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<SEC-DOCUMENT>0001019687-01-500809.txt : 20010914
<SEC-HEADER>0001019687-01-500809.hdr.sgml : 20010914
ACCESSION NUMBER:		0001019687-01-500809
CONFORMED SUBMISSION TYPE:	10KSB
PUBLIC DOCUMENT COUNT:		2
CONFORMED PERIOD OF REPORT:	20010531
FILED AS OF DATE:		20010913

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			BIOMERICA INC
		CENTRAL INDEX KEY:			0000073290
		STANDARD INDUSTRIAL CLASSIFICATION:	DENTAL EQUIPMENT & SUPPLIES [3843]
		IRS NUMBER:				952645573
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			0531

	FILING VALUES:
		FORM TYPE:		10KSB
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-08765
		FILM NUMBER:		1736618

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

	MAIL ADDRESS:	
		STREET 1:		1533 MONROVIA AVENUE
		CITY:			NEWPORT BEACH
		STATE:			CA
		ZIP:			92663

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	NMS PHARMACEUTICALS INC
		DATE OF NAME CHANGE:	19871130

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	NUCLEAR INSTRUMENTS INC
		DATE OF NAME CHANGE:	19720508

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	NUCLEAR MEDICAL SYSTEMS INC
		DATE OF NAME CHANGE:	19830216
</SEC-HEADER>
<DOCUMENT>
<TYPE>10KSB
<SEQUENCE>1
<FILENAME>biomercia_10k-053101.txt
<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, 2001            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]
- ---

<PAGE>

State issuer's revenues for its most recent fiscal year:  $8,939,522.

State the aggregate market value of the voting and non-voting stock held by non-
affiliates of the issuer (based upon 4,223,822 shares held by non-affiliates and
the closing price of $0.70 per share for Common Stock in the over-the-counter
market as of September 4, 2001): $2,970,475.

Number of shares of the issuer's common stock, par value $0.08, outstanding as
of August 21, 2001: 5,036,754 shares.

DOCUMENTS INCORPORATED BY REFERENCE: The issuer's proxy statement for its 2001
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, 2001, for Lancer Orthodontics, Inc. and Allergy Immuno
Technologies, Inc.

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

                                       2
<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. THESE RISKS AND UNCERTAINTIES
  ALSO INCLUDE THE SUCCESS OF THE COMPANY IN RAISING NEEDED CAPITAL, THE ABILITY
  OF THE COMPANY TO MAINTAIN REQUIREMENTS TO BE LISTED ON NASDAQ, THE CONTINUAL
  DEMAND FOR THE COMPANY'S PRODUCTS, COMPETITIVE AND ECONOMIC FACTORS OF THE
  MARKETPLACE, AVAILABILITY OF RAW MATERIALS, 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 developed a wireless handheld point of care system for
physicians. All subsidiaries are majority-controlled subsidiaries.

     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 used the proceeds for developing an on-line drugstore and ReadyScript's
infrastructure (a wireless medication management system that enables physicians
to wirelessly transmit legible, pre-qualified formulary- compliant prescription
orders directly to the patient's choice of pharmacy).

     In August 2000 operations of the online drugstore, the BigRx.com, were shut
down due to insignificant revenue and non-performance by the other party of a
third party backend processing agreement. The Company adopted a formal plan in
April 2001 to discontinue operations of its ReadyScript subsidiary. The sale of
some of the ReadySript assets is being discussed with various parties. The
subsidiary is being reported in the financial statements as a discontinued
operation because it is no longer an operating entity.

                                       3
<PAGE>

                           OUR MEDICAL DEVICE BUSINESS

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

BIOMERICA - DIAGNOSTIC PRODUCTS

     Biomerica develops, manufactures, and markets medical diagnostic products
designed for the early detection and monitoring of chronic diseases and medical
conditions. The Company's medical diagnostic products are sold into three
markets: 1) clinical laboratories, 2) physicians offices and 3) over-the-counter
(drugstores). Our diagnostic test kits are used 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.

     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. One of our main objectives has been to develop and
market rapid diagnostic tests that are accurate, employ easily obtained
specimens, and are simple to perform without instrumentation. 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. 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. 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. The majority of our
over-the-counter tests are FDA cleared.

     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.


LANCER ORTHODONTICS, INC. -- ORTHODONTIC PRODUCTS

     Lancer is engaged in developing, manufacturing, and selling orthodontic
Products. 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 standard 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.

                                       4
<PAGE>

     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.


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. AIT also owns four
patents covering several inventions relating to the therapeutic treatment of
allergy.

     AIT employs one medical technologist and has received assistance in the
past from Biomerica whose operations are adjacent to that of AIT.


DISCONTINUED OPERATIONS

     The Company's fiscal 2001 and 2000 losses were partially the result of its
investment in ReadyScript. The ReadyScript subsidiary was a development-stage
enterprise and required the raising of a significant amount of capital to fund
its short-term working capital needs. The ReadyScript operations were
discontinued in May 2001. The net assets and operating results of ReadyScript
are shown separately in the accompanying consolidated financial statements as
discontinued operations and are held for sale. Prior periods have been restated
to reflect the results of ReadyScript as discontinued.


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 do not believe that material availability in the
foreseeable future will be a problem.

                                       5
<PAGE>

     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 October 2000. Lancer has retained
an option to convert the manufacturing operation to a wholly owned subsidiary at
any time without penalty.

     Lancer is in the process of converting Mexican assets and obligations to
its own division, a Mexican corporation named Lancer Orthodontics de Mexico
(Lancer de Mexico). This division will administer services previously provided
by an independent manufacturing contractor. A new lease was negotiated effective
April 1, 2001, for the 16,000 square foot facility used for Lancer's Mexican
operations. Utility and Mexican vendor obligations have been converted to the
Lancer de Mexico name. This conversion will eliminate the expense of an
administrative fee and is expected to provide better control in meeting
obligations.

     Should Lancer discontinue operations in Mexico, it is responsible for
accumulated employee seniority obligations as prescribed by Mexican law. At May
31, 2001, this obligation was approximately $361,000. Such obligation is
contingent in nature and accordingly has not been accrued in Lancer's 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, 2001 and 2000 aggregated approximately $322,000 and $465,000,
respectively. These expenses included approximately $72,000 and $184,000 for
fiscal 2001 and 2000, respectively, for Lancer's product development.

MARKETS AND METHODS OF DISTRIBUTION

     Biomerica has approximately 300 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.

                                       6
<PAGE>

     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 seven 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.

     Lancer also markets products which are purchased and resold to
orthodontists, including sealants, adhesives, elastomerics, headgear cases,
retainer cases, orthodontic wire, and preformed arches.

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

BACKLOG

     At May 31, 2001 and 2000 Biomerica had a backlog of $80,000 and $0,
respectively and Allergy Immuno Technologies, Inc. had no backlog of product
orders. As of May 31, 2001 and 2000, Lancer had a backlog of $167,000 and
$146,000, 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.

     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, 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
2001 fiscal year, and does not anticipate that there will be any interruption or
cessation of supply in the future.

                                       7
<PAGE>

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.

     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 and Ormco, subsidiaries or divisions
of Sybron; RMO Inc., a private company; American Orthodontics, a private
company; GAC, a private 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, has more diversified product lines and has 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. AIT is not a significant factor in the market.

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.

                                       8
<PAGE>

     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 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 FDA 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, 2002. 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, 2002. We also hold two radioactive materials licenses from the
State of California (both expiring on June 20, 2002), and two permits from the
USDA, one expiring on January 28, 2002 and the other expiring on June 30, 2002.
These licenses are renewed periodically, and to date we have never failed to
obtain a renewal.

                                       9
<PAGE>

     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 begun the process of complying with the
"CE Mark" directives and believes it will be in full compliance by the time the
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.

     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.

     AIT currently holds an annually renewed clinical laboratory license with
the Department of Health Services, State of California. The current license
expires December 31, 2001. AIT also holds a clinical laboratory license from the
state of Florida. This current license expires November 11, 2001 and is renewed
every two years. AIT holds a CLIA Certificate of Compliance, which is a
requirement of the Federal government for clinical laboratories. This
certificate expires in February 2002 and is renewed every two years. Although
AIT has never failed to obtain renewals, its business operations would be
materially and adversely affected if it were unable to do so.

                                       10
<PAGE>

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:

                                                  Year Ended May 31,
                                                  ------------------
                                             2001                 2000
                                             ----                 ----
     U.S. Customers                   $4,700,000/52.6%       $4,431,000/55.3%
     Asia                                221,000/2.5%           349,000/ 4.4%
     Europe                            2,207,000/24.7%        1,683,000/21.0%
     S. America                          558,000/6.2%           543,000/ 6.8%
     Other foreign                    1,254,000/14.0%         1,008,000/12.6%
                                      ---------------         --------------

                Total Revenues       $8,940,000/100%         $8,014,000/100%

     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 diagnostic 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
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
most of 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

                                       11
<PAGE>

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 product brands 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.

BRANDS, TRADEMARKS, PATENTS

     We registered the tradenames "Fortel," "Isletest," "Nimbus" and "GAP" with
the Office of Patents and Trademarks on December 31, 1985. Our unregistered
tradenames are "EZ-Detect," "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.

     Lancer has made a practice of selling its products under trademarks and of
obtaining protection for those trademarks in the United States and certain
foreign countries. Lancer considers these trademarks to be of importance in the
operation of its business.

     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.

                                       12
<PAGE>

EMPLOYEES

     As of August 14, 2001, the Company and its subsidiaries employed 73 full-
time employees and 9 part-time employees. Lancer, through its Mexican
subcontractor, utilizes the services of approximately 129 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 1993 we leased approximately 21,000 square feet of space in
Newport Beach, California for a term which expired May 31, 1998. Pursuant to the
prior 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 2001 the
Company paid a total of $169,440 in rent for approximately 24,500 square feet of
space. These facilities were used for diagnostic test kit research and
development, manufacturing, marketing, administration, and our ReadyScript
operations. The ReadyScript subsidiary still owed $12,500 in back rent as of May
31, 2001.

     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 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 in 1994 to $6,317 per month in 2004.
The lease expense is being recognized on a straight-line basis over the term of
the lease. The excess of the expense recognized over the cash paid aggregates
$11,032 at May 31, 2001, and is included in accrued liabilities in the
accompanying balance sheet. Total rental expense for this facility for each of
the years ended May 31, 2001 and 2000 was approximately $69,000.

     Lancer has entered into a non-cancelable operating lease for its Mexico
facility which expires in March 2006 and requires average monthly rentals of
approximately $6,000. Total expense for this facility for the years ended May
31, 2001 and 2000, was approximately $74,000.

     At May 31, 2001, future aggregate minimum lease payments for Lancer are as
follows:

                       Years ending
                       ------------
                       May 31, 2002                     $133,543
                       May 31, 2003                      136,397
                       May 31, 2004                      106,511
                       May 31, 2005                       62,292
                       Thereafter                         51,910

                       Total                            $490,653

                                       13
<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, 2001 . . . . . . . . . . . . . .         $1.25          $0.656
 February 28, 2001 . . . . . . . . . . . .        $0.969         $0.313
 November 30, 2000 . . . . . . . . . . . .        $1.75          $0.75
 August 31, 2000 .. . . . . . . . . . . .         $1.875         $1.25
 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

     As of August 21, 2001, the number of holders of record of Biomerica's
common stock was approximately 1,222, excluding stock held in street name.

                                       14
<PAGE>

     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 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. THESE RISKS AND UNCERTAINTIES
ALSO INCLUDE THE SUCCESS OF THE COMPANY IN RAISING NEEDED CAPITAL, THE ABILITY
OF THE COMPANY TO MAINTAIN REQUIREMENTS TO BE LISTED ON NASDAQ, THE CONTINUAL
DEMAND FOR THE COMPANY'S PRODUCTS, COMPETITIVE AND ECONOMIC FACTORS OF THE
MARKETPLACE, AVAILABILITY OF RAW MATERIALS, 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.


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 developed an 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 51.19% over Lancer via voting agreements with
certain shareholders. ReadyScript is a 88.9% owned subsidiary of Biomerica. As a
result of our control and ownership, our financial statements are consolidated
with those of Lancer, AIT and ReadyScript. Both Lancer and AIT are public
companies. The common stock of Lancer is traded on the bulletin board system
under the symbol "LANZ," and the common stock of AIT is traded in the pink
sheets under the symbol "ALIM."

     In August 2000 operations of the online drugstore, the BigRx.com, were shut
down due to insignificant revenue and non-performance by the other party of a
third party backend processing agreement. The ReadyScript subsidiary was a
development-stage enterprise and required the raising of a significant amount of
capital to fund its short-term working capital needs. The ReadyScript operations
were discontinued in May 2001. The sale of some of the ReadyScript assets is
being discussed with various parties. The subsidiary is being reported in the
financial statements as a discontinued operation because it is no longer an
operating entity.

                                       15
<PAGE>

Fiscal 2001 Compared to Fiscal 2000

     Our consolidated net sales were $8,939,522 for fiscal 2001 compared to
$8,013,921 for fiscal 2000. This represents an increase of $925,601, or 11.5%
for fiscal 2001. Of the total consolidated net sales for fiscal 2001, $5,927,603
is attributable to Lancer, $100,270 to AIT and $2,911,649 to Biomerica. Lancer's
sales increased by $277,091, Biomerica showed a sales increase of $628,216 and
AIT had an increase of $20,294. The increase at Lancer was attributable to an
increase in European sales. The increase in sales at Biomerica was in large part
due to an increase of sales in the over-the-counter market domestically.

     Cost of sales in fiscal 2001 as compared to fiscal 2000 increased by
$526,248 or 9.4%. Lancer's cost of sales as a percentage of sales decreased from
68.4% to 67.4% in fiscal 2001 as compared to fiscal 2000. The decrease was
primarily attributable to product mix. Biomerica had a decrease in cost of goods
as a percentage of sales from 72.0% to 70.4% in fiscal 2001 as compared to
fiscal 2000 due to a more profitable sales mix offset by a write-down for
obsolete inventory and scrap of approximately $150,000. AIT had a decrease in
cost of goods as a percentage of sales of 118.0% to 86.7% primarily due to lower
material costs.

     Selling, general and administrative costs decreased in fiscal 2001 as
compared to fiscal 2000 by $712,152 or 18.3%. Lancer had a decrease of $144,652
in these costs due to decreases in labor costs and travel expenses, partially
offset by increases in bad debt expense and other expenses. Biomerica had a
decrease in fiscal 2001 as compared to fiscal 2000 of $535,427, primarily due to
warrant expenses incurred in fiscal 2000. AIT had decreased costs of $32,073 due
to higher legal and accounting costs related to new SEC filing requirements in
fiscal 2000.

     Research and development expense decreased in fiscal 2001 as compared to
fiscal 2000 by $142,916 or 30.7%. Of this, Lancer had a decrease of $112,744, as
a result of the termination of the dental amalgam development. Biomerica had an
increase in research and development expenses of $22,828 primarily due to the
expenses related to consulting services. AIT had a decrease of $52,600 as a
result of termination of a research project.

     Interest expense, which was incurred primarily by Lancer, increased in
fiscal 2001 as compared to fiscal 2000 by $1,996 or 10.2% due to borrowings
against the line of credit to finance development costs and an increase in the
interest rate.

     Other income net, decreased by $70,636 or 59.7% in fiscal 2001 as compared
to fiscal 2000. A decrease of $225,900 is attributable to Lancer due to income
received in the prior fiscal year from an insurance claim for inventory theft.
An increase of $152,478 was attributable to Biomerica due to the sale of
marketable securities offset by lower interest and dividend income. An increase
of $3,722 was attributable to AIT due to income realized from the sale of land
this fiscal year.

     As of May 31, 2001, Biomerica had net tax operating loss carryforwards of
approximately $9,466,000 and investment tax and research and development credits
of approximately $45,000, which are available to offset future federal tax
liabilities. These carryforwards expire at varying dates from 2001 to 2021. As
of May 31, 2001, Biomerica has net operating tax loss carryforwards of
approximately $2,127,000 available to offset future state income tax
liabilities, which expire through 2011. As of May 31, 2001, Lancer had net

                                       16
<PAGE>

operating loss carryforwards of approximately $2,049,000 and business tax
credits of approximately $98,000 available to offset future Federal tax
liabilities. The Lancer carryforwards expire through 2021. As of May 31, 2001,
AIT had net tax operating loss carryforwards of $1,931,000 and business tax
credits of approximately $29,000 to offset future Federal tax liabilities. The
carryforwards expire at varying dates through 2021. AIT also had net tax
operating loss carryforwards of approximately $580,000 to offset future
California taxable income, expiring at varying dates through 2011.

Liquidity and Capital Resources

     As of May 31, 2001, we had cash and available for sale securities of
$136,299 (see Note 1 of Notes to Consolidated Financial Statements) and current
working capital of $2,944,596. Of the current working capital, $2,697,500 is
attributable to the Lancer subsidiary, which is restricted from distribution to
Biomerica as a result of Lancer's line of credit agreement. The Company's fiscal
2001 losses were substantially the result of its investment in ReadyScript,
which has been reported as a discontinued operation. During 2001, cash provided
by operations was $108,955. During 2000, the Company used cash flows from
operations of $723,997. Cash provided by investing activities was $50,532,
partially due to the sale of marketable securities and land. The Company
generated cash flow from financing activities of $339,662 during fiscal 2001,
primarily due to two private placements and a shareholder loan at Biomerica.
This compares to cash provided by financing activities of $1,889,295 in 2000
primarily a result of the sale of common stock net of offering proceeds.

     The Company has suffered substantial recurring losses from operations over
the last couple of years. The Company has funded its operations through debt and
equity financings and may have to do so in the future.

     ReadyScript was discontinued in May 2001. ReadyScript was a primary contri-
butor to the Company's losses. The Company also plans to reduce operating costs
through certain cost reduction efforts and concentrate on its core business in
Lancer and Biomerica to increase sales. There can be no assurances that the
Company will be able to become profitable, generate positive cash flow from
operations or sustain the necessary equity or debt financing to fund operations
in the future.

     At May 31, 2001, Lancer had a $300,000 line of credit with a bank.
Borrowings are made at prime plus 1.25% (8.25% at May 31, 2001) and are limited
to specified percentages of eligible accounts receivable. The unused portion
available to Lancer under the line of credit at May 31, 2001 was $160,000. The
line of credit expired on September 10, 2001. As of May 31, 2001, there was
$140,000 outstanding under the line of credit.

    The line of credit is collateralized by substantially all the assets of
Lancer, including inventories, receivables, and equipment. The lending agreement
for the line of credit requires, among other things, that Lancer maintain a
tangible net worth ratio of no more than 1 to 1, and a current ratio in excess
of 2 to 1, and prohibits the advancing of funds to Biomerica. Lancer is not
required to maintain compensating balances in connection with this lending
agreement. Lancer was in violation of certain of its debt covenants at May 31,
2001. Lancer is currently in discussions with a new lender to replace its
existing line of credit. Management believes it will be successful in such
discussions, however, there can be no assurance of this success nor that
management would be successful in finding a replacement lender with acceptable
terms.

                                       17
<PAGE>

     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 was due to expire September 12, 2001. On September 12, 2001
the line of credit was extended until September 13, 2002 at an interest rate of
8% and is secured by accounts receivable and inventory. The unused portion
available under the line of credit at May 31, 2001, was approximately $405,000.
During June and July 2001 the Company borrowed an additional $130,000 on the
line of credit; therefore, the unused portion of the line of credit as of
September 10, 2001, is $275,000.

     The Company has been notified by Nasdaq that it has failed to maintain the
listing requirement that its minimum bid price be $1.00 or more and that it must
regain compliance by October 4, 2001, or it will be subject to delisting. The
Company will be subject to that and other continuing requirements to be listed
on the Nasdaq SmallCap Market. There can be no assurance that the Company can
continue to meet such requirements. The price and liquidity of the Common Stock
may be materially adversely affected if the Company is unable to meet such
requirements in the future.


     Recent Accounting Pronouncements:

     In June 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments and requires recognition of all derivatives
as assets or liabilities in the statement of financial position and measurement
of those instruments at fair value. SFAS No. 133, as amended by SFAS No. 137, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company currently does not engage in derivative or hedging activities, and
accordingly, believes that there will be no impact to its consolidated financial
statements upon implementation in the Company's fiscal year 2002.

     In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). SAB 101 summarizes certain areas of the Staff's views in applying
accounting principles generally accepted in the United States of America to
revenue recognition in financial statements. The Company believes that its
current revenue recognition policies comply with SAB 101.

     In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations", which eliminates the pooling method of accounting for business
combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the
accounting for intangible assets and goodwill acquired in a business
combination. This portion of SFAS 141 is effective for business combinations
completed after June 30, 2001. The Company does not expect SFAS 141 will have a
material impact on the Company's financial position or results of operations.

     In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Intangible Assets", which revises the
accounting for purchased goodwill and intangible assets. Under SFAS 142,
goodwill and intangible assets with indefinite lives will no longer be amor-
tized and will be tested for impairment annually. SFAS 142 is effective for
fiscal years beginning after December 15, 2001, with earlier adoption per-
mitted. The Company has not yet determined the impact on the Company's fin-
ancial position or results of operations as a result of the future adoption of
SFAS 142.

                                       18
<PAGE>

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.


                                    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 2001 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,
2001.

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

     This information is incorporated by reference to the Company's proxy
statement for its 2001 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,
2001.

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

     This information is incorporated by reference to the Company's proxy
statement for its 2001 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,
2001.

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

     This information is incorporated by reference to the Company's proxy
statement for its 2001 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,
2001.

                                       19
<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 on 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 (incorporated by reference to Exhibit 3.8
                 filed with the Registrant's Annual Report on Form 10-KSB for
                 the fiscal year ended May 31, 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).

                                       20
<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).

                                       21
<PAGE>

  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).


  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).

                                       22
<PAGE>

  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. 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, 2001 and 2000 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.

                                       23
<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:  9/12/01
                                               -------

     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: 9/12/01
- ------------------------------------
Zackary S. Irani
President, Director, Chief Executive
Officer


/s/ Janet Moore                                                 Date: 9/12/01
- ------------------------------------
Janet Moore, Secretary
Director, Chief Financial Officer


/s/ Robert Orlando                                              Date: 9/12/01
- ------------------------------------
Robert Orlando, M.D., Ph.D.
Director


/s/ Carlos St. Aubyn Beharie                                    Date: 9/12/01
- ------------------------------------
Carlos St. Aubyn Beharie
Director


/s/ David Burrows                                               Date: 9/12/01
- ------------------------------------
David Burrows
Director


/s/ Francis R. Cano
- ------------------------------------                            Date: 9/12/01
Francis R. Cano
Director

/s/ Allen Barbieri                                              Date: 9/12/01
- ------------------------------------
Allen Barbieri
Director

                                       24


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>3
<FILENAME>biomerica_financials.txt
<TEXT>
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES


                                    CONTENTS

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




EPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                      FS-2


ONSOLIDATED FINANCIAL STATEMENTS

   Consolidated Balance Sheet as of May 31, 2001                       FS-3

   Consolidated Statements of Operations and
     Comprehensive Loss for the Years Ended
     May 31, 2001 and 2000, respectively                        FS-4 - FS-5

   Consolidated Statements of Shareholders' Equity
     for  the Years Ended May 31, 2001 and 2000                 FS-6 - FS-7

   Consolidated Statements of Cash Flows for the
     Years Ended May 31, 2001 and 2000                          FS-8 - FS-9


   Notes to Consolidated Financial Statements                 FS-10 - FS-53





<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, 2001, and the related
consolidated statements of operations and comprehensive loss, shareholders'
equity and cash flows for the years ended May 31, 2001 and 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2001, and the results of their operations and their
cash flows for the years ended May 31, 2001 and 2000, in conformity with
accounting principles generally accepted in the United States of America.

The Company has suffered substantial recurring losses from operations and has
relied on equity and debt financings to fund operations and may have to do so in
the future. Management's plan in regards to these matters are described in Note
1.



                                                                BDO SEIDMAN, LLP


Costa Mesa, California
August 10, 2001, except as to
 Note 6, which is as
 of September 11, 2001


                                      FS-2
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                                      CONSOLIDATED BALANCE SHEET
================================================================================


MAY 31,                                                                 2001
- --------------------------------------------------------------------------------

ASSETS

CURRENT ASSETS
   Cash and cash equivalents                                        $   136,299
   Available for-sale securities                                         41,570
   Accounts receivable, less allowance for doubtful
     accounts and sales returns of $192,559                           1,525,255
   Inventories, net                                                   2,865,956
   Notes receivable                                                      18,394
   Prepaid expenses and other                                            89,422
- --------------------------------------------------------------------------------

Total current assets                                                  4,676,896
- --------------------------------------------------------------------------------

INVENTORIES, non-current                                                 15,000

PROPERTY AND EQUIPMENT, at cost
   Equipment                                                          2,912,011
   Furniture, fixtures and leasehold improvements                       439,096
- --------------------------------------------------------------------------------

                                                                      3,351,107

ACCUMULATED DEPRECIATION AND AMORTIZATION                            (3,032,659)
- -------------------------------------------------------------------------------

Net property and equipment                                              318,448

INTANGIBLE ASSETS, net of accumulated amortization                      297,239

OTHER ASSETS                                                             39,538
- --------------------------------------------------------------------------------

                                                                    $ 5,347,121
================================================================================



<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                                      CONSOLIDATED BALANCE SHEET
================================================================================


MAY 31,                                                                2001
- --------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
   Line of credit                                                   $   140,000
   Accounts payable and accrued expenses                                930,965
   Accrued compensation                                                 263,277
   Net liabilities from discontinued operations                         398,058
- --------------------------------------------------------------------------------

Total current liabilities                                             1,732,300
- --------------------------------------------------------------------------------


SHAREHOLDER LOAN                                                         95,000

MINORITY INTEREST                                                     2,046,956
- --------------------------------------------------------------------------------


SHAREHOLDERS' EQUITY
   Common stock, $.08 par value; 25,000,000 shares
     authorized; 5,036,754 shares subscribed or issued
     and outstanding                                                    391,254
   Additional paid in capital                                        16,859,742
   Accumulated other comprehensive loss                                 (10,289)
   Accumulated deficit                                              (15,767,842)
- --------------------------------------------------------------------------------

Total shareholders' equity                                            1,472,865
- --------------------------------------------------------------------------------

                                                                    $ 5,347,121
================================================================================

                    See accompanying notes to consolidated financial statements.


                                      FS-3
<PAGE>
<TABLE>

                                                          BIOMERICA, INC. AND SUBSIDIARIES

                                                 CONSOLIDATED STATEMENTS OF OPERATIONS AND
                                                                        COMPREHENSIVE LOSS
==========================================================================================
<CAPTION>

YEARS ENDED MAY 31,                                                2001          2000
- ------------------------------------------------------------------------------------------
<S>                                                            <C>            <C>
NET SALES                                                      $ 8,939,522    $ 8,013,921

Cost of sales                                                    6,129,900      5,603,652
- ------------------------------------------------------------------------------------------

GROSS PROFIT                                                     2,809,622      2,410,269
- ------------------------------------------------------------------------------------------

OPERATING EXPENSES
   Selling, general and administrative                           3,171,085      3,883,237
   Research and development                                        322,121        464,637
- ------------------------------------------------------------------------------------------

Total operating expenses                                         3,493,206      4,347,874
- ------------------------------------------------------------------------------------------

OPERATING LOSS FROM CONTINUING OPERATIONS                         (683,584)    (1,937,605)

OTHER INCOME (EXPENSE)
   Interest expense                                                (21,558)       (19,562)
   Other income, net                                                47,762        118,398
- ------------------------------------------------------------------------------------------

LOSS FROM CONTINUING OPERATIONS, before minority interest
   in net loss of consolidated subsidiaries and income taxes      (657,380)    (1,838,769)

MINORITY INTEREST IN NET LOSS OF CONSOLIDATED SUBSIDIARIES          80,894        202,722
- ------------------------------------------------------------------------------------------

LOSS FROM CONTINUING OPERATIONS, before income taxes              (576,486)    (1,636,047)

INCOME TAX EXPENSE                                                   2,400          2,400
- ------------------------------------------------------------------------------------------

NET LOSS FROM CONTINUING OPERATIONS                               (578,886)    (1,638,447)

DISCONTINUED OPERATIONS:
   Loss from discontinued operations, net                       (2,093,432)    (2,252,402)
- ------------------------------------------------------------------------------------------

NET LOSS                                                        (2,672,318)    (3,890,849)
</TABLE>

                                      FS-4

<PAGE>
<TABLE>

                                                            BIOMERICA, INC. AND SUBSIDIARIES

                                                   CONSOLIDATED STATEMENTS OF OPERATIONS AND
                                                              COMPREHENSIVE LOSS (CONTINUED)
============================================================================================
<CAPTION>

YEARS ENDED MAY 31,                                                2001            2000
- --------------------------------------------------------------------------------------------
<S>                                                          <C>              <C>
OTHER COMPREHENSIVE (LOSS) INCOME, net of tax
   Unrealized (loss) gain on available-for-sale securities          (5,966)           4,456
- --------------------------------------------------------------------------------------------

COMPREHENSIVE LOSS                                           $  (2,678,284)   $  (3,886,393)
============================================================================================

BASIC NET LOSS PER COMMON SHARE:
   Net loss from continuing operations                       $       (0.12)   $       (0.36)
   Net loss from discontinued operations                             (0.43)           (0.50)
- --------------------------------------------------------------------------------------------

Basic net loss per common share                              $       (0.55)   $       (0.86)
============================================================================================

DILUTED NET LOSS PER COMMON SHARE:
   Net loss from continuing operations                       $       (0.12)   $       (0.36)
   Net loss from discontinued operations                             (0.43)           (0.50)
- --------------------------------------------------------------------------------------------

Diluted net loss per common share                            $       (0.55)   $       (0.86)
============================================================================================

WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
   EQUIVALENT SHARES
   Basic                                                         4,814,790        4,542,820
============================================================================================

   Diluted                                                       4,814,790        4,542,820
============================================================================================

                                See accompanying notes to consolidated financial statements.

</TABLE>
                                      FS-5

<PAGE>
<TABLE>
                                                                                                  BIOMERICA, INC. AND SUBSIDIARIES

                                                                                   CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
==================================================================================================================================
<CAPTION>
                                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>
Balances, May 31, 1999      4,110,445  $ 328,835     $ 12,703,339    $   (8,779)        $   (1,000)   $ (9,204,675)  $  3,817,720

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)
- ----------------------------------------------------------------------------------------------------------------------------------

Balances, May 31, 2000      4,575,070    366,005       15,529,421        (4,323)                 -     (13,095,524)    2,795,579

</TABLE>

                                                               FS-6
<PAGE>
<TABLE>
                                                                                                    BIOMERICA, INC. AND SUBSIDIARIES

                                                                         CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
====================================================================================================================================
<CAPTION>
                                                                 Common Stock      Accumulated
                                Common Stock       Additional     Subscribed          Other
                            ---------------------   Paid-in   ------------------   Comprehensive Shareholder Accumulated
                            Shares       Amount     Capital    Shares    Amount    Income (Loss)    Loan       Deficit      Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>        <C>        <C>          <C>      <C>        <C>            <C>      <C>           <C>
Private placement, net of
   offering costs of $1,140   113,375      9,070      142,368  126,075    90,774              -          -            -     242,212

Change in unrealized gain
   (loss) on available-for-sale
   securities                       -          -            -        -         -         (5,966)         -            -      (5,966)

Common stock issued in
   satisfaction of payables    34,643      2,772       35,843        -         -              -          -            -      38,615

Exercise of stock options       8,500        680        6,088        -         -              -          -            -       6,768

Common stock issued for
   services rendered          159,091     12,727      232,898        -         -              -          -            -     245,625

Compensation expense in
   connection with options
   and warrants granted             -          -       89,336        -         -              -          -            -      89,336

Common stock subscribed for
   services rendered                -          -            -   20,000    20,000              -          -            -      20,000

Conversion of subsidiary debt
   into common stock of
   subsidiary                       -          -      713,014        -         -              -          -            -     713,014

Net loss                            -          -            -        -         -              -          -   (2,672,318) (2,672,318)
- ------------------------------------------------------------------------------------------------------------------------------------

Balances, May 31, 2001      4,890,679  $ 391,254  $16,748,968  146,075  $110,774   $    (10,289)  $      - $(15,767,842) $1,472,865
====================================================================================================================================

                                                                        See accompanying notes to consolidated financial statements.

</TABLE>

                                                               FS-7
<PAGE>
<TABLE>
                                                                BIOMERICA, INC. AND SUBSIDIARIES

                                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================================
<CAPTION>


FOR THE YEARS ENDED MAY 31,                                              2001         2000
- ------------------------------------------------------------------------------------------------
<S>                                                                  <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss from continuing operations                               $  (578,886)   $(1,638,447)
   Adjustments to reconcile net loss to net cash provided
     by (used in) continuing operating activities:
     Depreciation and amortization                                       208,990        209,549
     Provision for losses on accounts receivable                          (4,235)        (2,834)
     Provision for losses on inventory                                   129,034              -
     Realized loss (gain) on sale of available-for-sale securities       (34,427)        13,241
     Warrants and options issued for services rendered                    89,336        821,043
     Common stock of a subsidiary issued for services                          -         50,631
     Gain on conversion of subsidiary preferred stock                          -        (55,487)
     Common stock issued or subscribed for services rendered             265,625         16,000
     Net gain on sale of land                                             (3,722)             -
     Net loss on sale of property and equipment                            2,000              -
     Minority interest in net profits of consolidated subsidiaries       (80,894)      (202,722)
     Changes in current liabilities and assets
       Accounts receivable                                               180,915        (95,844)
       Inventories                                                      (128,301)       198,406
       Prepaid expenses and other                                         54,756        152,561
       Accounts payable and other accrued liabilities                     76,507       (121,778)
       Accrued compensation                                              (67,743)       (68,316)
- ------------------------------------------------------------------------------------------------

Net cash provided by (used in) operating activities                      108,955       (723,997)
- ------------------------------------------------------------------------------------------------

</TABLE>


                                      FS-8
<PAGE>
<TABLE>

                                                      BIOMERICA, INC. AND SUBSIDIARIES

                                     CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
======================================================================================
<CAPTION>


FOR THE YEARS ENDED MAY 31,                                     2001           2000
- --------------------------------------------------------------------------------------
<S>                                                           <C>            <C>
CASH FLOWS FROM INVESTING ACTIVITIES
   Sales of available-for-sale securities                       85,665         18,191
   Decrease in notes receivable                                 16,600          9,491
   Purchases of property and equipment                         (61,919)      (101,010)
   Proceeds from sale of land                                   49,722              -
   Increase in intangible assets                               (20,090)             -
   Other assets                                                (19,446)       110,737
- --------------------------------------------------------------------------------------

Net cash provided by investing activities                       50,532         37,409
- --------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net decrease under line of credit agreement                 (20,000)       (20,000)
   Increase in shareholder loan                                 95,000              -
   Repurchase of minority interests                             15,682       (117,914)
   Decrease in shareholder receivable                                -          1,000
   Exercise of stock options                                     6,768         60,652
   Sale of common stock, net of offering expenses              242,212      1,965,557
- --------------------------------------------------------------------------------------

Net cash provided by financing activities                      339,662      1,889,295
- --------------------------------------------------------------------------------------

Net cash used in discontinued operations                      (977,907)    (2,256,855)
- --------------------------------------------------------------------------------------

Net change in cash and cash equivalents                       (478,758)    (1,054,148)

CASH AND CASH EQUIVALENTS, beginning of year                   615,057      1,669,205
- --------------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS, end of year                     $   136,299    $   615,057
======================================================================================

SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION
  CASH PAID DURING THE YEAR FOR:
     Interest                                              $    19,931    $    19,562
======================================================================================

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

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
  FINANCING ACTIVITIES
  Change in unrealized holding gain (loss) on available-
     for-sale securities                                   $     5,966    $     4,456
======================================================================================
                          See accompanying notes to consolidated financial statements.

</TABLE>

                                      FS-9
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


1.  ORGANIZATION       ORGANIZATION
    AND
    LIQUIDITY          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, and the performance of specialized
                       diagnostic testing services.

                       LIQUIDITY

                       The Company has suffered substantial recurring losses
                       from operations over the last couple of years. The
                       Company has funded its operations through debt and equity
                       financings, and may have to do so in the future.

                       ReadyScript operations were discontinued in May 2001.
                       (see Notes 2 and 13). ReadyScript was a primary
                       contributor to the Company's losses. The Company also
                       plans to reduce operating costs through certain cost
                       reduction efforts and concentrate on its core business in
                       Lancer and Biomerica to increase sales. There can be no
                       assurances that the Company will be able to become
                       profitable, generate positive cash flow from operations
                       or obtain the necessary equity or debt financing to fund
                       operations in the future.

2.  SUMMARY OF         PRINCIPLES OF CONSOLIDATION
    SIGNIFICANT
    ACCOUNTING         The consolidated financial statements for the years ended
    POLICIES           May 31, 2001 and 2000 (see Note 3) include the accounts
                       of Biomerica, Inc. ("Biomerica"), Lancer Orthodontics,
                       Inc. ("Lancer"), Allergy Immuno Technologies, Inc.
                       ("AIT") and ReadyScript, Inc. (discontinued). All
                       significant intercompany accounts and transactions have
                       been eliminated in consolidation.

                       ACCOUNTING ESTIMATES

                       The preparation of financial statements in conformity
                       with accounting principles generally accepted in the
                       United States of America requires management to make
                       estimates and assumptions

                                     FS-10
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


2.  SUMMARY OF         that affect the reported amounts of assets and
    SIGNIFICANT        liabilities and disclosure of contingent assets and
    ACCOUNTING         liabilities at the date of the financial statements, and
    POLICIES           the reported amounts of revenues and expenses during the
    (Continued)        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, 2001.

                       CONCENTRATION OF CREDIT RISK

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

                       The Company provides credit in the normal course of
                       business to customers throughout the United States and
                       foreign markets. The Company's sales 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, 2001 two customers
                       accounted for approximately 10.7% and 10.6% of gross
                       accounts receivable. No one customer accounted for 10% or
                       more of revenues for the years ended May 31, 2001 and
                       2000.



                                     FS-11
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


2.  SUMMARY OF         CASH EQUIVALENTS
    SIGNIFICANT
    ACCOUNTING         Cash and cash equivalents consists of demand deposits,
    POLICIES           money market accounts and mutual funds with remaining
    (Continued)        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 2001 and
                       2000 totaled $85,665 and $18,191, respectively (see Note
                       9). The change in the net unrealized holding (loss) gain
                       on available-for-sale securities that has been included
                       as a separate component of shareholders' equity totaled
                       $(5,966) and $4,456 for the years ended May 31, 2001 and
                       2000, respectively.

                       INVENTORIES

                       Inventories are stated at the lower of cost (first-in,
                       first-out method) or market and 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


                                     FS-12
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


2.  SUMMARY OF         advancement and change. Should demand for the Company's
    SIGNIFICANT        products prove to be significantly less than anticipated,
    ACCOUNTING         the ultimate realizable value of the Company's
    POLICIES           inventories could be substantially less than the amount
    (Continued)        shown on the accompanying consolidated balance sheet.

                       Inventories consist of the following:

                       MAY 31,                                           2001
                       ---------------------------------------------------------

                       Raw materials                                $   909,408
                       Work in progress                                 442,613
                       Finished products                              1,768,136
                       Inventory reserve                               (254,201)
                       ---------------------------------------------------------

                                                                    $ 2,865,956
                       =========================================================

                       Approximately $1,878,000 of Lancer's inventory is located
                       at its manufacturing facility in Mexico as of May 31,
                       2001.

                       PROPERTY AND EQUIPMENT

                       Property and equipment are stated at cost. Expenditures
                       for additions and major improvements 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 $119,325 and $127,696 for the years ended May
                       31, 2001 and 2000, respectively. At May 31, 2001,
                       approximately $38,000 of property and equipment, net of
                       accumulated depreciation and amortization, is located at
                       Lancer's manufacturing facility in Mexico.


                                     FS-13
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


2.  SUMMARY OF         Management of the Company assesses the recoverability of
    SIGNIFICANT        property and equipment by determining whether the
    ACCOUNTING         depreciation and amortization of such assets over their
    POLICIES           remaining lives can be recovered through projected
    (Continued)        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, 2001.

                       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 (the "Purchase")
                       by Lancer of the manufacturing assets and technology of
                       Titan Research Associates, Ltd. ("Titan"). Prior to the
                       Purchase, certain former officers of Lancer and
                       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 $89,665 and $81,853
                       for the years ended May 31, 2001 and 2000, 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, 2001.

                                      FS-14
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


2.  SUMMARY OF         RISKS AND UNCERTAINTIES
    SIGNIFICANT
    ACCOUNTING         LICENSES - Certain of the Company's sales of products are
    POLICIES           governed by license agreements with outside third
    (Continued)        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.

                       DISTRIBUTION - Lancer has entered into various exclusive
                       and non-exclusive distribution agreements (the
                       "Agreements") which generally specify territories of
                       distribution. The Agreements range in term from one to
                       five years. Lancer may be dependent upon such
                       distributors for the marketing and selling of its
                       products worldwide during the terms of these agreements.
                       Such distributors are generally not obligated to sell any
                       specified minimum quantities of Lancer's product. There
                       can be no assurance of the volume of product sales that
                       may be achieved by such distributors.

                       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
                       Federal Food, Drug and Cosmetic Act, and the regulations
                       promulgated thereunder, the FDA regulates, among other
                       things, the clinical testing, manufacture, labeling,
                       promotion, 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.


                                     FS-15
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


2.  SUMMARY OF         Sales of medical devices outside the United States are
    SIGNIFICANT        subject to foreign requirements for licensing may differ
    ACCOUNTING         regulatory requirements that vary widely from country to
    POLICIES           country. The time significantly from FDA requirements.
    (Continued)        There required to obtain registrations or approvals
                       required by foreign countries may can be no assurance
                       that Biomerica will be be longer or shorter than that
                       required for FDA clearance or approval, and 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.

                       EUROPEAN COMMUNITY - Lancer is required to obtain
                       certification in the European community to sell products
                       in those countries. The certification requires Lancer to
                       maintain certain quality standards. Lancer has been
                       granted certification. However, there is no assurance
                       that Lancer will be able to retain its certification in
                       the future.

                       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.

                       Lancer is subject to the same risks of product liability.
                       Lancer currently has product liability insurance. Lancer
                       also is subject to the risk of loss of its product
                       liability insurance and the consequent exposure to
                       liability.

                                     FS-16
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================

2.  SUMMARY OF         HAZARDOUS MATERIALS - Biomerica's manufacturing and
    SIGNIFICANT        research and development involves the controlled use of
    ACCOUNTING         hazardous materials and chemicals. Although Biomerica
    POLICIES           believes that safety procedures for handling and
    (Continued)        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 7). 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. At May 31,
                       2001, Biomerica owned 30.78% of Lancer (see Note 3),
                       74.6% of AIT (see Note 3) and 88.9% of ReadyScript.

                                     FS-17
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


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 services are recognized when the
                       related services are performed.

                       RESEARCH AND DEVELOPMENT

                       Research and development expenses are expensed as
                       incurred. The Company expensed approximately $322,000 and
                       $465,000 of research and development expenses during the
                       years ended May 31, 2001 and 2000, respectively.

                       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 $50,000 and $69,000
                       for the years ended May 31, 2001 and 2000, respectively.

                                     FS-18
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================

2.  SUMMARY OF         LOSS PER SHARE
    SIGNFICANT
    ACCOUNTING         In February 1997, the Financial Accounting Standards
    POLICIES           Board ("FASB") issued Statement of Financial Accounting
    (Continued)        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 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.

                                                     For the Years Ended May 31,
                                                     --------------------------
                                                          2001         2000
                       ---------------------------------------------------------

                       Numerator:
                           Loss from continuing
                             operations               $  (578,886)  $(1,638,447)
                           Loss from discontinued
                             operations                (2,093,432)   (2,252,402)
                       ---------------------------------------------------------

                       Numerator for basic and
                           diluted net income per
                           common--net loss           $(2,672,318)  $(3,890,849)
                       =========================================================


                       Denominator for basic net loss
                           per common share           $ 4,814,790   $ 4,542,820
                       Effect of dilutive securities:
                           Options and warrants                 -              -
                       ---------------------------------------------------------

                       Denominator for diluted net loss
                           per common share           $ 4,814,790   $ 4,542,820
                       =========================================================


                                     FS-19
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================

2.  SUMMARY OF                                       For the Years Ended May 31,
    SIGNIFICANT                                      ---------------------------
    ACCOUNTING                                            2001         2000
    POLICIES           ---------------------------------------------------------
    (Continued)
                       Basic net loss per common
                           share:
                           Loss from continuing
                             operations               $     (0.12)  $     (0.36)
                           Loss from discontinued
                             operations                     (0.43)        (0.50)
                       ---------------------------------------------------------

                       Basic net income per common
                           share                      $     (0.55)  $     (0.86)
                       =========================================================

                       Diluted net loss per common
                           share:
                           Loss from continuing
                             operations               $     (0.12)  $     (0.36)
                           Loss from discontinued
                             operations                     (0.43)        (0.50)
                       ---------------------------------------------------------

                       Diluted net loss per common
                           share                      $     (0.55)  $     (0.86)
                       =========================================================

                       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 7.

                       As of May 31, 2001, there was a total of 3,144,234
                       potential dilutive shares of common stock.


                                     FS-20
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


2.  SUMMARY OF         SEGMENT REPORTING
    SIGNIFICANT
    ACCOUNTING         The Financial Accounting Standards Board has issued
    POLICIES           Statement of Financial Accounting Standards No. 131
    (Continued)        "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
                       requires them to report selected segment information in
                       their quarterly reports issued to shareholders. It also
                       requires entity-wide disclosures about the product,
                       services an entity provides, the material countries in
                       which it holds assets and reports revenues, and its major
                       customers. The Company adopted the provisions of this
                       statement for 1999 annual reporting (Note 10).

                       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.

                       RECENT ACCOUNTING PRONOUNCEMENTS

                       In June 1998, the Financial Accounting Standards Board
                       issued Statement of Financial Accounting Standards (SFAS)
                       No. 133, "Accounting for Derivative Instruments and
                       Hedging Activities." This statement establishes
                       accounting and reporting standards for derivative
                       instruments and requires recognition of all derivatives
                       as assets or liabilities in the statement of financial
                       position and measurement of those instruments at fair
                       value. SFAS No. 133, as amended by SFAS No. 137, is
                       effective for all fiscal quarters of fiscal years
                       beginning after June 15, 2000. The Company currently does
                       not engage in derivative or hedging activities, and
                       accordingly, believes that there will be no impact to its
                       consolidated financial statements upon implementation in
                       the Company's fiscal year 2002.



                                     FS-21
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================

2.  SUMMARY OF         In December 1999, the Securities and Exchange Commission
    SIGNIFICANT        issued Staff Accounting Bulletin No. 101, Revenue
    ACCOUNTING         Recognition in Financial Statements ("SAB 101"). SAB 101
    POLICIES           summarizes certain areas of the Staff's views in applying
    (CONTINUED)        accounting principles generally accepted in the United
                       States of America to revenue recognition in financial
                       statements. The Company believes that its current revenue
                       recognition policies comply with SAB 101.

                       In March 2000, the Financial Accounting Standards Board
                       ("FASB") issued Interpretation No. 44 ("FIN 44"),
                       "Accounting for Certain Transactions involving Stock
                       Compensation." The adoption of this Interpretation did
                       not have a material impact on the consolidated results of
                       operations or financial position of the Company.

                       In July 2001, the Financial Accounting Standards Board
                       ("FASB") issued Statement of Financial Accounting
                       Standards No. 141 ("SFAS 141"), "Business Combinations",
                       which eliminates the pooling method of accounting for
                       business combinations initiated after June 30, 2001. In
                       addition, SFAS 141 addresses the accounting for
                       intangible assets and goodwill acquired in a business
                       combination. This portion of SFAS 141 is effective for
                       business combinations completed after June 30, 2001. The
                       Company does not expect SFAS 141 will have a material
                       impact on the Company's financial position or results of
                       operations.

                       In July 2001, the FASB issued Statement of Financial
                       Accounting Standards No. 142 ("SFAS 142"), "Goodwill and
                       Intangible Assets", which revises the accounting for
                       purchased goodwill and intangible assets. Under SFAS 142,
                       goodwill and intangible assets with indefinite lives will
                       no longer be amortized and will be tested for impairment
                       annually. SFAS 142 is effective for fiscal years
                       beginning after December 15, 2001, with earlier adoption
                       permitted. The Company has not yet determined the impact
                       on the Company's financial position or results of
                       operations as a result of the future adoption of SFAS
                       142.

                                     FS-22
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


3.  CONSOLIDATED       Lancer is engaged in the design, manufacture and
    SUBSIDIARIES       distribution of orthodontic products. 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 51.19% as of May 31, 2001.

                       AIT provides immune allergy testing and products to
                       physicians and medical institutions. During 1998,
                       1,916,429 shares of AIT were subscribed to Biomerica in
                       exchange for debt (see Note 7) 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%.

                       The Company's fiscal 2001 and 2000 losses were partially
                       the result of its investment in ReadyScript. The
                       ReadyScript subsidiary was a development-stage enterprise
                       and required the raising of a significant amount of
                       capital to fund its short-term working capital needs. The
                       ReadyScript operations were discontinued in May 2001.
                       (see Note 13). The net assets and operating results of
                       ReadyScript are shown separately in the accompanying
                       consolidated financial statements as discontinued
                       operations and are held for sale. Prior periods have been
                       restated to reflect the results of ReadyScript as
                       discontinued.


                                     FS-23
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


3.  CONSOLIDATED       Operating results for Lancer, AIT and ReadyScript in the
    SUBSIDIARIES       aggregate for the years ended May 31, 2001 and 2000,
    (Continued)        which are included in the consolidated operating results
                       of the Company, are as follows:

                                                        2001            2000
                       ---------------------------------------------------------

                       Net sales                     $ 6,027,873    $ 5,730,488
                       Cost of sales                   4,081,143      3,960,362
                       ---------------------------------------------------------

                       Gross profit                    1,946,730      1,770,126
                       ---------------------------------------------------------

                       Operating expenses:
                          Selling, general and
                            administrative             2,038,565      2,268,090
                          Research and development        71,505        184,849
                       ---------------------------------------------------------

                            Total operating expenses   2,110,070      2,452,939
                       ---------------------------------------------------------

                       Other income (expense):
                          Interest expense               (19,931)       (19,526)
                          Other income, net                5,358        228,368
                       ---------------------------------------------------------

                                                         (14,573)       208,842
                       ---------------------------------------------------------

                       Loss from continuing operations
                          before income taxes           (177,913)      (473,971)

                       Income tax expense                  1,600          1,600
                       ---------------------------------------------------------

                       Net loss from continuing
                          operations                  $ (179,513)   $  (475,571)

                       Discontinued operations:
                          Loss from discontinued
                            operations, net           (2,093,432)    (2,252,402)
                       ---------------------------------------------------------

                       Net loss                      $(2,272,945)   $(2,727,973)
                       =========================================================


                                     FS-24
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


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

                       MAY 31,                                          2001
                       ---------------------------------------------------------

                       Marketing and distribution rights            $   442,750
                       Technology use rights                            858,328
                       Patents and other intangibles                    172,170
                       ---------------------------------------------------------

                                                                      1,473,248

                       Less accumulated amortization                 (1,176,009)
                       ---------------------------------------------------------

                                                                    $   297,239
                       =========================================================

                       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 2001 and 2000, 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, 2001 and 2000 related to these assets.

                       Amortization expense related to patents and other
                       intangibles which is included in the accompanying
                       consolidated statements of operations amounted to $16,069
                       and $8,257 for the years ended May 31, 2001 and 2000,
                       respectively.

5.  LINE OF            At May 31, 2001, Lancer had a $300,000 line of credit
    CREDIT             with a bank. Borrowings are made at prime plus 1.25%
                       (8.25% at May 31, 2001) and are limited to specified
                       percentages of eligible accounts receivable. The unused
                       portion available to Lancer under the line of credit at
                       May 31, 2001 was $160,000. The line of credit expired on
                       September 10, 2001. As of May 31, 2001, there was
                       $140,000 outstanding under the line of credit.


                                     FS-25
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================

5.  LINE OF            The line of credit is collateralized by substantially all
    CREDIT             the assets of Lancer, including inventories, receivables,
    (Continued)        and equipment. The lending agreement for the line of
                       credit requires, among other things, that Lancer maintain
                       a tangible net worth of $2,800,000, a debt to tangible
                       net worth ratio of no more than 1 to 1, and a current
                       ratio in excess of 2 to 1, and prohibits the advancing of
                       funds to Biomerica. Lancer is not required to maintain
                       compensating balances in connection with this lending
                       agreement. Lancer was in violation of certain of its debt
                       covenants at May 31, 2001. Lancer is currently in
                       discussions with a new lender to replace its existing
                       line of credit. Management believes it will be successful
                       in such discussions, however, there can be no assurance
                       of this success nor that management would be successful
                       in finding a replacement lender with acceptable terms.

                       The following summarizes information on short-term
                       borrowings for the year ended May 31, 2001:

                       MAY 31,                                          2001
                       ---------------------------------------------------------

                       Average month end balance                      $ 193,333
                       Maximum balance outstanding at any month end   $ 220,000
                       Weighted average interest rate (computed
                         by dividing interest expense by average
                         monthly balance)                                 10.31%
                       Interest rate at year end                           8.25%
                       =========================================================

6.  RELATED            SHAREHOLDER RECEIVABLE
    PARTY
    TRANSACTIONS       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.


                                     FS-26
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


6.  RELATED            SHAREHOLDER LINE OF CREDIT
    PARTY
    TRANSACTIONS       Biomerica, Inc. entered into an agreement in substance
    (Continued)        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 accounts receivable and inventory, and expires
                       September 12, 2001. There was $95,000 outstanding under
                       this line of credit at May 31, 2001. Biomerica and the
                       shareholder are in the process of formalizing this line
                       of credit. During 2001, the Company incurred $1,051 in
                       interest expense related to the shareholder line of
                       credit. Subsequent to year-end, an additional $130,000
                       was borrowed under the line of credit (Note 14).

7.  SHAREHOLDERS'      1991, 1995 AND 1999 STOCK OPTION AND RESTRICTED STOCK
    EQUITY             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.

                       In January 1996, the Company adopted a stock option and
                       restricted stock plan (the "1995 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.


                                     FS-27
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


7.  SHAREHOLDERS'      During 1998, the Company granted options to purchase
    EQUITY             152,500 shares at an exercise price of $1.85 to employees
    (Continued)        and a total of 1,500 shares to non-employees, at an
                       exercise price of $1.91.

                       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.

                       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.

                       On June 11, 1999, the Company issued 1,150,000 and 50,000
                       options to purchase shares of the Company's stock to
                       employees and non-employees, respectively. The purchase
                       price of the options is $3.00 per share. The options vest
                       immediately and 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.



                                     FS-28
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


7.  SHAREHOLDERS'      The Company issued 410,000 stock purchase warrants for
    EQUITY             these services. The holder was granted the right to
    (Continued)        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 May 31, 2000, 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 May 31, 2000.

                       On June 11, 1999, the Company entered into a Five Year
                       Strategic Marketing Agreement with 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 May 31, 2000, 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 May 31,
                       2000.

                       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.


                                     FS-29
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


7.  SHAREHOLDERS'      In August 1999, the Company adopted a stock option and
    EQUITY             restricted stock plan (the "1999 Plan") which provides
    (Continued)        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 the lesser 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.

                       During 2000, the Company granted 726,000 and 50,000
                       options to purchase 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 $0 and $25,135, respectively, during
                       the years ended May 31, 2001 and 2000, respectively, of
                       expense related to the granting of options to employees.
                       Management recorded $69,230 and $22,004 during the years
                       ended May 31, 2001 and 2000, respectively, 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. During 2001, the Company issued 5,000 of these
                       warrants at an exercise price of $3.25. The Company
                       recorded $17,372 of expense related to these warrants in
                       2000. Unissued warrants are not included in the table
                       below.

                       During the years ended May 31, 2001 and 2000, the Company
                       recorded compensation expense of $1,207 and $2,625,
                       respectively related to the amortization of the fair
                       value of options to purchase common stock issued prior to
                       June 1, 1999.


                                     FS-30
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================

7.  SHAREHOLDERS'      During 2001, the Company granted 257,000 and 6,000
    EQUITY             options to purchase shares of the Company's stock to
    (Continued)        employees and non-employees, respectively. The purchase
                       price of the options range from $0.50 to $1.50 per share.
                       Management recorded $18,720 during the year ended May 31,
                       2001 of expense related to the granting of options to
                       employees. Management recorded $1,386 during the year
                       ended May 31, 2001 of expense related to the granting of
                       options to non-employees.

                       During 2001, the Company issued 57,424 warrants to
                       purchase shares of the Company's stock to various
                       employees. The warrants have an exercise price of $2.00.

                       During 2001, the Company, agreed to extend the expiration
                       date of 33,875 expiring options issued to employees.

                       Activity as to stock options and warrants under the 1991,
                       1995 and 1999 plans are as follows:
<TABLE>
<CAPTION>
                                                                                               WEIGHTED
                                                                   NUMBER                      AVERAGE
                                                                 OF STOCK      PRICE RANGE    EXERCISE
                                                                  OPTIONS        PER SHARE       PRICE
                       ---------------------------------------------------------------------------------
<S>                                                             <C>          <C>             <C>
                       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 outstanding at
                         May 31, 2000                           3,557,300    $ .85 - $5.00   $    3.15
                       Options granted                            268,000    $ .50 - $3.25   $     .91
                       Warrants granted                            57,434    $        2.00   $    2.00
                       Options exercised                           (8,500)   $ .50 - $ .86   $     .77
                       Options canceled or expired               (730,000)   $ .50 - $5.00   $    4.75
                       ---------------------------------------------------------------------------------

                       Options and warrants
                         outstanding at May 31, 2001            3,144,234    $ .50 - $3.25   $    2.58
                       =================================================================================

                       Options and warrants
                         exercisable at May 31, 2001            1,781,240    $ .50 - $3.25   $    1.37
                       =================================================================================
</TABLE>

                                     FS-31
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================

7.  SHAREHOLDERS'      The weighted average fair value of options and warrants
    EQUITY             granted during 2001 and 2000 was $0.93 and $1.25,
    (Continued)        respectively.

                       The following summarizes information about the Company's
                       stock options and warrants outstanding at May 31, 2001:
<TABLE>
<CAPTION>

                                                       WEIGHTED
                                                        AVERAGE
                                                       REMAINING   WEIGHTED     NUMBER       WEIGHTED
                             RANGE OF      NUMBER     CONTRACTUAL   AVERAGE   EXERCISABLE    AVERAGE
                             EXERCISE    OUTSTANDING    LIFE IN    EXERCISE   AT MAY 31,     EXERCISE
                              PRICES    MAY 31, 2001     YEARS       PRICE       2000         PRICE
                       -------------------------------------------------------------------------------
<S>                      <C>                <C>           <C>       <C>        <C>          <C>
                         $  .50 - $ .90       332,175     3.68      $  ..71     165,181      $  .78
                         $ 1.38 - $1.92       381,875     2.99      $ 1.67     272,125      $ 1.65
                         $ 2.00 - $3.25     2,430,184     3.10      $ 2.99     143,934      $ 2.83
                       ===============================================================================
</TABLE>

                       SFAS 123 PRO FORMA INFORMATION

                       Pro forma information regarding loss 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, 2001
                       and 2000; risk free interest rates ranging from 4.9% to
                       6.65%; dividend yield of 0%; expected life of the options
                       ranging from one to three years; and volatility factors
                       of the expected market price of the Company's common
                       stock ranging from 120% to 200%.

                       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-32
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================

7.  SHAREHOLDERS'      For purposes of pro forma disclosures, the estimated fair
    EQUITY             value of the options is amortized to expense over the
    (Continued)        option vesting period. Adjustments are made for options
                       forfeited prior to vesting. The effect on compensation
                       expense, net loss, and net loss 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:

                       MAY 31,                            2001          2000
                       ---------------------------------------------------------

                       Net loss from continuing
                         operations, as reported     $  (578,886)   $(1,638,447)
                       Adjustment to compensation
                         expense under SFAS 123       (1,094,095)    (1,600,464)
                       ---------------------------------------------------------

                       Net loss from continuing
                         operations, pro forma       $(1,672,981)   $(3,238,911)
                       =========================================================

                       Pro forma net loss from
                         continuing operations per share
                         - basic                     $     (0.35)   $     (0.71)
                       =========================================================

                       Pro forma net loss from
                         continuing operations per share
                         - diluted                   $     (0.35)   $     (0.71)
                       =========================================================

                       MAY 31,                            2001          2000
                       ---------------------------------------------------------

                       Net loss from discontinued
                         operations, as reported     $(2,093,432)   $(2,252,402)
                       Adjustment to compensation
                         expense under SFAS 123                -              -
                       ---------------------------------------------------------

                       Net loss from discontinued
                          operations, pro forma      $(2,093,432)   $(2,252,402)
                       =========================================================

                       Pro forma net loss from
                         discontinued operations per
                         share - basic               $     (0.43)   $     (0.50)
                       =========================================================

                       Pro forma net loss from
                         discontinued operations per
                         share - diluted             $     (0.43)   $     (0.50)
                       =========================================================


                                     FS-33
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


7.  SHAREHOLDERS'      STOCK ACTIVITY
    EQUITY
    (Continued)        During 2001, the Company sold 239,450 shares of its
                       common stock at an average selling price of $1.016 per
                       share. Proceeds to the Company were $242,212, net of
                       offering costs of $1,140. At May 31, 2001, 113,375 of the
                       shares have been issued. The remaining 126,075 shares
                       valued at $90,774 were issued subsequent to May 31, 2001
                       and accordingly have been classified as common stock
                       subscribed.

                       During 2001, the Company, agreed to issue 20,000 shares
                       of common stock to a consultant for services provided.
                       The Company valued these subscribed shares at $20,000. As
                       of May 31, 2001 the shares have not been issued and
                       accordingly have been classified as common stock
                       subscribed.

                       During 2001, the Company, issued 34,643 and 159,091
                       shares of common stock to various vendors and consultants
                       for satisfaction of payables and services provided,
                       respectively. The Company valued these shares at $38,615
                       and $245,625, respectively.

                       SUBSIDIARY OPTIONS AND WARRANTS

                       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 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.


                                     FS-34
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================

7.  SHAREHOLDERS'      During 2001, Lancer granted options to purchase 177,000
    EQUITY             shares of its common stock at an exercise prices of $0.25
    (Continued)        to $0.875 to employees.

                       During 2001, ReadyScript granted options to purchase
                       1,574,287 shares of its common stock at an exercise price
                       of $0.25 to employees.

                       During 2001, ReadyScript entered into convertible
                       Promissory Notes totaling $835,000. As of May 31, 2001,
                       $782,000 of that debt had been converted into 1,500,175
                       shares of ReadyScript common stock. The Company recorded
                       an increase to additional paid-in-capital of $713,014 as
                       a result of this conversion.

8.  INCOME TAXES       Income tax expense from continuing operations for the
                       years ended May 31, 2001 and 2000 consists of the
                       following current provisions:
<TABLE>
<CAPTION>

                       MAY 31,                                   2001           2000
                       ------------------------------------------------------------------
<S>                                                          <C>            <C>
                       U.S. Federal                          $         -    $          -

                       State and local                             2,400           2,400
                       ------------------------------------------------------------------

                                                             $     2,400    $      2,400
                       ==================================================================

                       Income tax expense from continuing operations differs
                       from the amounts computed by applying the U.S. Federal
                       income tax rate of 35 percent to pretax loss as a result
                       of the following:

                       MAY 31,                                     2001         2000
                       ------------------------------------------------------------------

                       Computed "expected" tax benefit        $ (201,770)   $   (572,616)
                       Increase (reduction) in income
                         taxes resulting from:
                         Meals and entertainment                   8,684          20,312
                         Change in valuation allowance           153,517         472,752
                         Equity in earnings of affiliates
                            not subject to taxation because
                            of dividends- received deduction
                            for tax purposes                      39,569          79,552
                         State income taxes                        2,400           2,400
                       ------------------------------------------------------------------

                                                              $    2,400    $      2,400
                       ==================================================================
</TABLE>


                                     FS-35
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================

8.  INCOME TAXES       The tax effect of temporary differences that give rise to
    (Continued)        significant portions of liabilities are presented below.

                       MAY 31,                                          2001
                       ---------------------------------------------------------

                       Deferred tax assets:
                         Accounts receivable, principally
                           due to allowance for doubtful
                           accounts and sales returns               $    76,705
                         Inventories, principally due to
                           additional costs inventoried for
                           tax purposes pursuant to the Tax
                           Reform Act of 1986 and
                           allowance for inventory
                           obsolescence                                 101,259
                         Compensated absences and
                           deferred payroll, principally due
                           to accrual for financial reporting
                           purposes                                     104,875
                         State net operating loss
                           carryforwards                                290,106
                         Federal net operating loss
                           carryforwards                              4,407,566
                         Tax credit carryforwards                       194,864
                         Investment in affiliates                       525,545
                       ---------------------------------------------------------

                                                                      5,700,920

                       Less valuation allowance                      (5,667,031)
                       ---------------------------------------------------------

                       Net deferred tax asset                            33,889

                       Deferred tax liability:
                         Marketing rights, principally due to
                           amortization                                 (33,889)
                       ---------------------------------------------------------

                       Net deferred tax liability                   $          -
                       =========================================================


                                     FS-36
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


8.  INCOME TAXES       The Company has provided a valuation allowance with
    (Continued)        respect to substantially all of its deferred tax assets
                       as of May 31, 2001 and 2000. 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, 2001, Biomerica had net tax operating loss
                       carryforwards of approximately $9,466,000 and investment
                       tax and research and development credits of approximately
                       $45,000, which are available to offset future Federal tax
                       liabilities. The carryforwards expire at varying dates
                       from 2001 to 2021. As of May 31, 2001, Biomerica has net
                       operating tax loss carryforwards of approximately
                       $2,127,000 available to offset future state income tax
                       liabilities, which expire through 2011.

                       As of May 31, 2000, Lancer had net tax operating loss
                       carryforwards of approximately $2,049,000 and business
                       tax credits of approximately $98,000 available to offset
                       future Federal tax liabilities. The carryforwards expire
                       through 2021. As of May 31, 2001, Lancer has net tax
                       operating loss carryforwards of approximately $205,000
                       and business tax credits of approximately $23,000
                       available to offset future state income tax liabilities.
                       The state carryforwards expire at varying dates through
                       2011.

                       As of May 31, 2001, AIT had net tax operating loss
                       carryforwards of approximately $1,931,000 and business
                       tax credits of approximately $29,000 available to offset
                       future Federal tax liabilities. The carryforwards expire
                       at varying dates through 2021. AIT also had net tax
                       operating loss carryforwards of approximately $580,000 to
                       offset future California taxable income, expiring at
                       varying dates through 2011.

                       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-37
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================

9.  OTHER INCOME       Other income consists of the following for the years
                       ending May 31:

                       MAY 31,                               2001        2000
                       ---------------------------------------------------------

                       Realized gain (loss) on available-
                         for-sale securities               $  34,427  $ (13,241)
                       Dividend and interest income            8,081     99,358
                       Tax reversal                                -     50,000
                       Insurance proceeds                          -    170,000
                       Offering expenses                           -   (251,574)
                       Other                                   5,254     63,855
                       ---------------------------------------------------------

                                                           $  47,762  $ 118,398
                       =========================================================

                       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.
                       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.

                       During 2000, $251,574 of amounts incurred by the Company
                       in connection with a registration of securities that was
                       cancelled were written-off.

                                     FS-38
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================

10. BUSINESS SEGMENTS  Reportable business segments for the years ended May 31,
                       2001 and 2000 are as follows:

                                                         2001           2000
                       ---------------------------------------------------------

                       Domestic sales:
                         Orthodontic products         $ 3,018,000   $ 3,133,000
                       =========================================================

                       Medical diagnostic products    $ 1,682,000   $ 1,298,000
                       =========================================================

                       Foreign sales:
                         Orthodontic products         $ 2,910,000   $ 2,518,000
                       =========================================================

                       Medical diagnostic products    $ 1,330,000   $ 1,065,000
                       =========================================================

                       Net sales:
                         Orthodontic products         $ 5,928,000   $ 5,651,000
                         Medical diagnostic products    3,012,000     2,363,000
                       ---------------------------------------------------------

                       Total                          $ 8,940,000   $ 8,014,000
                       =========================================================

                       Operating loss:
                         Orthodontic products         $   (98,000)  $  (504,000)
                         Medical diagnostic products     (586,000)   (1,434,000)
                       ---------------------------------------------------------

                       Total                          $  (684,000)  $(1,938,000)
                       =========================================================

                       Operating loss from discontinued
                         segment
                         ReadyScript                  $(2,093,432)  $(2,252,402)
                       ---------------------------------------------------------

                       Total                          $(2,093,432)  $(2,252,402)
                       =========================================================

                       Domestic long-lived assets:
                         Orthodontic products         $   196,000   $   283,000
                         Medical diagnostic products      375,000       484,000
                       ---------------------------------------------------------

                       Total                          $   571,000   $   767,000
                       =========================================================

                       Foreign long-lived assets:
                         Orthodontic products         $    45,000   $    70,000
                         Medical diagnostic products            -             -
                       ---------------------------------------------------------

                       Total                          $    45,000   $    70,000
                       =========================================================

                       Total assets:
                         Orthodontic products         $ 3,737,000   $ 3,755,000
                         Medical diagnostic products    1,610,000     3,030,000
                       ---------------------------------------------------------

                       Total                          $ 5,347,000   $ 6,785,000
                       =========================================================


                                     FS-39
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


10. BUSINESS SEGMENTS                                      2001         2000
    (Continued)        ---------------------------------------------------------

                       Depreciation and amortization
                         expense:
                         Orthodontic products         $   122,000   $   151,000
                         Medical diagnostic products       87,000        59,000
                       ---------------------------------------------------------

                       Total                          $   209,000   $   210,000
                       =========================================================

                       Capital expenditures:
                         Orthodontic products         $     9,000   $    10,000
                         Medical diagnostic products       53,000        91,000
                       ---------------------------------------------------------

                       Total                          $    62,000   $   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 2001 and 2000. No
                       customer accounted for more than 10% of net sales during
                       fiscal years 2001 and 2000.

                       Geographic information regarding net sales and operating
                       loss is as follows:

                                                          2001          2000
                       ---------------------------------------------------------

                       Net sales:
                         United States                $ 4,700,000   $ 4,431,000
                         Europe                         2,207,000     1,683,000
                         South America                    558,000       543,000
                         Asia                             221,000       349,000
                         Other foreign                  1,254,000     1,008,000
                       ---------------------------------------------------------

                       Total net sales                $ 8,940,000   $ 8,014,000
                       =========================================================


                                     FS-40

<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


10. BUSINESS SEGMENTS
    (Continued)
                                                         2001           2000
                       ---------------------------------------------------------

                       Operating loss:
                         United States                $ (727,000)   $(1,504,000)
                         Europe                          102,000       (176,000)
                         South America                    20,000        (37,000)
                         Asia                            (30,000)       (66,000)
                         Other foreign                   (49,000)      (155,000)
                       ---------------------------------------------------------

                       Total operating loss           $ (684,000)   $(1,938,000)
                       =========================================================

                       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.

11. 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 (2004).
                       The lease expense is being recognized on a straight-line
                       basis over the term of the lease.



                                     FS-41
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


11. COMMITMENTS AND    Lancer entered into a non-cancelable operating lease for
    CONTINGENCIES      its Mexico facility expiring March 2006, which requires
    (Continued)        average monthly rentals of approximately $6,000. Total
                       expense for this facility for the years ended May 31,
                       2001 and 2000, was approximately $74,000.

                       Rental expense for all operating leases amounted to
                       approximately $348,000 and $312,000 for the years ended
                       May 31, 2001 and 2000, respectively. The future annual
                       minimum payments are as follows:

                       YEARS ENDING MAY 31,                          Amount
                       ---------------------------------------------------------

                       2002                                         $   133,543
                       2003                                             136,397
                       2004                                             106,511
                       2005                                              62,292
                       2006                                              51,910
                       ---------------------------------------------------------

                       Minimum lease payments                       $   490,653
                       =========================================================

                       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-42
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================

11. COMMITMENTS AND    1994, Lancer again renegotiated the Manufacturing
    CONTINGENCIES      Agreement reducing the administrative fee and extending
    (Continued)        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 extended the
                       Manufacturing Agreement through October 31, 2000. The
                       Manufacturing Agreement is currently operating as
                       month-to-month. Should Lancer discontinue operations in
                       Mexico, it is responsible for the accumulated employee
                       seniority obligation as prescribed by Mexican law. At May
                       31, 2001, this obligation was approximately $361,000.
                       Such obligation is contingent in nature and accordingly
                       has not been accrued in the accompanying balance sheet.

                       Lancer is in the process of converting Mexican assets and
                       obligations to its own division, a Mexican corporation
                       named Lancer Orthodontics de Mexico (Lancer de Mexico).
                       This division will administer services previously
                       provided by an independent manufacturing contractor. A
                       new lease was negotiated effective April 1, 2001, for the
                       16,000 square foot facility used for Lancer's Mexican
                       operations. Utility and Mexican vendor obligations have
                       been converted to the Lancer de Mexico name. This
                       conversion will eliminate the expense of an
                       administrative fee and is expected to provide better
                       control in meeting obligations.

                       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,


                                     FS-43
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================

11. COMMITMENTS AND    whereby the chief executive officer would not receive any
    CONTINGENCIES      deferred compensation for the period June 1994 through
    (Continued)        November 1994 of approximately $54,500 and instead
                       received 60,000 stock options (see Note 7). Approximately
                       $121,000 of the total accrued compensation included in
                       the 2001 consolidated balance sheet is due to the chief
                       executive officer's estate.

                       LICENSE AND ROYALTY AGREEMENT

                       Lancer has entered into various 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.

                       LITIGATION

                       The Company is, from time to time, involved in legal
                       proceedings, claims and litigation arising in the
                       ordinary course of business. While the amounts claimed
                       may be substantial, the ultimate liability cannot
                       presently be determined because of considerable
                       uncertainties that exist. Therefore, it is possible the
                       outcome of such legal proceedings, claims and litigation
                       could have a material effect on quarterly or annual
                       operating results or cash flows when resolved in a future
                       period. However, based on facts currently available,
                       management believes such matters will not have a material
                       adverse affect on the Company's consolidated financial
                       position, results of operations or cash flows.

                                     FS-44
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================

11. COMMITMENTS AND    NASDAQ SMALLCAP MARKET LISTING REQUIREMENTS
    CONTINGENCIES
    (Continued)        The Company has been notified by Nasdaq that it has
                       failed to maintain the listing requirement that its
                       minimum bid price be $1.00 or more and that it must
                       regain compliance by October 4, 2001 or it will be
                       subject to delisting. The Company will be subject to
                       continuing requirements to be listed on the Nasdaq
                       SmallCap Market. There can be no assurance that the
                       Company can continue to meet such requirements. The price
                       and liquidity of the Common Stock may be materially
                       adversely affected if the Company is unable to meet such
                       requirements in the future.

12. CONDENSED          Lancer's line-of-credit prohibits the transfer or
    FINANCIAL          dividend of funds to Biomerica, Inc. As a result, the
    INFORMATION OF     following condensed unconsolidated balance sheet for
    PARENT COMPANY     Biomerica, Inc. as of May 31, 2001, and the condensed
                       unconsolidated statements of operations and cash flows
                       for the years ended May 31, 2001 and 2000 have been
                       provided. No cash dividends were paid by the consolidated
                       subsidiaries (see Note 3) during the years ended May 31,
                       2001 and 2000.
<TABLE>

                                      CONDENSED UNCONSOLIDATED BALANCE SHEET
<CAPTION>
                       MAY 31,                                                         2001
                       -----------------------------------------------------------------------
                                                          ASSETS
<S>                                                                                <C>
                       Current Assets:
                          Available-for-sale securities                            $   41,570
                          Accounts receivable, net                                    356,831
                          Inventories                                                 722,344
                          Notes receivable                                             18,394
                          Prepaid expenses and other                                   20,389
                       -----------------------------------------------------------------------

                       Total current assets                                         1,159,528

                       Investment in and advances to unconsolidated subsidiary,
                          restricted                                                  910,218
                       Inventory, non-current                                          15,000
                       Property and equipment, net                                    239,708
                       Intangible assets                                              124,363
                       Other                                                           41,151
                       ------------------------------------------------------------------------

                                                                                   $ 2,489,968
                       ========================================================================


                                     FS-45
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


12. CONDENSED                   CONDENSED UNCONSOLIDATED BALANCE SHEET (CONTINUED)
    FINANCIAL          MAY 31,                                                         2001
    INFORMATION OF     ------------------------------------------------------------------------
    PARENT COMPANY
    (Continued)                        LIABILITIES AND SHAREHOLDERS' EQUITY

                       Current Liabilities:
                          Accounts payable and accrued liabilities                 $   402,205
                          Accrued compensation                                         145,552
                       ------------------------------------------------------------------------

                       Total current liabilities                                       547,757
                       ------------------------------------------------------------------------

                       Shareholder loan                                                 95,000
                       Equity in losses of unconsolidated subsidiaries, net of
                          advances, unrestricted                                       374,346
                       ------------------------------------------------------------------------

                       Shareholders' equity:
                          Common stock                                                 391,254
                          Additional paid-in capital                                16,859,742
                          Accumulated other comprehensive loss                         (10,289)
                          Accumulated deficit                                      (15,767,842)
                       ------------------------------------------------------------------------

                       Total shareholders' equity                                    1,472,865
                       ------------------------------------------------------------------------

                                                                                   $ 2,489,968
                       ========================================================================


</TABLE>


                                     FS-46
<PAGE>
<TABLE>

                                                            BIOMERICA, INC. AND SUBSIDIARIES

                                                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                           YEARS ENDED MAY 31, 2001 AND 2000
============================================================================================
<CAPTION>


12. CONDENSESD
    FINANCIAL                    CONDENSED UNCONSOLIDATED STATEMENTS OF OPERATIONS
    INFORMATION OF
    PARENT COMPANY     MAY 31,                                      2001           2000
    (Continued)        ---------------------------------------------------------------------
<S>                                                             <C>            <C>
                       Net revenues                             $  2,911,649   $  2,283,433
                       Cost of sales                               2,048,757      1,643,290
                       ---------------------------------------------------------------------

                       Gross profit                                  862,892        640,143
                       ---------------------------------------------------------------------

                       Operating expenses:
                       Selling, general and administrative         1,132,519      1,867,520
                       Research and development                      250,616        279,788
                       ---------------------------------------------------------------------

                       Total operating expenses                    1,383,135      2,147,308
                       ---------------------------------------------------------------------

                          Operating loss                            (520,243)    (1,507,165)

                       Other income                                   40,776         86,081
                       ---------------------------------------------------------------------

                       Loss from operations before interest
                          in net income of consolidated
                          subsidiaries and income taxes             (479,467)    (1,421,084)

                       Interest in net loss of consolidated
                          subsidiaries                            (2,192,051)    (2,468,965)
                       ---------------------------------------------------------------------

                       Loss from continuing operations
                          before income taxes                     (2,671,518)    (3,890,049)

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

                       Net loss                                 $ (2,672,318)  $ (3,890,849)
                       =====================================================================

</TABLE>

                                     FS-47
<PAGE>
<TABLE>

                                                            BIOMERICA, INC. AND SUBSIDIARIES

                                                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                           YEARS ENDED MAY 31, 2001 AND 2000
============================================================================================

<CAPTION>
<S>                                                             <C>            <C>
12. CONDENSED                       CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS
    FINANCIAL
    INFORMATION OF     MAY 31,                                      2001           2000
    PARENT COMPANY     ---------------------------------------------------------------------
    (Continued)        Cash Flows from Operating Activities:
                          Net loss from continuing
                             operations                         $ (2,672,318)  $ (3,890,849)
                          Adjustments to reconcile net
                             income to net cash (used in)
                             provided by operating
                             activities:
                             Depreciation and
                                amortization                          76,311         93,187
                             Realized (gain) loss on
                                sale of available-for-
                                sale securities                      (34,427)        13,241
                             Loss of subsidiaries                  2,192,051      2,468,965
                             Options and warrants issued
                                for services rendered                 89,336        821,043
                             Common stock is for rent                      -         16,000
                             Common stock issued or
                                subscribed for services
                                rendered                             265,625              -
                             Deferred compensation                         -        (77,231)
                             Loss on disposal of assets                2,000              -
                             Increase in investment in
                                and advances to
                                consolidated subsidiaries         (1,020,476)    (2,336,205)
                             Net change in other current
                                assets and current
                                liabilities                          166,406        (89,171)
                       ---------------------------------------------------------------------

                       Net cash used in operating activities        (935,492)    (2,981,020)
                       ---------------------------------------------------------------------

                       Cash flows from investing activities:
                          Sales of available-for-sale
                             securities                               85,665         18,191
                          Principal payments received on
                             notes receivable                         16,600          9,491
                          Increase in intangible assets              (20,000)             -
                          Purchase of property and
                             equipment                                     -       (125,335)
                       ---------------------------------------------------------------------

                       Net cash used in investing activities          82,265        (97,653)
                       ---------------------------------------------------------------------

</TABLE>

                                     FS-48
<PAGE>
<TABLE>

                                                            BIOMERICA, INC. AND SUBSIDIARIES

                                                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                           YEARS ENDED MAY 31, 2001 AND 2000
============================================================================================

<CAPTION>
<S>                                                             <C>            <C>
12. CONDENSED                       CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS
    FINANCIAL                                            CONTINUED
    INFORMATION OF     MAY 31,                                      2001           2000
    PARENT COMPANY     ---------------------------------------------------------------------
    (Continued)        Cash Flows from financing activities:
                          Exercise of stock options                    6,768         60,652
                          Proceeds from sale of stock                242,212      1,965,557
                          Increase in shareholder loan                95,000              -
                          Decrease in shareholder
                             receivable                                    -          1,000
                       ---------------------------------------------------------------------

                       Net cash provided by financing
                          activities                                 343,980      2,027,209
                       ---------------------------------------------------------------------

                       Net change in cash and cash
                          equivalents                               (509,247)    (1,051,464)

                       Cash and cash equivalents at
                          beginning of year                          509,247      1,560,711
                       ---------------------------------------------------------------------

                       Cash and cash equivalents at end of
                          year                                  $          -   $    509,247
                       =====================================================================

                       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                         $      5,966   $      4,456
                       =====================================================================


</TABLE>

                                     FS-49
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


13.  DISCONTINUED      The following summarizes the net liabilities of the
     OPERATIONS        discontinued operations as of May 31, 2001 and the
                       results of its operations for each of the years in the
                       two-year period ended May 31, 2001.

                       Balance sheet items:

                       MAY 31,                                          2001
                       ---------------------------------------------------------

                       Assets:
                          Cash                                      $     1,081
                          Prepaid expenses and other                      3,886
                          Other assets                                   62,831
                       ---------------------------------------------------------

                                                                         67,798

                       Less liabilities
                          Accrued liabilities                          (465,856)
                       ---------------------------------------------------------

                       Net liabilities                              $  (398,058)
                       ---------------------------------------------------------

                       Results of its operations items:

                       YEARS ENDED MAY 31,                2001         2000
                       ---------------------------------------------------------

                       Revenues                       $         -   $    19,786

                       Cost and expenses
                          Cost of Sales                         -        20,978
                          General and administrative    1,837,187     1,817,725
                          Research and development        256,245       433,485
                       ---------------------------------------------------------

                       Total costs                      2,093,432     2,272,188
                       ---------------------------------------------------------

                       Loss from operations           $(2,093,432)  $(2,252,402)
                       =========================================================


                                     FS-50
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2001 AND 2000
================================================================================


14. SUBSEQUENT         During June and July 2001, the Company borrowed
    EVENTS             $130,000 from a shareholder according to the September
                       12, 2000 line of credit agreement (see Note 5).
<TABLE>
<CAPTION>

YEARS ENDED MAY 31,                                                2001             2000
- --------------------------------------------------------------------------------------------
<S>                                                            <C>             <C>
Deleted from FS-5
OTHER COMPREHENSIVE (LOSS) INCOME, net of tax
   Unrealized (loss) gain on available-for-sale securities           (5,966)          4,456
- --------------------------------------------------------------------------------------------

COMPREHENSIVE LOSS                                             $ (2,667,284)   $ (3,886,393)
============================================================================================

PER SHARE DATA FROM CONTINUING OPERATIONS:
   Net loss from continuing operations (basic)                 $      (0.12)   $      (0.36)
   Net loss from continuing operations (diluted)               $      (0.12)   $      (0.36)
============================================================================================

PER SHARE DATA FROM DISCONTINUED OPERATIONS:
   Net loss from discontinued operations (basic)               $      (0.43)   $      (0.50)
   Net loss from discontinued operations (diluted)             $      (0.43)   $      (0.50)
============================================================================================


PER SHARE DATA:
   Net loss (basic)                                            $      (0.55)   $      (0.86)
   Net loss (diluted)                                          $      (0.55)   $      (0.86)
============================================================================================

WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
   EQUIVALENT SHARES
   Basic                                                          4,814,790       4,542,820
============================================================================================

   Diluted                                                        4,814,790       4,542,820
============================================================================================

</TABLE>

                                     FS-51
<PAGE>
<TABLE>

                                                           BIOMERICA, INC. AND SUBSIDIARIES

                                                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                          YEARS ENDED MAY 31, 2001 AND 2000
===========================================================================================
<CAPTION>

FROM FS-19, NOTE 2                                       FOR THE YEAR ENDED MAY 31, 2001
                                             ----------------------------------------------
                                                         Loss         Shares      Per Share
                                                      (Numerator)  (Denominator)    Amount
                       --------------------------------------------------------------------
<S>                                                  <C>              <C>         <C>
                       BASIC EPS -

                         Loss from continuing
                          operations attributable to
                          common shareholders        $  (578,886)     4,772,765   $  (0.12)
                       ====================================================================

                         Loss from discontinued
                          operations
                          attributable to common
                          shareholders               $(2,093,432)     4,772,765   $  (0.56)
                       ====================================================================

                       EFFECT OF DILUTIVE
                          SECURITIES -

                         Options and warrants                  -              -           -
                       --------------------------------------------------------------------

                       DILUTED EPS -

                         Loss from continuing
                          operations attributable to
                          common shareholders plus
                          assumed conversions        $  (578,886)     4,772,765   $  (0.12)
                       ====================================================================

                         Loss from discontinued
                          operations attributable to
                          common shareholders plus
                          assumed conversions        $(2,093,432)     4,772,765   $  (0.56)
                       ====================================================================

</TABLE>


                                     FS-52
<PAGE>
<TABLE>

                                                           BIOMERICA, INC. AND SUBSIDIARIES

                                                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                          YEARS ENDED MAY 31, 2001 AND 2000
===========================================================================================
<CAPTION>

FROM FS-19, NOTE 2                                       FOR THE YEAR ENDED MAY 31, 2001
                                             ----------------------------------------------
2.  SUMMARY OF                                           Loss         Shares      Per Share
    SIGNIFICANT                                      (Numerator)  (Denominator)    Amount
    ACCOUNTING         --------------------------------------------------------------------
    POLICIES
    (Continued)
<S>                                                  <C>              <C>         <C>
                       BASIC EPS -

                         Loss from continuing
                          operations attributable
                          to common shareholders     $(1,638,447)     4,542,820   $  (0.36)
                       ====================================================================


                         Loss from discontinued
                          operations attributable
                          to common shareholders     $(2,252,402)     4,542,820   $  (0.50)
                       ====================================================================

                       EFFECT OF DILUTIVE
                          SECURITIES -

                         Options and warrants                  -              -           -
                       --------------------------------------------------------------------

                       DILUTED EPS -

                         Loss from continuing
                          operations attributable
                          to common shareholders
                          plus assumed conversions   $(1,638,447)     4,542,820   $  (0.86)
                       ====================================================================

                         Loss from discontinued
                          operations attributable
                          to common shareholders     $(2,252,402)     4,542,820   $  (0.50)
                       ====================================================================


</TABLE>

                                     FS-53

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