statement establishes standards
                     for reporting the components of comprehensive income and
                     requires that all items that are required to be recognized
                     under accounting standards as components of comprehensive
                     income be included in a financial statement that is
                     displayed with the same prominence as other financial
                     statements. Comprehensive income includes net income as
                     well as certain items that are reported directly within a
                     separate component of stockholders' equity. The Company
                     adopted the provisions of this statement in 1998.

3.    Consolidated   Lancer is engaged in the design, manufacture and
      Subsidiaries   distribution of orthodontic products. During 1999, Lancer
                     issued 10,625 shares of its common stock to Biomerica for
                     certain management and consulting services valued at
                     $8,500. During 1999, Lancer repurchased 25,372 shares of
                     its common stock for aggregate consideration of $25,950.
                     During 2000, Lancer repurchased 114,998 shares of its
                     common stock for aggregate consideration of $117,914.
                     During 2000, Lancer issued 54,725 shares of its common
                     stock valued at $50,631 for certain management and
                     consulting services. In May 2000, all 370,483 shares issued
                     and outstanding of Lancer's Redeemable Convertible
                     Preferred Stock-Series C were converted into 52,926 shares
                     of Lancer's common stock. The result of these transactions
                     increased Biomerica's direct ownership percentage of Lancer
                     to 30.78% and increased its direct and indirect (via
                     agreements with certain shareholders) voting control over
                     Lancer to 53.23% as of May 31, 2000.

                                     FS-21
<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                                               Years Ended May 31, 2000 and 1999

================================================================================

3.    Consolidated    AIT provides immune allergy testing and product to
      Subsidiaries    physicians and medical institutions. During 1998,
      (Continued)     1,916,429 shares of AIT were subscribed to Biomerica in
                      exchange for debt (see Note 6) and 35,000 shares of AIT
                      were issued to two AIT employees. The net effect of these
                      issues increased Biomerica's interest in AIT to 74.6%.

                      Operating results for Lancer and AIT in the aggregate for
                      the years ended May 31, 2000 and 1999, which are included
                      in the consolidated operating results of the Company, are
                      as follows:

<TABLE>
<CAPTION>
                                                                      2000              1999
                      --------------------------------------------------------------------------
                      <S>                                       <C>               <C>
                      Net sales                                 $   5,730,488     $   6,229,847
                      Cost of sales                                 3,960,362         3,868,141
                      --------------------------------------------------------------------------

                          Gross profit                              1,770,126         2,361,706
                      --------------------------------------------------------------------------

                      Operating expenses:
                        Selling, general and
                          administrative                            2,268,090         2,206,839
                        Research and development                      184,849           178,393
                      --------------------------------------------------------------------------

                          Total operating expenses                  2,452,939         2,385,232
                      --------------------------------------------------------------------------

                      Other income (expense):
                        Interest expense                              (19,526)          (15,607)
                        Other income, net                             228,368           104,329
                      --------------------------------------------------------------------------

                                                                      208,842            88,722
                      --------------------------------------------------------------------------

                      (Loss) income before income taxes              (473,171)           65,196

                      Income tax expense                                1,600             5,404
                      --------------------------------------------------------------------------

                      Net (loss) income                         $    (474,771)    $      59,792
                      ==========================================================================
</TABLE>

                                     FS-22
<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                                               Years Ended May 31, 2000 and 1999

4.  Intangible    Intangible assets, net of accumulated amortization, consist of
    Assets        the following:


<TABLE>
<CAPTION>
                  May 31,                                               2000
                  --------------------------------------------------------------
<S>                                                           <C>
                  Marketing and distribution rights           $       442,750
                  Technology use rights                               858,328
                  Patents and other intangibles                       152,080
                  --------------------------------------------------------------

                                                                    1,453,158

                  Less accumulated amortization                    (1,086,344)
                  --------------------------------------------------------------

                                                              $       366,814
                  ==============================================================
</TABLE>

                  Included in marketing and distribution rights are repurchased
                  sales territories by Lancer which are being amortized over the
                  estimated useful life of eighteen years. In each of the fiscal
                  years 2000 and 1999, the Company recorded amortization expense
                  of $24,900 related to repurchased sales territories.

                  During fiscal 1985, Lancer purchased certain assets and
                  technology which is being amortized over the estimated useful
                  life of eighteen years. Lancer recorded amortization expense
                  of $48,696 for each of the years ended May 31, 2000 and 1999
                  related to these assets.

                  Amortization expense related to patents and other intangibles
                  which is included in the accompanying consolidated statements
                  of operations amounted to $8,257 and $6,197 for the years
                  ended May 31, 2000 and 1999, respectively.

5.  Line of       At May 31, 2000, Lancer had a $500,000 line of credit with a
    Credit        bank. Borrowings are made at prime plus 1.25% (10.75% at May
                  31, 2000) and are limited to specified percentages of eligible
                  accounts receivable. The unused portion available to Lancer
                  under the line of credit at May 31, 2000 was $172,707. The
                  line of credit expires on November 3, 2000. As of May 31,
                  2000, there was $160,000 outstanding under the line of credit.
                  Lancer was in compliance with its bank covenants as of May 31,
                  2000. Lancer was in violation of certain of its debt covenants
                  at July 31, 2000, Lancer has not obtained a waiver.

                                     FS-23
<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                                               Years Ended May 31, 2000 and 1999


5.  Line of                    The following summarizes information on short-
    Credit                     term borrowings for the year ended May 31, 2000:
    (Continued)

<TABLE>
<CAPTION>
                                  May 31,                                                                2000
                                  --------------------------------------------------------------------------------
                                  <S>                                                          <C>
                                  Average month end balance                                    $      203,333
                                  Maximum balance outstanding at any month
                                    end                                                        $      220,000
                                  Weighted average interest rate (computed by
                                    dividing interest expense by average monthly
                                    balance)                                                             9.62%
                                  Interest rate at year end                                             10.75%
                                  ===============================================================================
</TABLE>

6.  Shareholders'              Shareholder Loan
    Equity
                               During fiscal 1998, the estate of the chief
                               executive officer exercised a stock option to
                               purchase 25,000 common shares at $0.80 per share
                               and 60,000 common shares at $0.85 per share for a
                               total of $71,000 via a shareholder loan. During
                               1999, $70,000 of the shareholder loan was repaid.
                               During 2000, the remaining $1,000 was repaid.

                               1991, 1995 and 1999 Stock Option and Restricted
                               Stock Plans

                               In December 1991, the Company adopted a stock
                               option and restricted stock plan (the "1991
                               Plan") which provides that non-qualified options
                               and incentive stock options and restricted stock
                               covering an aggregate of 350,000 of the Company's
                               unissued common stock may be granted to officers,
                               employees or consultants of the Company. Options
                               granted under the 1991 Plan may be granted at
                               prices not less than 85% of the then fair market
                               value of the common stock, vest at not less than
                               20% per year and expire not more than 10 years
                               after the date of grant.

                                     FS-24
<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                                               Years Ended May 31, 2000 and 1999


6.  Shareholders'              In January 1996, the Company adopted a stock
    Equity                     option and restricted stock plan (the "1995
    (Continued)                Plan") which provides that non-qualified options
                               and incentive stock options and restricted stock
                               covering an aggregate of 500,000 of the Company's
                               unissued common stock may be granted to
                               affiliates, employees or consultants of the
                               Company. Options granted under the 1995 Plan may
                               be granted at prices not less than 85% of the
                               then fair market value of the common stock and
                               expire not more than 10 years after the date of
                               grant.

                               During 1997, the Company granted options to
                               purchase 72,000 and 45,000 shares of common stock
                               at exercise prices of $1.90 and $1.92 per share,
                               respectively, to various employees of the
                               Company. The options vest over a period ranging
                               from four to five years. During 1997, the Company
                               granted options to purchase 18,000 and 5,000
                               shares of common stock at exercise prices of
                               $1.90 and $3.00 per share respectively, to
                               various consultants of the Company. Management
                               recorded $10,471 during the year ended May 31,
                               1998 of expense related to the granting of these
                               options.

                               During 1998, the Company granted options to
                               purchase 152,500 shares at an exercise price of
                               $1.85 to employees and a total of 1,500 shares to
                               non-employees, at an exercise price of $1.91.
                               Management elected not to record any compensation
                               expense related to the options issued to non-
                               employees, as such was immaterial.

                               During 1999, the Company granted options to
                               purchase 2,000, 179,850 and 27,900 shares of its
                               common stock at an exercise prices of $0.90,
                               $0.86 and $0.85, respectively, to employees and
                               2,000 and 7,000 shares to non-employees, at
                               exercise prices of $0.90 and $0.86, respectively.
                               The Company recorded $4,581 in compensation
                               expense related to the options issued to non-
                               employees, calculated using the Black Scholes
                               option model.

                               On June 3, 1999, the Company, issued 8,000 shares
                               of common stock to a consultant for services
                               provided. The Company valued these shares at
                               $16,000.

                                     FS-25
<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                                               Years Ended May 31, 2000 and 1999


6.  Shareholders'              On June 11, 1999, the Company issued 1,150,000
    Equity                     and 50,000 options to purchase shares of the
    (Continued)                Company's stock to employees and non-employees,
                               respectively. The purchase price of the options
                               is $3.00 per share. The options are exercisable
                               for a period of ten years. The Company recorded
                               $58,806 related to the fair value of options
                               granted to non-employees. In addition, the
                               Company issued 1,000,000 stock purchase warrants
                               to unaffiliated entities for consulting and fund-
                               raising services rendered. The holder is granted
                               the right to purchase common stock at an exercise
                               price of $3.00 per share through the year 2005.
                               The Company valued these warrants at $1,176,126.
                               Of this, $588,063 was expensed for consulting
                               services and $588,063 was recorded as a reduction
                               of paid-in-capital in connection with the private
                               placement as discussed below.

                               On June 11, 1999, the Company entered into a Five
                               Year Back-End Processing Agreement with an
                               unaffiliated entity. The unaffiliated entity was
                               to develop customized back-end processing to
                               enable the company to process customer
                               prescription orders on-line and insurance claims
                               and payments. In addition, the unaffiliated
                               entity transferred and assigned to the Company
                               the right, title and interest in and to the
                               internet domain name "TheBigRX.com" and all
                               rights to any trademark relating thereto. The
                               Company issued 410,000 stock purchase warrants
                               for these services. The holder was granted the
                               right to purchase common stock at an exercise
                               price of $5.00. The Company valued these warrants
                               at approximately $333,000 and initially was
                               expensing them over sixty months ($66,493 of
                               expense was recorded during the year ended May
                               31, 2000). Subsequent to year-end, the
                               unaffiliated entity stopped providing services to
                               the Company. The Company does not intend to issue
                               any common stock if the aforementioned warrants
                               are presented for exercise because of the breach
                               in performance. The Company stopped amortizing
                               the warrant expense subsequent to year-end.

                                     FS-26
<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                                               Years Ended May 31, 2000 and 1999


6.  Shareholders'              On June 11, 1999, the Company entered into a Five
    Equity                     Year Strategic Marketing Agreement with
    (Continued)                TheBigHub.com whereby TheBigHub.com will provide
                               strategic placement of advertising and marketing
                               for Biomerica's BigRX.com on its website. The
                               Company issued 250,000 stock purchase warrants
                               for these services. The holder was granted the
                               right to purchase common stock at an exercise
                               price of $5.00. The Company valued these warrants
                               at approximately $203,000 and initially was
                               expensing them over sixty months ($40,545 of
                               expense was recorded during the year ended May
                               31, 2000). Subsequent to year-end, the
                               TheBigHub.com stopped providing services to the
                               Company. The Company does not intend to issue any
                               common stock if the aforementioned warrants are
                               presented for exercise because of the breach in
                               performance. The Company stopped amortizing the
                               warrant expense subsequent to year-end.

                               During the year ended May 31, 2000, the Company
                               recorded compensation expense of $2,625 related
                               to the amortization of the fair value of options
                               to purchase common stock previously issued.

                               On June 11, 1999, the Company completed two
                               private placement agreements to sell and issue a
                               total of 400,000 (50,000 of which were sold to
                               related parties) shares of the Company's common
                               stock at $5.00 per share. The Company incurred
                               $34,443 in offering costs related thereto. The
                               shares have piggyback registration rights.

                               In August 1999, the Company adopted a stock
                               option and restricted stock plan (the "1999
                               Plan") which provides that non-qualified options
                               and incentive stock options and restricted stock
                               covering an aggregate of 1,000,000 of the
                               Company's unissued common stock may be granted to
                               affiliates, employees or consultants of the
                               Company. As of January 1, of each calendar year,
                               commencing January 1, 2000, this amount is
                               subject to automatic annual increases equal to
                               the lessor of 1.5% of the total number of
                               outstanding common shares assuming conversion of
                               convertible securities or 500,000. Options
                               granted under the 1999 Plan may be granted at
                               prices not less than 85% of the then fair market
                               value of the common stock and expire not more
                               than 10 years after the date of grant.

                                     FS-27
<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                                               Years Ended May 31, 2000 and 1999


6.  Shareholders'              Additionally, during 2000, the Company granted an
    Equity                     additional 726,000 and 50,000 options to purchase
    (Continued)                shares of the Company's stock to employees and
                               non-employees, respectively. The purchase price
                               of the options range from $1.38 to $3.88 per
                               share. Management recorded $25,135 during the
                               year ended May 31, 2000 of expense related to the
                               granting of options to employees. Management
                               recorded $22,004 during the year ended May 31,
                               2000 of expense related to the granting of
                               options to non-employees.

                               During 2000, the Company agreed to grant warrants
                               to three medical groups in exchange for services.
                               The Company was committed to, but had not yet
                               issued, 15,000 warrants at exercise prices of
                               $2.00 to $3.25 as of May 31, 2000. The Company
                               recorded $17,372 of expense related to these
                               warrants. These warrants are not included in the
                               table below.

                                     FS-28
<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                                               Years Ended May 31, 2000 and 1999


6.  Shareholders'                Activity as to stock options and warrants under
    Equity                       the 1991, 1995 and 1999 plans are as follows:
    (Continued)

<TABLE>
<CAPTION>
                                                                                                       Weighted
                                                                     Number                             Average
                                                                   of Stock         Price Range        Exercise
                                                                    Options           Per share           Price
                                  --------------------------------------------------------------------------------
<S>                                                             <C>             <C>               <C>
                                  Options outstanding at
                                    June 1, 1998                    356,350     $    .80 - $3.00    $       1.69
                                  Options granted                   218,750     $    .85 - $ .90    $        .86
                                  Options exercised                (115,800)    $    .80 - $3.00    $       1.33
                                  Options canceled or
                                    expired                          (5,250)    $    .85 - $1.85    $       1.80
                                  --------------------------------------------------------------------------------

                                  Options outstanding at
                                    June 1, 1999                    454,050     $    .80 - $3.00    $       1.38
                                  Options and warrants granted    3,636,000     $   1.38 - $5.00    $       3.27
                                  Options exercised                 (56,625)    $    .80 - $1.90    $       1.07
                                  Options canceled or
                                    expired                        (476,125)    $    .86 - $3.88    $       2.63
                                  --------------------------------------------------------------------------------

                                  Options and warrants
                                     outstanding at
                                     May 31, 2000                 3,557,300     $    .85 - $5.00    $       3.15
                                  --------------------------------------------------------------------------------

                                  Options and warrants
                                     exercisable at
                                     May 31, 2000                   338,125     $    .85 - $3.00    $       1.76
                                  ================================================================================
</TABLE>

                                     FS-29
<PAGE>

                                               Biomerica, Inc. and subsidiaries

                                     Notes to Consolidated financial Statements
                                              Years Ended May 31, 2000 and 1999


6.      Shareholders' Equity       The weighted average fair value of
        (Continued)                options and warrants granted during 2000 and
                                   1999 was $1.25 and $0.68, respectively.

                                   The following summarizes information about
                                   the Company's stock options and warrants
                                   outstanding at May 31, 2000:

<TABLE>
<CAPTION>
                                                                        Weighted
                                                                    Average    Weighted     Number       Weighted
                                        Range of       Number      Remaining    Average   Exercisable    Average
                                         Exercise    Outstanding  Contractual  Exercise   at May 31,     Exercise
                                          Prices    May 31, 2000     Life        Price       2000         Price
                                 ----------------------------------------------------------------------------------
                                 <S>                 <C>           <C>          <C>        <C>         <C>
                                   $    .85 - $ .90       177,175        3.68   $     .86      83,750    $    .86
                                   $   1.38 - $1.92       307,375        2.98   $    1.47     199,125    $   1.82
                                   $   2.06 - $3.10     2,412,750        5.63   $    2.99      55,250    $   2.88
                                   $          $5.00       660,000        2.00   $    5.00           -    $   5.00
                                 ===================================================================================
</TABLE>

                                  SFAS 123 Pro Forma Information

                                  Pro forma information regarding (loss)
                                  earnings per share is required by SFAS 123,
                                  and has been determined as if the Company had
                                  accounted for its employee stock options under
                                  the fair value method of SFAS 123. The fair
                                  value for these options was estimated at the
                                  date of grant using the Black Scholes option
                                  pricing model with the following assumptions
                                  for the years ended May 31, 2000 and 1999;
                                  risk free interest rates ranging from 5.62% to
                                  6.65% and 4.9%, respectively; dividend yield
                                  of 0%; expected life of the options of 1
                                  years; and volatility factors of the expected
                                  market price of the Company's common stock of
                                  120% and 112%, respectively.

                                  The Black Scholes option valuation model was
                                  developed for use in estimating the fair value
                                  of traded options which have no vesting
                                  restrictions and are fully transferable. In
                                  addition, option valuation models require the
                                  input of highly subjective assumptions
                                  including the expected stock price volatility.
                                  Because the Company's employee stock options
                                  have characteristics significantly different
                                  from those of traded options, and because
                                  changes in the subjective input assumptions
                                  can materially affect the fair value estimate,
                                  in management's opinion, the existing models
                                  do not necessarily provide a reliable single
                                  measure of the fair value of its employee
                                  stock options.

                                     FS-30
<PAGE>

                                                Biomerica, Inc. and subsidiaries

                                      Notes to Consolidated financial Statements
                                               Years Ended May 31, 2000 and 1999


6.  Shareholders' Equity  For purposes of pro forma disclosures, the estimated
                          fair value of the options is amortized to expense over
                          the option vesting period. Adjustments are made for
                          options forfeited prior to vesting. The effect on
                          compensation expense, net (loss) income, and net
                          (loss) income per share (basic and diluted) had
                          compensation costs for the Company's stock option
                          plans been determined based on fair value on the date
                          of grant consistent with the provisions of SFAS 123
                          are as follows:

<TABLE>
<CAPTION>
                          May 31,                                             2000               1999
                          ---------------------------------------------------------------------------
                          <S>                                     <C>                 <C>
                          Net loss, as reported                   $     (3,890,849)   $       (72,548)
                          Adjustment to compensation
                           expense under SFAS 123                       (1,600,464)          (213,436)
                          ---------------------------------------------------------------------------

                          Net loss, pro forma                     $     (5,491,313)   $      (285,984)
                          ===========================================================================

                          Pro forma net loss
                           per share - basic                      $          (1.21)   $         (0.07)
                          ===========================================================================

                          Pro forma net loss
                           per share - diluted                    $          (1.21)   $         (0.07)
                          ===========================================================================
</TABLE>
                          Stock Activity

                          During 1998, the Company incurred an additional $4,771
                          of offering costs related to a 1997 stock issuance.

                          During 1999, the Company repurchased 15,540 shares of
                          its common stock at an aggregate cost of $20,576.

                          During 1999, the Company issued 31,793 shares of its
                          common stock valued at $38,000 in satisfaction of
                          accrued rent.

                                     FS-31
<PAGE>

                                                Biomerica, Inc. and subsidiaries

                                      Notes to Consolidated financial Statements
                                               Years Ended May 31, 2000 and 1999


6.      Shareholders' Equity       Subsidiary Options and Warrants
        (Continued)

                                   During fiscal 1998, AIT granted options to
                                   purchase 1,185,000 shares of common stock to
                                   various employees and directors of AIT,
                                   including an option to purchase 250,000
                                   shares granted to Biomerica, Inc., the parent
                                   company. The exercise price will be the fair
                                   market value AIT's common stock on the date
                                   when certain conditions are met, as defined.
                                   The options will vest 50% per year and expire
                                   over five years.

                                   During 1998, intercompany advances
                                   outstanding of $134,150 were retired by the
                                   Company, in exchange for 1,916,429 shares of
                                   AIT's previously unissued common stock.

                                   During 1999, Lancer granted options to
                                   purchase 138,500 shares of its common stock
                                   at an exercise price of $1.00 to employees
                                   and options to purchase 29,000 shares of its
                                   common stock to non-employees, at an exercise
                                   price of $1.00.

                                   During 2000, Lancer granted options to
                                   purchase 15,000 shares of its common stock at
                                   an exercise price of $0.85 to employees.

7.      Income Taxes               Income tax expense for the years ended May
                                   31, 2000 and 1999 consists of the following
                                   current provisions:

                                   May 31,               2000            1999
                                   ---------------------------------------------

                                   U.S. Federal    $        -    $          -

                                   State and local      2,400           5,404
                                   ---------------------------------------------

                                                   $    2,400    $      5,404
                                   ---------------------------------------------

                                     FS-32
<PAGE>

                                               Biomerica, Inc. and subsidiaries

                                     Notes to Consolidated financial Statements
                                              Years Ended May 31, 2000 and 1999


7.  Income Taxes Income tax expense differs from the amounts computed by
    (Continued)  applying the U.S. (Continued) Federal income tax rate of
                 35 percent to pretax (loss) income as a result of the
                 following:

                 May 31,                                     2000         1999
                 ---------------------------------------------------------------

                 Computed "expected" tax
                  benefit                          $   (1,360,957) $   (22,829)

                 Increase (reduction) in income
                  taxes resulting from:

                  Meals and entertainment                  20,312        9,945

                  Change in net operating
                   loss carryforwards                   1,261,093       22,829

                   Other, net                                   -         (917)

                   Equity in earnings of affiliates
                    not subject to taxation
                    because of dividends-
                    received deduction for tax
                    purposes                               79,552       (9,028)

                   State income taxes                       2,400        5,404
                 ---------------------------------------------------------------

                                                         $  2,400  $     5,404
                 ===============================================================

                                     FS-33
<PAGE>

                                               Biomerica, Inc. and subsidiaries

                                     Notes to Consolidated financial Statements
                                              Years Ended May 31, 2000 and 1999


7.      Income Taxes  The tax effect of temporary differences that
        (Continued)   give rise to significant portions of
                      liabilities are presented below.
<TABLE>
<CAPTION>
                      May 31,                                                        2000
                      -------------------------------------------------------------------
                      <S>                                                     <C>
                      Deferred tax assets:
                        Accounts receivable, principally
                          due to allowance for doubtful
                          accounts and sales returns                        $      78,392
                        Inventories, principally due to
                          additional costs inventoried for
                        tax purposes pursuant to the Tax
                          Reform Act of 1986 and
                          allowance for inventory
                          obsolescence                                             77,835
                        Compensated absences and
                          deferred payroll, principally due
                            to accrual for financial reporting
                          purposes                                                 91,403
                        State net operating loss
                          carryforwards                                           173,490
                        Federal net operating loss
                          carryforwards                                         3,550,167
                        Tax credit carryforwards                                  190,259
                        Investment in affiliates                                  479,185
                      -------------------------------------------------------------------

                                                                                4,640,731

                      Less valuation allowance                                 (4,596,923)
                      -------------------------------------------------------------------

                      Net deferred tax asset                                       43,808

                      Deferred tax liability:
                        Marketing rights, principally due to
                          amortization                                            (43,808)
                      -------------------------------------------------------------------

                      Net deferred tax liability                            $           -
                      ===================================================================
</TABLE>

                                     FS-34
<PAGE>

                                               Biomerica, Inc. and subsidiaries

                                     Notes to Consolidated financial Statements
                                              Years Ended May 31, 2000 and 1999


7.      Income Taxes               The Company has provided a valuation
        (Continued)                allowance with respect to substantially
                                   all of its deferred tax assets as of May 31,
                                   2000 and 1999. Management provided such
                                   allowance as it is currently more likely than
                                   not that tax-planning strategies will not
                                   generate taxable income sufficient to realize
                                   such assets in foreseeable future reporting
                                   periods.

                                   As of May 31, 2000, Biomerica had net tax
                                   operating loss carryforwards of approximately
                                   $6,648,158 and investment tax and research
                                   and development credits of approximately
                                   $23,000, which are available to offset future
                                   Federal tax liabilities. The carryforwards
                                   expire at varying dates from 2000 to 2020. As
                                   of May 31, 2000, Biomerica has net operations
                                   tax loss carryforwards of approximately
                                   $1,318,000 available to offset future state
                                   income tax liabilities.

                                   As of May 31, 2000, Lancer had net tax
                                   operating loss carryforwards of approximately
                                   $2,101,000 and business tax credits of
                                   approximately $115,000 available to offset
                                   future Federal tax liabilities. As of May 31,
                                   2000, Lancer has net tax operations loss
                                   carryforwards of approximately $250,000 and
                                   business tax credits of approximately $23,000
                                   available to offset future state income tax
                                   liabilities. The carryforwards expire in
                                   2005. The carryforwards expire at varying
                                   dates from 2000 to 2020.

                                   As of May 31, 2000, AIT had net tax operating
                                   loss carryforwards of approximately
                                   $1,866,000 and business tax credits of
                                   approximately $29,000 available to offset
                                   future Federal tax liabilities. The
                                   carryforwards expire at varying dates from
                                   2000 to 2012. AIT also had net tax operating
                                   loss carryforwards of approximately $395,000
                                   to offset future California taxable income,
                                   expiring at varying dates between 2000 and
                                   2005.

                                   The Tax Reform Act of 1986 includes
                                   provisions which limit the Federal net
                                   operating loss carryforwards available for
                                   use in any given year if certain events,
                                   including a significant change in stock
                                   ownership, occur.

                                     FS-35
<PAGE>

                                               Biomerica, Inc. and subsidiaries

                                     Notes to Consolidated financial Statements
                                              Years Ended May 31, 2000 and 1999


8.      Other Income              Other income consists of the following for the
                                  years ending May 31:

<TABLE>
<CAPTION>
                                  May 31,                                                2000              1999
                                  -------------------------------------------------------------------------------
                                  <S>                                        <C>                    <C>
                                  Realized (loss) gains on
                                     available-for-sale securities            $       (13,241)      $   111,885
                                  Dividend and interest income                         99,358            76,453
                                  Tax reversal                                         50,000                 -
                                  Insurance proceeds                                  170,000                 -
                                  Offering expenses                                  (251,574)                -
                                  Consulting                                                -           100,000
                                  Other                                                63,855             4,329
                                  -------------------------------------------------------------------------------

                                                                              $       118,398       $   292,667
                                  ===============================================================================
</TABLE>

                                   During 1999, AIT earned $100,000 as a
                                   non-recurring consulting fee from an
                                   unrelated entity.

                                   Management of Lancer completed an assessment
                                   of a theft of inventory located at its
                                   facility in Mexicali Mexico on April 6, 1999.
                                   The carrying value of the inventory stolen
                                   approximated $110,000, valued at standard
                                   cost, which has been reflected in the
                                   accompanying financial statements as of May
                                   31, 1999 as a reduction in inventories and an
                                   addition to insurance claim receivable.
                                   During the year ended May 31, 2000, Lancer
                                   settled the claim with the insurance carrier
                                   and received approximately $280,000. This
                                   amount represents the value of the stolen
                                   inventory at net average selling price, less
                                   commissions and royalties. The $170,000
                                   received in excess of the $110,000 estimated
                                   carrying value was recognized as other income
                                   for the year ended May 31, 2000.

                                   During 1999, Lancer was assessed $64,724 in
                                   pass through net assets taxes by their
                                   subcontractor under their Manufacturing
                                   Agreement. During 2000, legal counsel
                                   determined that Lancer was not liable for
                                   portions of the assessment. Accordingly,
                                   approximately $50,000 of the prior year
                                   accrual was reversed and recognized as other
                                   income during the year ended May 31, 2000.

                                     FS-36
<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                                              Years Ended May 31, 2000 and 1999


8. Other Income      During 2000, $251,574 of amounts incurred in connection
   (Continued)       with a registration of securities that was cancelled were
                     written-off.

9. Business Segments Reportable business segments for the years ended May 31,
                     2000 and 1999 are as follows:
                                                            2000           1999
                     -----------------------------------------------------------

                     Domestic sales:
                       Orthodontic products          $ 3,133,000   $  3,413,000
                     ===========================================================

                      Medical diagnostic products    $ 1,318,000   $    868,000
                     ===========================================================

                     Foreign sales:
                       Orthodontic products          $ 2,518,000   $  2,746,000
                     ===========================================================

                       Medical diagnostic products   $ 1,065,000   $  1,661,000
                     ===========================================================

                     Net sales:
                       Orthodontic products          $ 5,651,000   $  6,159,000
                       Medical diagnostic products     2,383,000      2,529,000
                     -----------------------------------------------------------

                     Total                           $ 8,034,000   $  8,688,000
                     ===========================================================

                     Operating (loss) profit:
                       Orthodontic products          $  (504,000)  $     60,000
                       Medical diagnostic products    (3,686,000)      (371,000)
                     -----------------------------------------------------------

                     Total                            (4,190,000)  $   (311,000)
                     ===========================================================

                     Identifiable assets:
                       Orthodontic products          $ 3,520,000   $  4,018,000
                       Medical diagnostic products     2,848,000      3,383,000
                     -----------------------------------------------------------

                     Total                             6,368,000   $  7,401,000
                     ===========================================================

                     Total assets:
                       Orthodontic products          $ 3,755,000   $  4,327,000
                       Medical diagnostic products     2,980,000      3,523,000
                     -----------------------------------------------------------

                     Total                           $ 6,735,000   $  7,850,000
                     ===========================================================

                                     FS-37
<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                                              Years Ended May 31, 2000 and 1999


9. Business Segments                                            2000       1999
                     -----------------------------------------------------------
   (Continued)
                     Depreciation and amortization expense:
                       Orthodontic products               $  151,000 $  172,000
                       Medical diagnostic products            71,000     79,000
                     -----------------------------------------------------------

                     Total                                $  222,000 $  251,000
                     ===========================================================

                     Capital expenditures:
                       Orthodontic products               $   10,000 $   71,000
                       Medical diagnostic products           196,000     30,000
                     -----------------------------------------------------------

                     Total                                $  206,000 $  101,000
                     ===========================================================

                     The net sales as reflected above consist of sales to
                     unaffiliated customers only as there were no significant
                     intersegment sales during fiscal years 1999 and 1998. No
                     customer accounted for more than 10% of net sales during
                     fiscal years 2000 and 1999.

                     Geographic information regarding net sales and operating
                     profits is as follows:
                                                                2000       1999
                     -----------------------------------------------------------

                     Net sales:
                       United States                      $4,451,000 $4,638,000
                       Europe                              1,683,000  1,710,000
                       South America                         543,000    749,000
                       Asia                                  349,000    426,000
                       Other foreign                       1,008,000  1,165,000
                     -----------------------------------------------------------

                     Total net sales                      $8,034,000 $8,688,000
                     ===========================================================

                                     FS-38
<PAGE>

                                                Biomerica, Inc. and Subsidiaries

                                      Notes to Consolidated Financial Statements
                                              Years Ended May 31, 2000 and 1999


9. Business Segments  Geographic information regarding net sales and operating
   (Continued)        profits is as follows:
                                                             2000          1999
                      ----------------------------------------------------------

                      Operating profit (loss):
                       United States               $   (3,756,000) $   (267,000)
                       Europe                            (176,000)       35,000
                       South America                      (37,000)       26,000
                       Asia                               (66,000)      (69,000)
                       Other foreign                     (155,000)      (36,000)
                      ----------------------------------------------------------

                      Total operating loss         $   (4,190,000) $   (311,000)
                      ==========================================================

                      Identifiable assets by business segment are those assets
                      that are used in the Company's operations in each
                      industry. Identifiable assets are held primarily in the
                      United States. The Company's interests in AIT, whose
                      operations are in the United States, are vertically
                      integrated with the Company's operations in the medical
                      diagnostic products industry.

10. Commitments and   Operating Leases
    Contingencies
                      Biomerica leases its primary facility under a non-
                      cancelable operating lease which expired on May 31, 1998.
                      The lease is currently month-to-month. AIT leases its
                      primary facility under a month-to-month operating lease.
                      These facilities are owned and operated by four of the
                      Company's shareholders. The lease rate is $12,720 and
                      $1,400 per month, respectively.

                      Lancer leases its main facility under a non-cancelable
                      operating lease expiring December 31, 2003, as extended,
                      which requires monthly rentals that increase annually,
                      from $2,900 per month (1994) to $6,317 per month (2003).
                      The lease expense is being recognized on a straight-line
                      basis over the term of the lease.

                                     FS-39
<PAGE>

                                          Biomerica, Inc. and Subsidiaries

                                Notes to Consolidated Financial Statements
                                         Years Ended May 31, 2000 and 1999


10. Commitments and      Effective November 1, 1998, Lancer entered into a
    Contingencies        non-cancelable operating lease for its Mexico
    (Continued)          facility expiring October 31, 2003, which requires
                         average monthly rentals of approximately $5,500.
                         The rentals are subject to annual increases based
                         on the United States Consumer Price Index. Prior
                         to April 1, 1996, such was included in amounts
                         paid under the terms of the manufacturing
                         agreement as discussed below.

                         Rental expense for all operating leases amounted
                         to approximately $312,000 and $294,000 for the
                         years ended May 31, 2000 and 1999, respectively.
                         The future annual minimum payments are as follows:

                         Years ending May 31,                       Amount
                         --------------------------------------------------

                         2001                                    $ 145,547
                         2002                                      148,547
                         2003                                       75,505
                         --------------------------------------------------

                         Minimum lease payments                  $ 369,599
                         ==================================================

                         Manufacturing Agreement

                         In May 1990, Lancer entered into a manufacturing
                         subcontractor agreement (the "Manufacturing
                         Agreement"), whereby the subcontractor agreed to
                         provide manufacturing services to Lancer through
                         its affiliated entities located in Mexicali, B.C.,
                         Mexico. Lancer moved the majority of its
                         manufacturing operations to Mexico during fiscal
                         1992 and 1991. Under the terms of the original
                         agreement, the subcontractor manufactured Lancer's
                         products based on an hourly rate per employee
                         based on the number of employees in the
                         subcontractor's workforce. As the number of
                         employees increase, the hourly rate decreases. In
                         December 1992, Lancer renegotiated the
                         Manufacturing Agreement changing from an hourly
                         rate per employee cost to a pass through of actual
                         costs plus a weekly administrative fee. The
                         amended Manufacturing Agreement gives Lancer
                         greater control over all costs associated with the
                         manufacturing operation. In July

                                     FS-40
<PAGE>

                                          Biomerica, Inc. and Subsidiaries

                                Notes to Consolidated Financial Statements
                                         Years Ended May 31, 2000 and 1999


10. Commitments and     1994, Lancer again renegotiated the Manufacturing
    Contingencies       Agreement reducing the administrative fee and
    (Continued)         extending the Manufacturing Agreement through June
                        1998. In March 1996, Lancer agreed to extend the
                        manufacturing agreement through October 1998, to
                        coincide with the building lease. Effective April
                        1, 1996, Lancer leased the Mexicali facility under
                        a separate agreement, as discussed above. During
                        1999, Lancer agreed to extend the Manufacturing
                        Agreement through October 2003. After June 1996,
                        either party may cancel the agreement with three
                        months notice. Lancer has retained the option to
                        convert the manufacturing operation to a wholly-
                        owned subsidiary of Lancer at any time without
                        penalty. Should Lancer discontinue operations in
                        Mexico, it is responsible for the accumulated
                        employee seniority obligation as prescribed by
                        Mexican law. At May 31, 2000, this obligation was
                        approximately $256,000. Such obligation is
                        contingent in nature and accordingly has not been
                        accrued in the accompanying consolidated balance
                        sheet.

                        Employment Agreement

                        In June 1986, the Company entered into an
                        employment agreement with its then chief executive
                        officer. In May 1996, the agreement was extended
                        for an additional three years expiring in May 1999.
                        This agreement was cancelled in April 1997. This
                        agreement required minimum annual compensation
                        payments of $169,000 and provided for periodic cost
                        of living increases. The chief executive officer
                        was paid approximately $81,000 during the year
                        ended May 31, 1996. The chief executive officer and
                        the Company agreed to amend the employment
                        agreement for fiscal year 1995, whereby the chief
                        executive officer would not receive any deferred
                        compensation for the period June 1994 through
                        November 1994 of approximately $54,500 and instead
                        received 60,000 stock options (see Note 6).
                        Approximately $ 204,000 of the total accrued
                        compensation included in the 2000 consolidated
                        balance sheet is due to the chief executive
                        officer's estate.

                                     FS-41
<PAGE>

                                          Biomerica, Inc. and Subsidiaries

                                Notes to Consolidated Financial Statements
                                         Years Ended May 31, 2000 and 1999


10. Commitments and     License and Royalty Agreement
    Contingencies
    (Continued)         Lancer has entered into a number of license and/or
                        royalty agreements pursuant to which it has
                        obtained rights to manufacture and market certain
                        products. The agreements are for various durations
                        expiring through 2007 and they require the Company
                        to make payments based on the sales of the
                        individual licensed products.

                        Lancer has entered into license agreements expiring
                        in 2006 whereby, for cash consideration, the
                        counter party has obtained the rights to
                        manufacture and market certain products patented by
                        Lancer.

                        Retirement Savings Plan

                        Effective September 1, 1986, the Company
                        established a 401(k) plan for the benefit of its
                        employees. The plan permits eligible employees to
                        contribute to the plan up to the maximum percentage
                        of total annual compensation allowable under the
                        limits of Internal Revenue Code Sections 415,
                        401(k) and 404. The Company, at the discretion of
                        its Board of Directors, may make contributions to
                        the plan in amounts determined by the Board each
                        year. No contributions by the Company have been
                        made since the plan's inception.

11. Subsequent Events   Subsequent to year-end, ReadyScript, Inc., a wholly
                        owned subsidiary of the Company, entered into
                        convertible promissory notes totaling $715,000. The
                        notes mature between July 3 and July 31, 2001. The notes
                        do not bear interest, provided they are converted. If
                        not converted, the notes bear interest at 8.0%. Upon
                        conversion, each note holder shall receive the number of
                        shares of common stock that is equal to the principal
                        amount divided by 60% of the then per share purchase
                        price of the common stock, as defined.

                        Between June 15, 2000 and August 3, 2000, the
                        Company granted 87,000 options to purchase shares
                        of the Company's stock to employees. The exercise
                        prices of the options range from $1.38 to $3.25.

                                     FS-42
<PAGE>

                                          Biomerica, Inc. and Subsidiaries

                                Notes to Consolidated Financial Statements
                                         Years Ended May 31, 2000 and 1999

                           Between August 4, 2000 and September 8, 2000, the
                           Company issued 111,174 shares of the Companys common
                           stock with a total market value of $152 864 to
                           unaffiliated entities for services rendered and to be
                           rendered.

                           The Company has entered into an agreement to issue
                           50,000 shares of the Company's common stock on
                           September 15, 2000 to an unaffiliated entity for
                           services rendered and to be rendered.

11. Subsequent Events      Biomerica, Inc. entered into an Agreement, in
    (Continued)            substance, for a line of credit agreement on
                           September 12, 2000, with a shareholder whereby the
                           shareholder will loan to the Company, as needed, up
                           to $500,000 for working capital needs. The line of
                           credit bears interest at 8%, is secured by
                           Biomerica's accounts receivable and inventory, and
                           expires September 12, 2001. Biomerica and the
                           shareholder are in the process of formalizing this
                           line of credit.


12. Condensed Financial    Biomerica, Inc. sold 79,375 shares of common stock
    Information of Parent  between September 11 and 12, 2000 for aggregate
    Company                proceeds of approximately $106,000. Each shareholder
                           also received one warrant to purchase common stock
                           for every four shares of common stock acquired. The
                           warrants are for a term of five years and have an
                           exercise price of $2.00.


NOTE  12- CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
- -----------------------------------------------------------

Lancer's line-of-credit prohibits the transfer or dividend of funds to
Biomerica, Inc. As a result, the following condensed unconsolidated balance
sheet for Biomerica, Inc. as of May 31, 2000, and the condensed unconsolidated
statements of operations and cash flows for the years ended May 31, 2000 and
1999 have been provided. No cash dividends were paid by the consolidated
subsidiaries (see Note 3) during the years ended May 31, 2000 and 1999.

                    Condensed Unconsolidated Balance Sheet
                                 May 31, 2000

<TABLE>
<CAPTION>
                                    ASSETS
<S>                                                                                              <C>
Current assets:
   Cash and cash equivalents                                                                     $         509,247
   Available-for-sale securities                                                                            98,774
   Accounts receivable, net                                                                                457,161
   Inventories                                                                                             842,663
   Notes receivable                                                                                         34,994
   Prepaid expenses and other                                                                               87,531
                                                                                                 -----------------
         Total current assets                                                                            2,035,370

Investment in and advances to unconsolidated subsidiary, restricted                                        945,572
Investment in and advances to unconsolidated subsidiaries, unrestricted                                    100,567
Inventory, non-current                                                                                      21,405
Property and equipment, net                                                                                260,378
Intangible assets                                                                                          118,862
Other                                                                                                       13,532
                                                                                                 -----------------

                                                                                                 $       3,490,686
                                                                                                 =================

                              LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Accounts payable and accrued liabilities                                                      $         463,724
   Accrued compensation                                                                                    229,457
                                                                                                 -----------------
   Total current liabilities                                                                               693,181
                                                                                                 -----------------

Shareholders' equity:
   Common stock                                                                                            366,005
   Additional paid-in capital                                                                           15,529,421
   Accumulated other comprehensive loss                                                                     (4,323)
   Accumulated deficit                                                                                 (13,093,598)
                                                                                                 -----------------
         Total shareholders' equity                                                                      2,797,505
                                                                                                 -----------------

                                                                                                 $       3,490,686
                                                                                                 =================
</TABLE>

               Condensed Unconsolidated Statements of Operations
                             May 31, 2000 and 1999

<TABLE>
<CAPTION>
                                                                                2000                      1999
                                                                        ------------------        ------------------
<S>                                                                     <C>                       <C>
Net revenues                                                             $     2,283,433          $      2,458,259
Cost of sales                                                                  1,643,290                 1,548,579
                                                                         ---------------          ----------------
         Gross profit                                                            640,143                   909,680
                                                                         ---------------          ----------------

Operating expenses:
   Selling, general and administrative                                         1,867,520                   903,046
   Research and development                                                      279,788                   293,272
                                                                         ---------------          ----------------
         Total operating expenses                                              2,147,308                 1,196,318
                                                                         ---------------          ----------------

         Operating loss                                                       (1,507,165)                 (286,638)

Other income                                                                      86,081                   188,338
                                                                         ---------------          ----------------

Loss before interest in net income of consolidated
  subsidiaries and income taxes                                               (1,421,084)                  (98,300)

Interest in net (loss) income of consolidated subsidiaries                    (2,468,965)                   26,552
                                                                         ---------------          ----------------

Loss before income taxes                                                      (3,890,049)                  (71,748)

Income tax expense                                                                   800                       800
                                                                         ---------------          ----------------

Net loss                                                                 $    (3,890,849)         $        (72,548)
                                                                         ===============          ================

<CAPTION>
                          Condensed Unconsolidated Statements of Cash Flows
                                     May 31, 2000 and 1999

                                                                              2000                      1999
                                                                        ------------------        ------------------
<S>                                                                     <C>                       <C>
Cash flows from operating activities:
   Net loss                                                              $    (3,890,849)          $       (72,548)
   Adjustments to reconcile net income to net cash
    (used in) provided by operating activities:
      Depreciation and amortization                                               93,187                    65,959
      Realized loss (gain) on sale of available-for-sale securities               13,241                  (111,885)
      Provision for losses on accounts receivable                                      -                     6,377
      Loss (income) of subsidiaries                                            2,468,965                   (26,552)
      Options and warrants issued for services rendered                          821,043                     4,581
      Common stock is for rent                                                    16,000                    38,000
      Deferred compensation                                                      (77,231)                 (138,358)
      Loss on disposal of assets                                                       -                     6,518
      Net change in other current assets and current liabilities                 (89,171)                   94,259
                                                                         ---------------           ---------------

   Net cash used in provided by operating activities                            (644,815)                 (133,649)
                                                                         ---------------           ---------------

Cash flows from investing activities:
   Sales of available-for-sale securities                                         18,191                   254,313
   Purchases of available-for-sale securities                                          -                         -
   Principal payments received on notes receivable                                 9,491                         -
   Additional notes receivable                                                         -                   (16,000)
   Increase in investment in and advances to
     affiliates and consolidated subsidiaries                                 (2,336,205)                 (159,768)
   Purchases of property and equipment                                          (125,335)                 (103,452)
                                                                         ---------------           ---------------

   Net cash used in investing activities                                      (2,433,858)                  (24,907)
                                                                         ----------------          ---------------

Cash flows from financing activities:
   Exercise of stock options                                                      60,652                         -
   Proceeds from sale of stock                                                 1,965,557                   133,290
    Decrease in shareholder receivable                                             1,000                    70,000
                                                                         ---------------           ---------------

   Net cash provided by financing activities                                   2,027,209                   203,290
                                                                         ---------------           ---------------

Net change in cash and cash equivalents                                       (1,051,464)                   44,734

Cash and cash equivalents at beginning of year                                 1,560,711                 1,515,977
                                                                         ---------------           ---------------

Cash and cash equivalents at end of year                                 $       509,247           $     1,560,711
                                                                         ===============           ===============

Supplemental disclosure of cash flow information -
   Cash paid during the year for:
      Interest                                                           $             -           $             -
                                                                         ===============           ===============
      Income taxes                                                       $           800           $           800
                                                                         ===============           ===============

Supplemental schedule of non-cash investing and financing
 activities:
   Change in unrealized holding gain on available-for-sale
     securities                                                          $         4,456           $       (66,681)
   Reduction in taxes payable and increase in additional
     paid-in capital for exercise of non-qualified stock options         $             -           $        25,039
</TABLE>

                                     FS-43
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
