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<SEC-DOCUMENT>0001019687-02-001715.txt : 20020829
<SEC-HEADER>0001019687-02-001715.hdr.sgml : 20020829
<ACCEPTANCE-DATETIME>20020829164428
ACCESSION NUMBER:		0001019687-02-001715
CONFORMED SUBMISSION TYPE:	10KSB
PUBLIC DOCUMENT COUNT:		5
CONFORMED PERIOD OF REPORT:	20020531
FILED AS OF DATE:		20020829

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:		02752986

	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:	NUCLEAR INSTRUMENTS INC
		DATE OF NAME CHANGE:	19720508

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	NUCLEAR MEDICAL SYSTEMS INC
		DATE OF NAME CHANGE:	19830216

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	NMS PHARMACEUTICALS INC
		DATE OF NAME CHANGE:	19871130
</SEC-HEADER>
<DOCUMENT>
<TYPE>10KSB
<SEQUENCE>1
<FILENAME>biomerica_10k-053102.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, 2002            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                                          OTC-Bulletin Board

         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:  $8,598,000.

State the aggregate market value of the voting and non-voting stock held by non-
affiliates of the issuer (based upon 4,337,437 shares held by non-affiliates and
the closing price of $.56 per share for Common Stock in the over-the-counter
market as of May 31, 2002): $2,428,965.

Number of shares of the issuer's common stock, par value $0.08, outstanding as
of August 27 2002: 5,172,364.

DOCUMENTS INCORPORATED BY REFERENCE: The issuer's proxy statement for its 2002
Annual Meeting of Stockholders is incorporated into Part III hereof. Also
incorporated by reference is the Annual Report on Form 10-KSB for the fiscal
year ended May 31, 2002, for Lancer Orthodontics, 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. During fiscal 2002 we had 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, but which operations were discontinued during fiscal 2001. On
May 30, 2002, Biomerica sold its controlling interest in AIT. 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. From June 1999
until April 2001 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).

     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. The Company adopted a formal plan in March, 2002, to
discontinue operations of AIT. On May 30, 2002, we sold 13,350,000 shares of AIT
common stock held by us, representing 98.1% of the shares we owned in AIT, to a
third party in exchange for $212,500. The operations of AIT are being reported
in the financial statements as discontinued operations. We continued to hold
255,575, or 1.4%, shares of AIT common stock.

                                        3

<PAGE>

                           OUR MEDICAL DEVICE BUSINESS

     Our existing medical device business is conducted through two companies:
(1) Biomerica, Inc., engaged in the diagnostic products market and (2) Lancer
Orthodontics, Inc., engaged in the orthodontic products 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 in 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 rapid point
of care 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 rapid 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, and orthodontic wire.

                                        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.

DISCONTINUED OPERATIONS

     The Company's fiscal 2002 and 2001 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.

     On May 30, 2002, Biomerica received $212,500 for its interest in AIT and
recorded a gain of $224,481 on the sale. The gain from sale and loss from
operations are included in discontinued operations in the accompanying statement
of operations for the year ended May 31, 2002. Certain reclassifications have
been made to the 2001 balances to conform to the 2002 presentation for
discontinued operations.

PRODUCTION

     All of our diagnostic test kits are processed and assembled at our
facilities in Newport Beach, California. Production of diagnostic tests can
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>

     During fiscal 2002 Lancer converted its Mexican assets and obligations to
its own division, a Mexican corporation named Lancer Orthodontics de Mexico
(Lancer de Mexico). This division administers 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, 2002, this obligation was approximately $365,000. 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, 2002 and 2001 aggregated approximately $160,000 and $322,000,
respectively. These expenses included approximately $4,000 and $72,000 for
fiscal 2002 and 2001, 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 and orthodontic wire.

     No customer accounted for 10% or more of Lancer's or Biomerica's sales in
the fiscal years ended May 31, 2002 and 2001.

BACKLOG

     At May 31, 2002 and 2001 Biomerica had a backlog of $122,000 and $80,000
respectively. As of May 31, 2002 and 2001, Lancer had a backlog of $84,000 and
$167,000, 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. At May 31, 2002, one company
accounted for 17.3% of accounts payable. No company accounted for more than 10%
of purchases for the years ended May 31, 2002 and 2001.

     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
2002 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 Dental Specialities; 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.


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. The
Company's products are either Class I or Class II medical 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, 2003. 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, 2003. We also hold two radioactive materials licenses from the
State of California (both expiring on June 20, 2003), and two permits from the
USDA, one expiring on January 28, 2003 and the other expiring on June 30, 2003.
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 December 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. With the CE
certification, Lancer is now permitted to sell its products within the European
Community. The international ISO 9002 and EN 46002 standards will become
obsolete in December 2003. As a result, Lancer is currently in the process of
updating its Quality Management System for conformance to the new ISO 9000:2000
international quality system standards, as well as the ISO 13485 standard for
medical devices. Compliance with and certification to both ISO 9000:2000 and ISO
13485 is expected in the Spring of 2003.

     Biomerica has begun the process of obtaining CE certification and expects
to have it completed by the December 2003 deadline.

                                       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's assets, 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,
                                                  ------------------
                                             2002                 2001
                                             ----                 ----
     U.S. Customers                     $4,254,000/49.5%     $4,599,000/52.0%
     Asia                                  199,000/ 2.3%        221,000/ 2.5%
     Europe                              2,313,000/26.9%      2,207,000/25.0%
     Middle East                           449,000/ 5.2%        445,000/ 5.0%
     Oceania                               393,000/ 4.6%        318,000/ 3.6%
     S. America                            498,000/ 5.8%        558,000/ 6.3%
     Other foreign                         492,000/ 5.7%        491,000/ 5.6%
                                      ---------------         --------------

                Total Revenues          $8,598,000/100%      $8,839,000/100%

     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 or
Lancer, 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." A trademark for "Aware" was issued and
assigned in January, 2002.

          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, 2002, the Company and its subsidiaries employed 63 full-
time employees and 2 part-time employees in the United States. Lancer, through
its Mexican subsidiary, employees approximately 97 people. 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 2002 the company entered into a lease of the existing
facilities of approximately 21,000 square feet of space in Newport Beach,
California for a four year term which expires October 31, 2005. Pursuant to the
lease we pay an annual base rent of $180,000 plus all real estate taxes and
insurance costs. During fiscal 2002 the Company paid a total of approximately
$179,000 in rent for approximately 21,000 square feet of space. The rent shall
escalate by 3% on September 1, 2003. These facilities were used for diagnostic
test kit research and development, manufacturing, marketing and administration.

     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.

     At May 31, 2002, future aggregate minimum lease payments for Biomerica are
as follows:

                              Years ending May 31
                              -------------------

                              2003     $163,248
                              2004      187,398
                              2005      188,748
                              2006       80,598
                              2007        1,674
                                       --------
                                       $621,666

     On May 16, 2002, the Company signed a one-year sub-lease agreement for
1,392 square foot of office space, included in the above-described lease, for
the sum of $1,642 per month.

     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
$8,894 at May 31, 2002, 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, 2002 and 2001 was approximately $69,000.

     Lancer 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, 2002 and 2001, was approximately $69,000 and $74,000.

     At May 31, 2002, future aggregate minimum lease payments for Lancer are as
follows:

                       Years ending May 31
                       -------------------
                             2003                       $144,545
                             2004                        114,659
                             2005                         70,440
                          Thereafter                      58,700
                                                        --------
                       Total                            $388,344




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

     During fiscal 2002 Biomerica's common stock was traded on the Nasdaq Small
Cap system under the symbol "BMRA". Since June 20, 2002, the Company's stock has
been traded on the OTC Bulletin Board under the symbol "BMRA.OB".

     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, and may not reflect actual transactions.
                                                         Bid Prices
                                             --------------------------------
                                                  High             Low
                                             --------------  ----------------
Quarter ended:
 May 31, 2002.............................        $0.70           $0.41
 February 28, 2002........................        $0.74           $0.45
 November 30, 2001........................        $1.13           $0.35
 August 31, 2001..........................        $0.95           $0.52
 May 31, 2001.............................        $1.25           $0.656
 February 29, 2001........................        $0.969          $0.313
 November 30, 2000........................        $1.75           $0.75
 August 31, 2000..........................        $1.875          $1.25

     As of August 21, 2002, the number of holders of record of Biomerica's
common stock was approximately 1,019, excluding stock held in street name.

     On April 10, 2002, the Company filed a Form S-4 for the proposed
registration of between 488,200 and 984,274 shares of Biomerica common stock.
The shares were to be issued for the purchase of the assets of the subsidiary
Lancer Orthodontics, Inc. Due to market conditions, both boards of directors
have agreed not to proceed with the proposed purchase and Biomerica requested in
July 2002 that the registration statement be withdrawn.

                                       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 one active subsidiary, Lancer Orthodontics, Inc.
("Lancer"), which is engaged in manufacturing, sales and development of
orthodontic products. We own approximately 31.63% of the outstanding stock of
Lancer. We exercise effective control of 50.1% over Lancer via voting agreements
with certain shareholders. As a result of our control and ownership, our
financial statements are consolidated with those of Lancer. Lancer is a public
company whose common stock is traded on the bulletin board system under the
symbol "LANZ,". On May 30, 2002, Biomerica sold its controlling interest in
Allergy Immuno Technologies, Inc. The operations of AIT for fiscal 2002 and 2001
are being reported as discontinued operations as a result of this sale.

     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 2002 Compared to Fiscal 2001

     Our consolidated net sales were $8,598,054 for fiscal 2002 compared to
$8,839,252 for fiscal 2001. This represents a decrease of $241,198, or 2.7% for
fiscal 2002. Of the total consolidated net sales for fiscal 2002, $6,022,331 is
attributable to Lancer, and $2,575,723 to Biomerica. Lancer's sales increased by
$94,728 while Biomerica showed a sales decrease of $335,926. The increase at
Lancer was primarily attributable to increased sales in the Middle East and
Mexico. The decrease in sales at Biomerica was due to the loss of a major
customer as well as lower sales of the EZ Detect product due to smaller
screening programs than the previous year.

     Cost of sales in fiscal 2002 as compared to fiscal 2001 increased by
$19,544 or 0.3%. Lancer's cost of sales as a percentage of sales increased from
67.4% to 69.1% in fiscal 2002 as compared to fiscal 2001. The increase was
primarily attributable to increased sales to distributors and managed care
facilities which have a smaller gross margin. Biomerica had an increase in cost
of sales as a percentage of sales from 70.4% to 73.9% in fiscal 2002 as compared
to fiscal 2001. The increase was due to the Company recording an impairment
expense for the unamortized balance of a license in the amount of $100,320 which
is reflected in cost of sales in the accompanying statement of operations for
the year ended May 31, 2002.


     Selling, general and administrative costs decreased in fiscal 2002 as
compared to fiscal 2001 by $250,804 or 8.1%. Lancer had a decrease of $199,619
in these costs due to decreases in labor costs, travel expenses and show costs.
Biomerica had a decrease in fiscal 2002 as compared to fiscal 2001 of $51,185,
primarily due to lower wages and related costs.

     Research and development expense decreased in fiscal 2002 as compared to
fiscal 2001 by $162,363 or 50.4%. Of this, Lancer had a decrease of $67,663, as
a result of the transfer of personnel from product development to operations.
Biomerica had a decrease in research and development expenses of $94,700
primarily due to the lower wages and related costs due to less personnel in the
research and development department.

     Interest expense net of interest income, increased in fiscal 2002 as
compared to fiscal 2001 by $14,928 or 58.7% due to borrowings against the line
of credit at Biomerica which was offset by a decrease in interest at Lancer of
$2,749.

     Other expense, increased by $80,429 or 168.4% in fiscal 2002 as compared to
fiscal 2001. Of this, Lancer had an increase in other expense of $44,287 due to
investor relations costs and financing costs expensed associated with the line
of credit and exploring other financing options. Biomerica had decreases in
other income due to lower cash balances and therefore less interest income.

     As of May 31, 2002, Biomerica had net tax operating loss carryforwards of
approximately $5,171,000 and investment tax and research and development credits
of approximately $62,000, which are available to offset future federal tax
liabilities. These carryforwards expire at varying dates from 2002 to 2022. As
of May 31, 2002, Biomerica had net operating tax loss carryforwards of
approximately $1,152,000 available to offset future state income tax
liabilities, which expire through 2012. As of May 31, 2002, Lancer had net

                                       16

<PAGE>

operating loss carryforwards of approximately $2,037,000 and business tax
credits of approximately $80,000 available to offset future Federal tax
liabilities. The Lancer federal carryforwards expire through 2021. As of May 31,
2002, Lancer had net tax opoerating loss carryforwards of approximately $185,000
and business tax credits of approximately $24,000 available to offset future
state income tax liabilities. The state carryforwards expire through the year
2011.

Liquidity and Capital Resources

     As of May 31, 2002, we had cash and available for sale securities of
$331,809 (see Note 1 of Notes to Consolidated Financial Statements) and current
working capital of $3,246,030. Of the current working capital, $2,840,291 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 $165,576. During 2002, the Company used cash flows from
operations of $131,073. During fiscal 2002, cash provided by investing
activities was $219,452, primarily due to the sale of stock of a subsidiary. 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 and $228,779 during fiscal 2002 primarily due to the increase in
shareholder loan.

     On an unconsolidated basis, the Company used cash in operating activities
of $313,475 in fiscal 2002 as compared to $935,492 in fiscal 2001. Net cash
provided by investing activities for the years ended May 31, 2002 and 2001 were
$222,839 and $82,265, respectively. Net cash provided by financing activities
was $291,328 for fiscal 2002 and $343,980 for fiscal 2001. See Note 12 to the
Notes to Consolidated Financial Statements.

     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 and Allergy Immuno Technologies, Inc. was sold in
May 2002 (see Notes 2 and 13). ReadyScript and Allergy Immuno Technologies, Inc.
were contributors to the Company's losses. The Company has also obtained a line
of credit from a shareholder/officer which it has and will continue to rely on
to help fund operations. The Company has reduced operating costs through certain
cost reduction efforts and plans to concentrate on its core business in Lancer
and Biomerica to increase sales. Management believes that cash flows from
operations and its available credit coupled with reduced costs and anticipated
sales will enable the company to fund operations for at least the next twelve
months. 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.

     During fiscal 2002 Lancer management negotiated a new line of credit with a
financial institution through October 24, 2003. The line of credit allows for
borrowings up to $400,000 and is limited to specified percentages of eligible
accounts receivable. The outstanding balance at May 31, 2002 was $65,669. The
unused portion available under the line of credit at May 31, 2002, was approx-
imately $229,000. Borrowings bear interest at prime plus 2.00% per annum, but no
lower than 8% (8.00% at May 31, 2002).

    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 $2,100,000, which was met, and that receivables'
payments be sent to a controlled lockbox. In addition to interest, a management
fee of .25% of the average monthly outstanding loan balance and an unused
balance fee of .0425% on the average monthly unused portion available are
required. Lancer is not required to maintain compensating balances in connection
with this lending agreement.

     Lancer's management believes that it will be able to finance Lancer's
operations through cash flow and available borrowings for the foreseeable
future.

                                       17

<PAGE>

     Biomerica, Inc. entered into an agreement 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% and is secured by Biomerica accounts receivable and
inventory. There was $375,000 outstanding under this line of credit at May 31,
2002. The line of credit has been extended until September 12, 2003. During 2002
and 2001, the Company incurred $19,661 and $1,051, respectively, in interest
expense related to the shareholder line of credit, all of which is accrued as of
May 31, 2002. The unused portion available under the line of credit at May 31,
2002, was approximately $135,000. As of August 29, 2002, the unused portion
available was $169,900. During fiscal 2002 a shareholder advanced the Company
$10,000. The loan bears an interest at 8%.

     Pursuant to a decision by the Nasdaq Listing Qualifications Panel, the
Company's common stock was delisted from the Nasdaq Stock Market effective June
20, 2002, for failure to comply with the net tangible assets or shareholders'
equity requirements as set forth in Marketplace Rule 4310(c)(2)(B). The
Company's securities were immediately eligible to trade on The OTC Bulletin
Board and are traded under the symbol BMRA.OB.

CRITICAL ACCOUNTING POLICIES

     The discussion and analysis of our financial condition and results of
operations are based on the consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. Note 2 of the Notes to Consolidated Financial Statements
describes the significant accounting policies essential to the consolidated
financial statements. The preparation of these financial statements requires
estimates and assumptions that affect the reported amounts and disclosures.

     We believe the following to be critical accounting policies as they require
more significant judgments and estimates used in the preparation of our
consolidated financial statements. Although we believe that our judgments and
estimates are appropriate and correct, actual future results may differ from our
estimates.

     In general the critical accounting policies that may require judgments or
estimates relate specifically to the Allowance for Doubtful Accounts, Inventory
Reserves for Obsolescence and Declines in Market Value, Impairment of Long-Lived
Assets, Stock Based Compensation, and Income Tax Accruals.

     We recognize product revenues when an arrangement exists, delivery has
occurred, the price is determinable and collection is reasonably assured.
Accordingly, we do not recognize revenue for estimated returns from all amounts
sold to these distributors until the right of exchange has expired.

     The Allowance for Doubtful Accounts is established for estimated losses
resulting from the inability of our customers to make required payments. The
assessment of specific receivable balances and required reserves is performed by
management and discussed with the audit committee. We have identified specific
customers where collection is probable and have established specific reserves,
but to the extent collection is made, the allowance will be released.
Additionally, if the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.

     Reserves are provided for excess and obsolete inventory, which are
estimated based on a comparison of the quantity and cost of inventory on hand to
management's forecast of customer demand. Customer demand is dependent on many
factors and requires us to use significant judgment in our forecasting process.
We must also make assumptions regarding the rate at which new products will be
accepted in the marketplace and at which customers will transition from older
products to newer products. Once a reserve is established, it is maintained
until the product to which it relates is sold or otherwise disposed of, even if
in subsequent periods we forecast demand for the product.

     In general, we are in a loss position for tax purposes, and have
established a valuation allowance against deferred tax assets, as we do not
believe it is likely that we will generate sufficient taxable income in future
periods to realize the benefit of our deferred tax assets. Predicting future
taxable income is difficult, and requires the use of significant judgment. At
May 31, 2002, all of our deferred tax assets were reserved. Accruals are made
for specific tax exposures and are generally not material to our operating
results or financial position, nor do we anticipate material changes to these
reserves in the near future.


                                       18
<PAGE>

FACTORS THAT MAY AFFECT FUTURE RESULTS

     You should read the following factors in conjunction with the factors
discussed elsewhere in this and our other filings with the SEC and in materials
incorporated by reference in these filings. The following is intended to
highlight certain factors that may affect the financial condition and results of
operations of Biomerica, Inc. and are not meant to be an exhaustive discussion
of risks that apply to companies such as Biomerica, Inc. Like other businesses,
Biomerica, Inc. is susceptible to macroeconomic downturns in the United States
or abroad, as were experienced in fiscal year 2002, that may affect the general
economic climate and performance of Biomerica, Inc. or its customers.

RECENT ACCOUNTING PRONOUNCEMENTS:

     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 adopted SFAS 141 effective July 1,
2001.

     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.

     In August 2001, the FASB issued FAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to all entities and
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or normal operation
of long-lived assets, except for certain obligations of lessees. This statement
is effective for financial statements issued for fiscal years beginning after
June 15, 2002. Management has not yet determined the impact of the adoption of
FAS No. 143 on the Company's financial position or results of operations.


                                       19
<PAGE>

     In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets," or SFAS 144. SFAS No. 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
No. 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, is to be applied prospectively. The
Company does not expect SFAS 144 will have a material impact on the Company's
financial position or results of operations.

     In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections," to update, clarify and
simplify existing accounting pronouncements. FASB Statement No. 4, which
required all gains and losses from debt extinguishment to be aggregated and, if
material, classified as an extraordinary item, net of related tax effect, was
rescinded. Consequently, FASB Statement No. 64, which amended FASB Statement No.
4, was rescinded because it was no longer necessary. We do not expect the
adoption of this statement to have a material effect on our financial
statements.

     In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
SFAS 146 addresses accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value when the liability
is incurred. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. We do not
expect the adoption of this statement to have a material effect on our financial
statements. 18




                                       20
<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 2002 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,
2002.

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

     This information is incorporated by reference to the Company's proxy
statement for its 2002 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,
2002.

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

     This information is incorporated by reference to the Company's proxy
statement for its 2002 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,
2002.

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

     This information is incorporated by reference to the Company's proxy
statement for its 2002 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,
2002.



                                       21
<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).

                                       22
<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).

                                       23

<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).

                                       24
<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).

  10.27          Lease between Biomerica, Inc., JSJ Management and Ilse
                 Sultanian dated September 1, 2001.

  10.28          Agreement between Biomerica, Inc. and Lancer Orthodontics, Inc.
                 for the acquisition of the remaining outstanding shares of
                 Lancer Orthodontics, Inc., common stock by Biomerica
                 (incorporated by reference to an exhibit filed with the S-4
                 filed on April 10, 2002).

  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).

  99.1           Certification pursuant to 18 U.S.C. Section 1350, as adopted
                 pursuant to Section 906 of the Sarbarnes-Oxley Act of 2002
                 signed by Zackary S. Irani, Chief Executive Officer.

  99.2           Certification pursuant to 18 U.S.C. Section 1350, as adopted
                 P0ursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                 signed by Janet Moore, Chief Financial Officer.

  99.3           Biomerica, Inc. and Subsidiaries Consolidated Financial
                 Statements For The Years Ended May 31, 2002 and 2001 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 June 6, 2002.

                                       25
<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:  8/29/02
                                               -------

     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: 8/29/02
- ------------------------------------
Zackary S. Irani
President, Director, Chief Executive
Officer

/s/ Janet Moore                                                 Date: 8/29/02
- ------------------------------------
Janet Moore, Secretary
Director, Chief Financial Officer

/s/ Robert Orlando                                              Date: 8/29/02
- ------------------------------------
Robert Orlando, M.D., Ph.D.
Director

/s/ Carlos St. Aubyn Beharie                                    Date: 8/29/02
- ------------------------------------
Carlos St. Aubyn Beharie
Director

/s/ David Burrows                                               Date: 8/29/02
- ------------------------------------
David Burrows
Director

/s/ Francis R. Cano
- ------------------------------------                            Date: 8/29/02
Francis R. Cano
Director

/s/ Allen Barbieri                                              Date: 8/29/02
- ------------------------------------
Allen Barbieri
Director, Vice President Finance



                                       26


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.27
<SEQUENCE>3
<FILENAME>lease.txt
<TEXT>
<PAGE>

                           STANDARD OFFICE LEASE - NET
                   AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION


1. BASIC LEASE PROVISIONS ("Basic Lease Provisions")

     1.1 PARTIES: This Lease, dated, for reference purposes only, October 1,
2001, is made by and between ILSE SULTANIAN & JSJ MANAGEMENT, (herein called
"Lessor") and BIOMERICA, INC., A DELAWARE CORPORATION, doing business under the
name of same (herein called "Lessee").

     1.2 PREMISES: Suite Numbers(s) A, B, D, H, I, J, K, L, M, plus, the second
floor of L, M and the 2nd floor of 1527 - first building floors, consisting of
approximately 21,000 square feet, more or less, as defined in paragraph 2 and as
shown on Exhibit "A" hereto (the "Premises").

     1.3 BUILDING: Commonly described as being located at 1527 & 1531-1533
Monrovia Avenue in the City of Newport Beach, County of Orange, State of CA, as
more particuiariy described in Exhibit A hereto, and as defined in paragraph 2.

     1.4 USE: general office, R & D and Laboratory, subject to paragraph 6.

     1.5 TERM: Four (4) years commencing November 1, 2001 ("Commencement Date")
and ending October 31, 2005, as defined in paragraph 3.

     1.6 BASE RENT: 15,000 per month, payable on the first day of each month,
per paragraph 4.1 and Paragraph 50 in the Addendum to Lease.

     1.7 BASE RENT INCREASE: On See Paragraph 50 in Addendum to Lease the
monthly Base Rent payable under paragraph 1.6 above shall be adjusted as
provided in paragraph 4.3 below.

     1.8 RENT PAID UPON EXECUTION: 15,000 for Not applicable.

     1.9 SECURITY DEPOSIT None

     1.10 LESSEE'S SHARE OF OPERATING EXPENSES: N/A % as defined in paragraph
4.2.

2. PREMISES, PARKING AND COMMON AREAS.

      2.1 PREMISES: The Premises are a portion of a building, herein sometimes
referred to as the "Building" identified in paragraph 1.3 of the Basic Lease
Provisions. "Building" shall include adjacent parking structures used in
connection therewith. The Premises, the Building, the Common Areas, the land
upon which the same are located, along with all other buildings and improvements
thereon or thereunder, are herein collectively referred to as the "Office
Building Project." Lessor hereby leases to Lessee and Lessee leases from Lessor
for the term, at the rental, and upon all of the conditions set forth herein,
the real property referred to the Basic Lease Provisions, paragraph 1.2, as the
"Premises", including rights to the Common Areas as hereinafter specified.

      2.2 VEHICLE PARKING: So long as Lessee is not in default, and subject to
the rules and regulations attached hereto, and as established by Lessor from
time to time, Lessee shall be entitled to rent and use of approximately thirty
(30) in common parking spaces in the Office Building Project at the monthly rate
applicable from time to time for monthly parking as set by Lessor and/or its
licensee.

          2.2.1 If Lessee commits, permits or allows any of the prohibited
activities described in the Lease or the rules then in effect, then Lessor shall
have the right, without notice, in addition to such other rights and remedies
that it may have, to remove or tow away the vehicle involved and charge the cost
to Lessee, which coat shall be immediately payable upon demand by Lessor.

          2.2.2 The monthly parking rate per parking space will be $___________
per month at the commencement of the term of this Lease, and is subject to
change upon five (5) days prior written notice to Lessee. Monthly parking fees
shall be payable one month in advance prior to the first day of each calendar
month.

     2.3 COMMON AREAS - DEFINITION. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Office Building Project that are provided and designated by the Lessor
from time to time for the general non-exclusive use of Lessor, Lessee and of
other lessees of the Office Building Project and their respective employees,
suppliers, shippers, customers and invitees, including but not limited to common
entrances, lobbies, corridors, stairways and stairwells, public restrooms,
elevators, escalators, parking areas to the extent not otherwise prohibited by
this Lease, loading and unloading areas, trash areas, roadways, sidewaiks,
walkways, parkways, ramps, driveways, landscaped areas and decorative walls.

      2.4 COMMON AREAS - RULES AND REGULATIONS. Lessee agrees to abide by and
conform to the rules and regulations attached hereto as Exhibit B with respect
to the Office Building Project and Common Areas, and to cause its employees,
suppliers, shippers, customers, and invitees to so abide and conform. Lessor or
such other person(s) as Lessor may appoint shall have the exclusive control and
management of the Common Areas and shall have the right, from time to time, to
modify, amend and enforce said rules and regulations. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees, their agents, employees and invitees of the Office Building
Project.

     2.5 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessors sole
discretion, from time to time:
          (a) To make changes to the Building interior and exterior and Common
Areas, including, without limitation, changes in the location, size, shape,
number, and appearance thereof, including but not limited to the lobbies,
windows, stairways, air shafts, elevators, escalators, restrooms, driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, decorative walls, landscaped areas and walkways;
provided, however, Lessor whall at all times provide the parking facilities
required by applicable law;
          (b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
          (c) To designate other land and improvements outside the boundaries of
the Office Building Project to be a part of the Common Areas, provided that such
other land and improvements have a reasonable and functional relationship to the
Office Building Project;
          (d) To add additional buildings and improvements to the Common Areas;
          (e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Office Building Project, or any
portion thereof;
          (f) To do and perform such other acts and make such other changes in,
to or with respect to the Common Areas and Office Building Project as Lessor
may, in the exercise of sound business judgment deem to be appropriate.

3. TERM

     3.1 TERM. The term and Commencement Date of this Lease shall be as
specified in paragraph 1.5 of the Basic Lease Provisions.
     3.2 DELAY IN POSSESSION. Notwithstanding said Commencement Date, if for any
reason Lessor cannot deliver possession of the Premises to Lessee on said date
and subject to paragraph 3.2.2, Lessor shall not be subject to any liability
therefor, nor shall such failure affect the validity of this Lease or the


                                  Page 1 of 12
<PAGE>

obligations of Lessee hereunder or extend the term hereof; but in such case,
Lessee shall not be obligated to pay rent or perform any other obligation of
Lessee under the terms of this Lease, except as may be otherwise provided in
this Lease, until possession of the Premises is tendered to Lessee, as
hereinafter defined; provided, however, that if Lessor shall not have delivered
possession of the Premises within sixty (60) days following said Commencement
Date, as the same may be extended under the terms of a Work Letter executed by
Lessor and Lessee, Lessee may, at Lessee's option, by notice in writing to
Lessor within ten (10) days thereafter, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder; provided, however,
that, as to Lessee's obligations, Lessee first reimburses Lessor for all costs
incurred for Non-Standard Improvements and, as to Lessor's obligations, Lessor
shall return any money previously deposited by Lessee (less any offsets due
Lessor for Non-Standard Improvements); and provided further, that if such
written notice by Lessee is not received by Lessor within said ten (10) day
period, Lessee's right to cancel this Lease hereunder shall terminate and be of
no further force or effect.

          3.2.1 POSSESSION TENDERED - DEFINED. Possession of the Premises shall
be deemed tendered to Lessee ("Tender of Possession") when (1) the improvements
to be provided by Lessor under this Lease are substantially completed, (2) the
Building utilities are ready for use in the Premises, (3) Lessee has reasonable
access to the Premises, and (4) ten (10) days shall have expired following
advance written notice to Lessee of the occurrence of the matters described in
(1), (2) and (3), above of this paragraph 3.2.1.

          3.2.2 DELEYS CAUSED BY LESSEE. There shall be no abatement of rent,
and the sixty (60) day period following the Commencement Date before which
Lessee's right to cancel this Lease accrues under paragraph 3.2, shall be deemed
extended to the extent of any delays caused by acts or omissions of Lessee, its
agents, employees and contractors.

     3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said
Commencement Date, such occupancy shall be subject to all provisions of this
Lease, such occupancy shall not change the termination date, and Lessee shall
pay rent for such occupancy.

     3.4 UNCERTAIN COMMENCEMENT. In the event commencement of the Lease term is
defined as the completion of the improvements, Lessee and Lessor shall execute
an amendment to this Lease establishing the date of Tender of Possession (as
defined in paragraph 3.2.1) or the actual taking of possession by Lessee,
whichever first occurs, as the Commencement Date.

4. RENT.

     4.1 BASE RENT. Subject to adjustment as hereinafter provided in paragraph
4.3, and except as may be otherwise expressly provided in this Lease, Lessee
shall pay to Lessor the Base Rent for the Premises set forth in paragraph 1.6 of
the Basic Lease Provisions, without offset or deduction. Lessee shall pay Lessor
upon execution hereof the advance Base Rent described in paragraph 1.8 of the
Basic Lease Provisions. Rent for any period during the term hereof which is for
less than one month shall be prorated based upon the actual number of days of
the calendar month involved. Rent shall be payable in lawful money of the United
States to Lessor at the address stated herein or to such other persons or at
such other places as Lessor may designate in writing.

     4.2 OPERATING EXPENSES. Lessee shall pay to Lessor during the term hereof,
in addition to the Base Rent, Lessee's Share, as hereinafter defined, of all
Operating Expenses, as hereinafter defined, during each calendar year of the
term of this Lease, in accordance with the following provisions:

           (a) "Lessee's Share" is defined, for purposes of this Lease, as the
percentage set forth In paragraph 1.10 of the Basic Lease Provisions, which
percentage has been determined by dividing the approximate square footage of the
Premises by the total approximate square footage of the rentable space contained
in the Office Building Project. It is understood and agreed that the square
footage figures set forth in the Basic Lease Provisions are approximations which
Lessor and Lessee agree are reasonable and shall not be subject to revision
except in connection with an actual change In the size of the Premises or a
change In the space available for lease In the Office Building Project.

          (b) "Operating Expenses" is defined, for purposes of this Lease to
include all costs, if any, incurred by Lessor in the exercise of its reasonable
discretion, for:

               (i) The operation, repair, maintenance, and replacement, in neat,
clean, safe, good order and condition, of the Office Building Project, including
but not limited to, the following:

                    (aa) The Common Areas, including their surfaces, coverings,
decorative items, carpets, drapes and window coverings, and including parking
areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways,
stairways, parkways, driveways, landscaped areas, striping, bumpers, irrigation
systems, Common Area lighting facilities, building exteriors and roofs, fences
and gates;

                    (bb) All heating, air conditioning, plumbing, electrical
systems, life safety equipment, telecommunication and other equipment used in
common by, or for the benefit of, lessees or occupants of the Office Building
Project, including elevators and escalators, tenant directories, fire detection
systems including sprinkler system maintenance and repair.

               (ii) Trash disposal, janitorial and security services;

               (iii) Any other service to be provided by Lessor that is
elsewhere in this Lease stated to be an "Operating Expense";

               (iv) The cost of the premiums for the liability and property
insurance poilcies to be maintained by Lessor under paragraph 8 hereof;

               (v) The amount of the real properly taxes to be paid by Lessor
under paragraph 10.1 hereof;

               (vi) The cost of water, sewer, gas, electricity, and other
publicly mandated services to the Office Building Project;

               (vii) Labor, salaries, end applicable fringe benefits and costs,
materials, supplies and tools, used in maintaining and/or cleaning the Office
Buiiding Project and accounting and a management fee attributable to the
operation of the Office Building Project;

               (viii) Replacing and/or adding improvements mandated by any
governmental agency and any repairs or removals necessitated thereby amortized
over its useful life according to Federal income tax regulations or guidelines
for depreciation thereof (including interest on the unamortized balance as is
then reasonable in the judgment of Lessors accountants);

               (ix) Replacements of equipment or improvements that have a useful
life for depreciation purposes according to Federal Income tax guidelines of
five (5) years or less, as amortized over such life.

           (c) Operating Expenses shall not include the costs of replacements of
equipment or improvements that have a useful life for Federal income tax
purposes in excess of five (5) years unless it is of the type described in
paragraph 4.2(b)(viii), in which case their cost shall be included as above
provided.

          (d) Operating Expenses shall not include any expenses paid by any
lessee directly to third parties, or as to which Lessor is otherwise reimbursed
by any third party, other tenant, or by insurance proceeds.

          (e) Lessee's Share of Operating Expenses shall be payable by Lessee
withiri ten (10) days after a reasonably detailed statement of actual expenses
is presented to Lessee by Lessor. At Lessors option, however, an amount may be
estimated by Lessor from time to time of Lessee's Share of annual Operating
Expenses and the same shall be payable monthly or quarterly, as Lessor shall
designate, during each calendar year of the Lease term, on the same day as the
Base Rent is due hereunder. In the event that Lessee pays Lessor's estimate of
Lessee's Share of Operating Expenses as aforesaid, Lessor shall deliver to
Lessee within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual Operating
Expenses incurred during the preceding year. If Lessee's payments under this
paragraph 4.2(e) during said preceding calendar year exceed Lessee's Share as
indicated on said statement, Lessee shall be entitled to credit the amount of
such overpayment against Lessee's Share of Operating Expenses next falling due.
If Lessee's payments under this paragraph during said preceding calendar year
were less than Lessee's Share as indicated on said statement, Lessee shall pay
to Lessor the amount of the deficiency within ten (10) days after delivery by
Lessor to Lessee of said statement.

     4.3 RENT INCREASE. SEE PARAGRAPH 50 IN ADDENDUM TO LEASE.

          4.3.1 At the times set forth in paragraph 1.7 of the Basic Lease
Provisions, the monthly Base Rent payable under paragraph 4.1 of this Lease
shall be adjusted by the increase, if any, in the Consumer Price Index of the
Bureau of Labor Statistics of the Department of Labor for All Urban Consumers,
(1967 = 100), "All Items," for the city nearest the location of the Building,
herein referred to as "C.P.I.," since the date of this Lease.

          4.2.2 The monthly Base Rent payable pursuant to paragraph 4.3.1 shall
be calculated as follows: the Base Rent payable for the first month of the term
of this Lease, as set forth in paragraph 4.1 of this Lease, shall be multiplied
by a fraction the numerator of which shall be the C.P.I. of the calendar month
during which the adjustment is to take effect, and the denominator of which
shall be the C.P.I. for the calendar month in which the original Lease term
commences. The sum so calculated shall constitute the new monthly Base Rent
hereunder, but, in no event, shall such new monthly Base Rent be less than the
Base Rent payable for the month immediately preceding the date for the rent
adjustment.

          4.3.3 In the event the compilation and/or publication of the C.P.I.
shall be transferred to any other governmental department or bureau or agency or
shall be discontinued, then the index most nearly the same as the C.P.I. shall
be used to make such calculations. In the event that Lessor and Lessee cannot
agree on such alternative index, then the matter shall be submitted for decision
to the American Arbitration Association in the county in which the Premises are
located, in accordance with the then rules of said association and the decision
of the arbitrators shall be binding upon the parties, notwithstanding one party
failing to appear after due notice of the proceeding. The cost of said
Arbitrators shall be paid equally by Lessor and Lessee.

          4.3.4 Lessee shall continue to pay the rent at the rate previously in
effect until the increase, if any, is determined. Within five (5) days following


                                  Page 2 of 12
<PAGE>

the date on which the increase is determined, Lessee shall make such payment to
Lessor as will bring the increased rental current, commencing with the effective
date of such increase through the date of any rental installments then due.
Thereafter the rental shall be paid at the increased rate.

          4.3.5 At such time as the amount of any change in the rental required
by this Lease is known or determined, Lessor and Lessee shall execute an
amendment to this Lease setting forth such change.

5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the
security deposit set forth in paragraph 1.9 of the Basic Lease Provisions as
security for Lessee's faithful performance of Lessee's obligations hereunder. If
Lessee fails to pay rent or other charges due hereunder, or otherwise defaults
with respect to any provision of this Lease, Lessor may use, apply or retain all
or any portion of said deposit for the payment of any rent or other charge in
default for the payment of any other sum to which Lessor may become obligated by
reason of Lessee's default, or to compensate Lessor for any loss or damage which
Lesser may suffer thereby. If Lessor so uses or applies all or any portion of
said deposit, Lessee shall within ten (10) days after written demand therefor
deposit cash with Lessor in an amount sufficient to restore said deposit to the
full amount then required of Lessee. If the monthly Base Rent shall, from time
to time, increase during the term of this Lease, Lessee shall, at the time of
such increase, deposit with Lessor additional money as a security deposit so
that the total amount of the security deposit held by Lessor shall at all times
bear the same proportion to the then current Base Rent as the initial security
deposit bears to the initial Base Rent set forth in paragraph 1.6 of the Basic
Lease Provisions. Lessor shall not be required to keep said security deposit
separate from its general accounts, if Lessee performs all of Lessee's
obligations hereunder, said deposit, or so much thereof as has not heretofore
been applied by Lessor, shall be returned, without payment of interest or other
increment for its use, to Lessee (or, at Lessors option, to the last assignee,
if any, of Lessee's interest hereunder) at the expiration of the term hereof,
and after Lessee has vacated the Premises. No trust relationship is created
herein between Lessor and Lessee with respect to said Security Deposit.

6. USE.

     6.1 USE. The Premises shall be used and occupied only for the purposes set
forth in paragraph 1.4 of the Basic Lease Provisions or any other use which is
reasonably comparable to that use and for no other purpose.

     6.2 COMPLIANCE WITH LAW.

          (a) Lessor warrants to Lessee that the Premises, in the state existing
on the date that the Lease term commences, but without regard to alterations or
improvements made by Lessee or the use for which Lessee will occupy the
Premises, does not violate any covenants or restrictions of record, or any
applicable building code, regulation or ordinance in effect on such Lease term
Commencement Date. In the event it is determined that this warranty has been
violated, then it shall be the obligation of the Lessor, after written notice
from Lessee, to promptly, at Lessors sole cost and expense, rectify any such
violation.

          (b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's
expense, promptly comply with all applicable statutes, ordinances, rules,
regulations, orders, covenants end restrictions of record, and requirements of
any fire insurance underwriters or rating bureaus, now in effect or which may
hereafter come into effect, whether or not they reflect a change in policy from
that now existing, during the term or any part of the term hereof, relating in
any manner to the Premises and the occupation and use by Lessee of the Premises.
Lessee shall conduct its business in a lawful manner and shall not use or permit
the use of the Premises or the Common Areas in any manner that will tend to
create waste or a nuisance or shall tend to disturb other occupants of the
Office Building Project.

     6.3 CONDITION OF PREMISES.

          (a) Lessor shall deliver the Premises to Lessee in a clean condition
on the Lease Commencement Date (unless Lessee is already in possession) and
Lessor warrants to Lessee that the plumbing, lighting, air conditioning, and
heating system in the Premises shall be in good operating condition. In the
event that it is determined that this warranty has been violated, then it shall
be the obligation of Lessor, after receipt of written notice from Lessee setting
forth with specificity the nature of the violation, to promptly, at Lessor's
sole cost, rectify such violation.

          (b) Except as otherwise provided in this Lease, Lessee hereby accepts
the Premises and the Office Building Project in their condition existing as of
the Lease Commencement Data or the date that Lessee takes possession of the
Premises, whichever is earlier, subject to all applicable zoning, municipal,
county and state laws, ordinances and regulations governing and regulating the
use of the Premises, and any easements, covenants or restrictions of record, and
accepts this Lease subject thereto and to all matters disclosed thereby and by
any exhibits attached hereto. Lessee acknowledges that it has satisfied itself
by its own independent investigation that the Premises are suitable for its
intended use, and that neither Lessor nor Lessors agent or agents has made any
representation or warranty as to the present or future suitability of the
Premises, Common Areas, or Office Building Project for the conduct of Lessee's
business.

7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES.

     7.1 LESSOR'S OBLIGATIONS. Lessor shall keep the Office Building Project,
including the Premises, interior and exterior walls, roof, and common areas, and
the equipment whether used exclusively for the Premises or in common with other
premises, in good condition and repair; provided, however, Lessor shall not be
obligated to paint, repair or replace wall coverings, or to repair or replace
any improvements that are not ordinarily a part of the Building or are above
then Building standards, Except as provided in paragraph 9.2, there shall be no
abatement of rent or liability of Lessee on account of any injury or
interference with Lessee's business with respect to any improvements,
alterations or repairs made by Lessor to the Office Building Project or any part
thereof. Lessee expressly waives the benefits of any statute now or hereafter in
effect which would otherwise afford Lessee the right to make repairs at Lesser's
expense or to terminate this Lease because of Lessor's failure to keep the
Premises in good order, condition and repair.

     7.2 LESSEE'S OBLIGATIONS.

          (a) Notwithstanding Lessor's obligation to keep the Premises in good
condition and repair, Lessee shall be responsible for payment of the cost
thereof to Lessor as additional rent for that portion of the cost of any
maintenance and repair of the Premises, or any equipment (wherever located) that
serves only Lessee or the Premises, to the extent such cost is attributable to
causes beyond normal wear and tear. Lessee shall be responsible for the cost of
painting, repairing or replacing wail coverings, and to repair or replace any
Premises improvements that are not ordinarily a part of the Building or that are
above then Building standards. Lessor may, at its option, upon reasonable
notice, elect to have Lessee perform any particular such maintenance or repairs
the cost of which is otherwise Lessee's responsibility hereunder.

          (b) On the last day of the term hereof, or on any sooner termination,
Lessee shall surrender the Premises to Lessor in the same condition as received,
ordinary wear and tear excepted, clean and free of debris. Any damage or
deterioration of the Premises shall not be deemed ordinary wear and tear if the
same could have been prevented by good maintenance practices by Lessee. Lessee
shall repair any damage to the Premises occasioned by the installation or
removal of Lessee's trade fixtures, alterations, furnishings and equipment.
Except as otherwise stated in this Lease, Lessee shall leave the air lines,
power panels, electrical distribution systems, lighting fixtures, air
conditioning, window coverings, wall coverings, carpets, wall panelling,
ceilings and plumbing on the Premises and in good operating condition.

     7.3 ALTERATIONS END ADDITIONS.

          (a) Lessee shall not, without Lessor's prior written consent make any
alterations, improvements, additions, Utility Installations or repairs in, on or
about the Premises or the Office Building Project. As used in this paragraph 7.3
the term "utility Installation" shall mean carpeting, window and wall coverings,
power panels, electrical distribution systems, lighting fixtures, air
conditioning, plumbing, and telephone and telecommunication wiring and
equipment. At the expiration of the term, Lessor may require the removal of any
or all of said alterations, improvements, additions or Utility Installations,
and the restoration of the Premises and the Office Building Project to their
prior condition, at Lessee's expense. Should Lessor permit Lessee to make its
own alterations, improvements, additions or Utility Installations, Lessee shall
use only such contractor as has been expressly approved by Lessor, and Lessor
may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien
and completion bond in an amount equal to one and one-half times the etimated
cost of such improvements, to insure Lessor against any liability for mechanic's
and materialmen's liens and to insure completion of the work. Should Lessee make
any alterations, improvements, additions or Utility Installations without the
prior approval of Lessor, or use a contractor not expressly approved by Lessor,
Lessor may, at any time during the term of this Lease, require that Lessee
remove any part or all of the same.

          (b) Any alterations, improvements, additions or Utility Installations
in or about the Premises or the Office Building Project that Lessee shall desire
to make shall be presented to Lessor in written form, with proposed detailed
plans. If Lessor shall give its consent to Lessee's making such alteration,
improvement, addition or Utility Installation, the consent shall be deemed
conditioned upon Lessee acquiring a permit to do so from the applicable
governmental agencies, furnishing a copy thereof to Lessor prior to the
commencement of the work, and compliance by Lessee with all conditions of said
permit in a prompt and expeditious manner.

          (c) Lessee shall pay, whn due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use in
the



                                  Page 3 of 12
<PAGE>

Premises, which claims are or may be secured by any mechanic's or materlaimen's
lien against the Premises, the Building or the Office Building Project, or any
Interest therein.

          (d) Lessee shall give Lessor not less than ten (10) days' notice prior
to the commencement of any work in the Premises by Lessee, and Lessor shall have
the right to post notices of non-responsibility in or on the Premises or the
Building as provided by law, if Lessee shall, in good faith, contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend itself and Lessor against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof against the Lessor or the Premises, the Building or the Office Building
Project, upon the condition that if Lessor shall require, Lessee shall furnish
to Lessor a surety bond satisfactory to Lessor in an amount equal to such
contested lien claim or demand indemnifying Lessor against liability for the
same and holding the Premises, the Building and the Office Building Project free
from the effect of such lien or claim. In addition, Lsssor may require Lessee to
pay Lessor's reasonable attorneys' fees and costs in participating in such
action if Lessor shall decide it is to Lessors best interest so to do.

          (e) All alterations, improvements, additions and Utility installations
(whether or not such Utility Installations constitute trade fixtures of Lessee),
which may be made to the Premises by Lessee, including but not limited to, floor
coverings, panelings, doors, drapes, built-ins, moldings, sound attenuation, and
lighting and telephone or communication systems, conduit, wiring and outlets,
shall be made and done in a good and workmanlike manner end of good and
sufficient quality and materials and shall be the property of Lessor and remain
upon and be surrendered with the Premises at the expiration of the Lease term,
unless Lesser requires their removal pursuant to paragraph 7.3(a). Provided
Lessee is not in default, notwithstanding the provisions of this paragraph
7.3(e), Lessee's personal property and equipment, other than that which is
affixed to the Premises so that it cannot be removed without material damage to
the Premises or the Building, and other than Utility Installations, shall remain
the property of Lessee and may be removed by Lessee subject to the provisions of
paragraph 7.2.

          (f) Lessee shall provide Lessor with as-built plans and specifications
for any alterations, improvements, additions or Utility Installations.

     7.4 UTILITY ADDITIONS. Lessor reserves the right to install new or
additional utility facilities throughout the Office Building Project for the
benefit of Lessor or Lessee, or any other lessee of the Office Building Project,
including, but net by way of limitation, such utilities as plumbing, electrical
systems, security systems, communication systems, and fire protection and
detection systems, so iong as such installations do not unreasonably interfare
with Lessee's use of the Premises.

8. INSURANCE; INDEMNITY.

     8.1 LIABILITY INSURANCE - LESSEE. Lessee shall, at Lessee's expense, obtain
and keep in force during the term of this Lease a policy of Comprehensive
General Liability Insurance utilizing an insurance Services Office standard form
with Broad Form General Liability Endorsement (GL0404), or equivalent, in an
amount of not less than $1,000,000 per occurrence of bodily injury and property
damage combined or in a greater amount as reasonably determined by Lessor and
shall insure Lessee with Lessor as an additional insured against liability
arising out of the use, occupancy or maintenance of the Premises. Compliance
with the above requirement shall not, however, limit the liability of Lessee
hereunder.

     8.2 LIABILITY INSURANCE - LESSER. Lessor shall obtain and keep in force
during the term of this Lease a policy of Combined Single Limit Bodily Injury
and Broad Form Property Damage insurance, plus coverage against such other risks
Lessor deems advisable from time to time, insuring Lessor, but not Lessee,
against liability arising out of the ownership, use, occupancy nr maintenance of
the Office Building Project in an amount not less than $5,000,000.00 per
occurrence. $2,000,000.00

     8.3 PROPERTY INSURANCE - LESSEE. Lessee shall, at Lessee's expense, obtain
and keep in force during the term of this Lease for the benefit of Lessee,
replacement cost fire and extended coverage insurance, with vandalism and
malicious mischief, sprinkler leakage and earthquake sprinkler leakage
endorsements, in an amount sufficient to cover not less than 100% of the full
replacement cost, as the same may exist from time to time, of all of Lessee's
personal property, fixtures, equipment and tenant improvements.

     8.4 PROPERTY INSURANCE - LESSOR. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies of insurance covering loss or
damage to the Office Building Project improvements, but not Lessee's personal
property, fixtures, equipment or tenant improvements, in the amount of the full
replacement cost thereof, as the same may exist from time to time, utilizing
Insurance Services Office standard form, or equivalent, providing protection
against all perils included within the classification of fire, extended
coverage, vandalism, malicious mischief, plate glass, and such other perils as
Lessor deems advisable or may be required by a lender having a lien on the
Office Building Project. In addition, Lessor shall obtain and keep in force,
during the term of this Lease, a policy of rental value insurance covering a
period of one year, with loss payable to Lessor, which insurance shall also
cover all Operating Expenses for said period. Lessee will not be named in any
such policies carried by Lessor and shall have no right to any proceeds
therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain
such deductibles as Lessor or the aforesaid lender may determine. In the event
that the Premises shall suffer an Insured loss as defined in paragraph 9.1 (f)
hereof, the deductible amounts under the applicable insurance policies shall be
deemed an Operating Expense. Lessee shall not do or permit to be done anything
which shall invalidate the insurance policies carried by Lessor. Lessee shall
pay the entirety of any increase in the property insurance premium for the
Office Building Project over what it was immediately prior to the commencement
of the term of this Lease if the increase is specified by Lessor's insurance
carrier as being caused by the nature of Lessee's occupancy or any act or
omission of Lessee.

     8.5 INSURANCE POLICIES. Lessee shall deliver to Lessor copies of liability
insurance policies required under paragraph 8.1 or certificates evidencing the
existence and amounts of such insurance within seven (7) days after the
Commencement Date of this Lease. No such policy shall be cancellable or subject
to reduction of coverage or other modification except after thirty (30) days
prior written notice to Lessor. Lessee shall, at least thirty, (30) days prior
to the expiration of such policies, furnish Lessor with renewals thereof.

     8.6 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other,
for direct or consequential loss or damage arising out of or incident to the
perils covered by property insurance carried by such party, whether due to the
negligence of Lessor or Lessee or their agents, employees, contractors and/or
invitees. If necessary all property insurance policies required under this Lease
shall be endorsed to so provide.

     8.7 INDEMNITY. Lessee shall indemnify and hold harmless Lessor and its
agents, Lessor's master or ground lessor, partners and lenders, from and against
any and all claims for damage to the person or property of anyone or any entity
arising from Lessee's use of the Office Building Project, or from the conduct of
Lessee's business or from any activity, work or things done, permitted or
suffered by Lessee in or about the Premises or elsewhere and shall further
indemnify and hold harmless Lessor from and against any and all claims, costs
and expenses arising from any breach or default in the performance of any
obligation on Lessee's part to be performed under the terms of this Lease, or
arising from any act or omission of Lessee, or any of Lessee's agents,
contractors, employees or invitees and from and against all costs, attomey's
fees, expenses and liabilities incurred by Lessor as the result of any such use,
conduct, activity, work, things done, permitted or suffered, breach, default or
negligence, and in dealing reasonably therewith, Including but not limited to
the defense or pursuit of any claim or any action or proceeding involved
therein; and in case any action or proceeding be brought against Lessor by
reason of any such matter, Lessee upon notice from Lessor shall defend the same
at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified. Lessee, as a material part of the
consideration to Lessor, hereby assumes all risk of damage to property of Lessee
or injury to persons, in, upon or about the Office Building Project arising from
any cause and Lessee hereby waives all claims in respect thereof against Lessor.

     8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that Lessor
shall not be liable for injury to Lessee's business or any loss of income
therefrom or for loss of or damage to the goods, wares, merchandise or other
property of Lessee, Lessee's employees, invitees, customers, or any other person
in or about the Premises or the Office Building Project, nor shall Lessor be
liable for injury to the person of Lessee, Lessee's employees, agents or
contractors, whether such damage or injury is caused by or results from theft,
fire, steam, electricity, gas water or rain, or from the breakage, leakage,
obstrucion or other defects of pipes, sprinklers, wires, appliances, plumbing,
air conditioning or lighting fixtures, or from any other cuase, whether said
damage or injury results from conditions arising upon the Premises or upon other
portions of the Office Building Project, or from other sources or places, or
from new construction or the repair, alteration or improvement of any part of
the Office Building Project, or of the equipment, fixtures or appurtenances
applicable thereto, and regardless os whether the cause of such damage or injury
or the means of repairing the same is inaccessible, Lessor shall not be liable
for any damages arising from any act or neglect of any other lessee, occupant or
user of the Office Building Project, nor from the failure of Lessor to enforce
the provisions of any other lease of any other lessee of the Office Building
Project.

     8.9 NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation
that the limits or forms of coverage of insurance specified in this paragraph 8
are adequate to cover Lessee's property or obligations under this Lease.

9. DAMAGE OR DESTRUCTION.

     9.1 DEFINITIONS.


                                  Page 4 of 12


<PAGE>


          (a) "Premises Damage" shall mean if the Premises are damaged or
destroyed to any extent.

          (b) "Premises Building Partial Damage" shall mean if the Building of
which the Premises are a part is damaged or destroyed to the extent that the
cost of repair is less than fifty percent (50%) of the then Replacement Cost of
the Building.

          (c) "Premises Building Total Destruction shall mean if the Building of
which the Premises are a part is damaged or destroyed to the extent that the
cost of repair if fifty percent (50%) or more of the then Replacement Cost of
the Building.

          (d) "Office Buliding Project Buildings" shall mean all of the
buildings on the Office Building Project site.

           (e) "Office Building Project Buildings Total Destruction" shall mean
if the Office Building Project Buildings are damaged or destroyed to the extent
that the cost of repair is fifty percent (50%) or more of the then Replacement
Cost of the Office Building Project Buildings.

          (f) "Insured Loss" shall mean damage or destruction which was caused
by an event required to be covered by the insurance described in paragraph 8.
The fact that an Insured Loss has a deductible amount shall not make the loss an
uninsured loss.

          (g) "Replacement Cost" shall mean the amount of money necessary to be
spent in order to repair or rebuild the damaged area to the condition that
existed immediately prior to the damage occurring, excluding all improvements
made by lessees, other than those installed by Lessor at Lessee's expense.

     9.2 PREMISES DAMAGE; PREMISES BUILDING PARTIAL DAMAGE.

          (a) Insured Loss: Subject to the provisions of paragraphs 9.4 and 9.5,
if at any time during the term of this Lease there is damage which is an Insured
Loss and which falls into the classification of either Premises Damage or
Premises Building Partial Damage, then Lessor shall, as soon as reasonably
possible and to the extent the required materials and labor are readily
available through usual commercial channels, at Lessor's expense, repair such
damage (but not Lessee's fixtures, equipment or tenant improvements originally
paid for by Lessee) to its condition existing at the time of the damage, and
this Lease shall continue in full force and effect.

          (b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and
9.5, if at any time during the term of this Lease there is damage which is not
an Insured Loss and which falls within the classification of Premises Damage or
Premises Building Partial Damage, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense), which
damage prevents Lessee from making any substantial use of the Premises, Lessor
may at Lessor's option either (i) repair such damage as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in full
force and effect, or (ii) give written notice to Lessee within thirty (30) days
after the date of the occurrence of such damage of Lessor's intention to cancel
and terminate this Lease as of the date of the occurrence of such damage, in
which event this Lease shall terminate as of the date of the occurrence of such
damage.

     9.3 PREMISES BUILDING TOTAL DESTRUCTION; OFFICE BUILDING PROJECT TOTAL
DESTRUCTION. Subject to the provisions of paragraphs 9.4 and 9.5, if at any time
during the term of this Lease there is damage, whether or not it is an Insured
Loss, which falls into the classifications of either (i) Premises Building Total
Destruction, or (ii) Office Building Project Total Destruction, then Lessor may
at Lessor's option either (1) repair such damage or destruction as soon as
reasonably possible at Lessor's expense (to the extent the required materials
are readily available through usual commercial channels) to its condition
existing at the time of the damage, but not Lessee's fixtures, equipment or
tenant improvements, and this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after the date of
occurrence of such damage of Lessor's intention to cancel and terminate this
Lease, in which case this Lease shall terminate as of the date of the occurrence
of such damage.

     9.4 DAMAGE NEAR END OF TERM.

          (a) Subject to paragraph 9.4(b), if at any time during the last twelve
(12) months of the term of this Lease there is substantial damage to the
Premises, Lessor may at Lessor's option cancel and terminate this Lease as of
the date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within 30 days after the date of occurrence of such
damage.

          (b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an
option to extend or renew this Lease, and the time within which said option may
be exercised has not yet expired, Lessee shall exercise such option, if it is to
be exercised at all, no later than twenty (20) days after the occurrence of an
Insured Loss falling within the classification of Premises Damage during the
last twelve (12) months of the term of this Lease. If Lessee duly exercises such
option during said twenty (20) day period, Lessor shall, at Lessor's expense,
repair such damage, but not Lessee's fixtures, equipment or tenant improvements,
as soon as reasonably possible and this Lease shall continue in full force and
effect. If Lessee fails to exercise such option during said twenty (20) day
period, then Lessor may at Lessor's option terminate and cancel this Lease as of
the expiration of said twenty (20) day period by giving written notice to Lessee
of Lessor's election to do so within ten (10) days after the expiration of said
twenty (20) day period, notwithstanding any term or provision in the grant of
option to the contrary.

     9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES.

          (a) In the event Lessor repairs or restores the Building or Premises
pursuant to the provisions of this paragraph 9, and any part of the Premises are
not usable (including loss of use due to loss of access or essential services),
the rent payable hereunder (inoluding Lessee's Share of Operating Expense) for
the period during which such damage, repair or restoration continues shall be
abated, provided (1) the damage was not the result of the negligence of Lessee,
and (2) such abatement shall only be to the extent the operation and
profitability of Lessee's business as operated from the Premises is adversely
affected. Except for said abatement of rent, if any, Lessee shall have no claim
against Lessor for any damage suffered by reason of any such damage,
destruction, repair or restoration.

          (b) If Lessor shall be obligated to repair or restore the Premises or
the Building under the provisions of this Paragraph 9 and shall not commence
such repair or restoration within ninety (90) days after such occurrence, or if
Lessor shall not complete the restoration and repair within six (6) months after
such occurrence, Lessee may at Lessee's option cancel and terminate this Lease
by giving Lessor written notice of Lessee's election to do so at any time prior
to the commencement or completion, respectively, of such repair or restoration.
In such event this Lease shall terminate as of the date of such notice.

          (c) Lessee agrees to cooperate with Lessor in connection with any such
restoration and repair, including but not limited to the approval and/or
execution of plans and specifications required.

     9.6 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease pursuant
to this paragraph 9, an equitable adjustment shall be made concerning advance
rent and any advance payments made by Lessee to Lessor. Lessor shall, in
addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.

     9.7 WAIVER. Lessor and Lessee waive the provisions of any statute which
relate to termination of leases when leased property is destroyed and agree that
such event shall be governed by the terms of this Lease.

10. REAL PROPERTY TAXES.

     10.1 PAYMENT OF TAXES. Lessor shall pay the real property tax, as defined
in paragraph 10.3, applicable to the Office Building Project subject to
reimbursement by Lessee of Lessee's Share of such taxes in accordance with the
provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2.

     10.2 ADDITIONAL IMPROVEMENTS. Lessee shall not be responsible for paying
any increase in real property tax specified in the tax assessor's records and
work sheets as being caused by additional improvements placed upon the Office
Building Project by other lessees or by Lessor for the exclusive enjoyment of
any other lessee. Lessee shall, however, pay to Lessor at the time that
Opertaing Expenses are payable under paragraph 4.2(c) the entirety of any
increase in real property tax if assessed solely by reason of additional
improvements placed upon the Premises by Lessee or at Lessee's request.

     10.3 DEFINITION OF "REAL PROPERTY TAX". As used herein, the term "real
property tax" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed on the Office Building Project or any portion thereof
by any authority having the direct or indirect power to tax, including any city,
county, state or federal government, or any school, agricultural, sanitary,
fire, street, drainage or other improvement district thereof, as against any
legal or equitable interest of Lessor in the Office Building Project or in any
portion thereof, as against Lessor's right to rent or other income therefrom,
and as against Lessor's business of leasing the Office Building Project. The
term "real property tax" shall also include any tax, fee, levy, assessment or
charge (i) in substitution of, partially or totally, any tax, fee, levy,
assessment or charge hereinabove included within the definition of "real
property tax", or (ii) the nature of which was hereinbefore included withing the
definition of "real property tax", or (iii) which is imposed for a service or
right not charged prior to June 1, 1978 or, if previously charged, has been
increased since June 1, 1978, or (iv) which is imposed as a result of a change
in ownership, as defined by applicable local statutes for property tax purposes,
of the Office Building Project or which is added to a tax or charge herein
before included within the definition of real property tax by reason of such
change of ownership, or (v) which is imposed by reason of this transaction, any
modifications or changes hereto, or any transfers hereof.

     10.4 JOINT ASSESSMENT. If the improvements or property, the taxes for which
are to be paid separately by Lessee under paragraph 10.2 or 10.5 are


                                  Page 5 of 12
<PAGE>


not separately assessed, Lessee's portion of that tax shall be equitably
determined by Lessor from the respective valuations assigned in the assessors
work sheets or such other information (which may include the cost of
construction) as may be reesonably available. Lessors reasonable determination
thereof, in good faith, shall be conclusive.

     10.5 PERSONAL PROPERTY TAXES.

          (a) Lessee shall pay prior to delinquency all taxes assessed against
and levied upon trade fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises or elsewhere.

          (b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay to Lessor the taxes attributable to
Lessee within ten (10) days after receipt of a written statement setting forth
the taxes appilcabie to Lessee's property.

11. UTILITIES.

     11.1 SERVICES PROVIDED BY LESSER. Lessor shall pravide heating,
ventilation, air conditioning, and janitorial service as reasonably required,
reasonable amounts of electricity for normal lighting and office machines, water
for reasonable and normal drinking and lavatory use, and replacement light bulbs
and/or fluorescent tubes and ballasts for standard overhead fixtures.

     11.2 SERVICES EXCLUSIVE TO LESSEE. Lessee shall play for all water, gas,
heat, light, power, telephone and other utilities and services specially or
exclusively supplied and/or metered exclusively to the Premises or to Lessee,
together with any taxes thereon. If any such services are not separately metered
to the Premises, Lessee shall pay at Lessors option, either Lessee's Share or a
reasonable proportion to be determined by Lessor of all charges Jointly metered
with other premises in the Building.

     11.3 HOURS OF SERVICE. Said services and utilities shall be provided during
generally accepted business days and hours or such other days or hours as may
hereafter be set forth. Utilities and services required at other times shall be
subject to advance request and reimbursement by Lessee to Lessor of the cost
thereof.

     11.4 EXCESS USAGE BY LESSEE. Lessee shall not make connection to the
utlilties except by or through existing outlets and shall not install or use
machinery or equipment in or about the Premises that uses excess water, lighting
or power, or suffer or permit any act that causes extra burden upon the
utilities or services, including but not limited to security services, over
standard office usage for the Office Building Project. Lesser shall require
Lessee to reimburse Lessor for any excess expenses or costs that may arise out
of a breath of this subparagraph by Lessee. Lessor may, in its sole discretion,
install at Lessee's expense supplemental equipment and/or separate metering
applicable to Lessee's excess usage or loading.

     11.5 INTERRUPTIONS. There shah be no abatement of rent and Lessor shall not
be liable in any respect whatsoever for the inadequacy, stoppage, interruption
or discontinuance of any utility or service due to riot, strike, labor dispute,
breakdown, accident, repair or other cause beyond Lessor's reasonable control or
in cooperation with governmental request or directions.

12. ASSIGNMENT AND SUBLETTING.

     12.1 LESSORS CONSENT REQUIRED. Lessee shall not voluntarily or by operation
of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all
or any part of Lessee's interest in the Lease or in the Premises, without
Lessor's prior written consent, which Lessor shall not unreasonably withhold.
Lessor shall respond to Lessee's request for consent hereunder in a timely
manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a material
default and breach of this Lease without the need for notice to Lessee under
paragraph 13.1. "Transfer" within the meaning of this paragraph 12 shall include
the transfer or transfers aggregating: (a) If Lessee is a corporation, more than
twenty-five percent (25%) of the voting stock of such corporation, or (b) if
Lessee is a partnership, more than twenty-five percent (25%) of the profit and
loss participation in such partnership.

     12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12.1
hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessors consent, to any corporation which controls, is controlled by or
is under common control with Lessee, or to any corporation resulting from the
merger or consolidation with Lessee, or to any person or entity which acquires
all the assets of Lessee as a going concern of the business that is being
conducted on the Premises, all of which are referred to as "Lessee Affiliate";
provided that before such assignment shall be effective, (a) said assignee shall
assume, in full, the obligations of Lessee under this Lease, and (b) Lessor
shail be given written notice of such assignment and assumption. Any such
assignment shall not, in any way, affect or limit the liability of Lessee under
the terms of this Lease even if after such assignment or subletting the terms of
this Lease are materially changed or altered without the consent of Lessee, the
consent of whom shall not be necessary.

     12.3 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.

          (a) Regardless of Lessors consent, no assignment or subletting shall
release Lessee of Lessee's obiigations hereunder or alter the primary liability
of Lessee to pay the rent and other sums due Lessor hereunder including Lessee's
Share of Operating Expenses, and to perform all other obligations to be
performed by Lessee hereunder.

          (b) Lessor may accept rent from any person other than Lessee pending
approval or disapproval of such assignment.

          (c) Neither a delay in the approval or disapproval of such assignment
or subletting, nor the acceptance of rent, shall constitute a waiver or estoppel
of Lessors right to exercise its remedies for the breach of any of the terms or
conditions of this paragraph 12 or this Lease.

          (d) If Lessee's obligations under this Lease have been guaranteed by
third parties, then an assignment or sublease, and Lessors consent thereto,
shall not be effective unless said guarantors give their written consent to such
sublease and the terms thereof.

          (e) The consent by Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent sublettings and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent and such
action shall not relieve such persons from liability under this Lease or said
sublease; provided, however, such persons shall not be responsibie to the extent
any such amendment or modification enlarges or increases the obligations of the
Lessee or sublessee under this Lease or such sublease.

          (f) In the event of any default under this Lease, Lessor may proceed
directly against Lessee, any guarantors or anyone else responsible for the
performance of this Lease, including the sublessee, without first exhausting
Lessors remedies against any other person or entity responsible therefor to
Lessor, or any security held by Lessor or Lessee.

          (g) Lessors written consent to any assignment or subletting of the
Premises by Lessee shall not constitute an acknowledgment that no default then
exists under this Lease of the obligations to be performed by Lessee nor shall
such consent be deemed a waiver of any then existing default, except as may be
otherwise stated by Lessor at the time.

          (h) The discovery of the fact that any financial statement relied upon
by Lessor in giving its consent to an assignment or subletting was materially
false shall, at Lessors election, render Lessors said consent null and void.

     12.4 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. Regardless
of Lessors consent, the following terms and conditions shall apply to any
subletting by Lessee of all or any part of the Premises and shall be deemed
included in all subleases under this Lease whether or not expressly incorporated
therein:

          (a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from sublease heretofore or hereafter
made by Lessee, and Lessor may collect such rent and income and apply same
toward Lessee's obligations under this Lease; provided, however, that until a
default shall occur in the performance of Lessee's obligations under this Lease,
Lessee may receive, collect and enjoy the rents accruing under such sublease.
Lessor shall not, be reason of this or any othr assignment of such sublease to
Lessor nor by reason of the collection of the rents from a sublessee, be deemed
liable to the sublessee for any failure of Lessee to perform and comply with any
of Lessee's obligations to such sublessee under such sublease. Lessee hereby
irrevocably authorizes and directs any such sublessee, upon receipt of a written
notice from Lessor stating that a default exists in the performance of Lessee's
obligations under this Lease, to pay to Lessor the rents due and to become due
under the sublease. Lessee agrees that such sublessee shall have the right to
rely upon any such statement and request from Lessor, and that such sublessee
shall pay such rents to Lessor without any obligation or right to inquire as to
whether such default exists and notwithstanding any notice from or claim from
Lessee to the contrary, Lessee shall have no right or claim against said
sublessee or Lessor for any such rents so paid by said sublessee to Lessor.

          (b) No sublease entered into by Lessee shall be effective unless and
until it has been approved in writing by Lessor. In entering into any sublease,
Lessee shall use only such form of sublease as is satisfactory to Lessor, and
once approved by Lessor, such sublease shall not be changed or modified without
Lessor's prior written consent. Any sublessee shall, by reason of entering into
a sublease under this Lease, be deemed, for the benefit of Lessor, to have
assumed and agreed to conform and comply with each and every obligation herein
to be performed by Lessee other than such obligations as are contrary to or
inconsistent with provisions contained in a sublease to which Lessor has
expressly consented in writing.


                                  Page 6 of 12
<PAGE>

          (c) In the event Lessee shall default in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of Lessee under such sublease from the time of
the exercise of said option to the termination of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to Lessee or for any other prior defaults of Lessee under
such sublease.

          (d) No sublessee shall further assign or sublet all or any part of the
Premises without Lessor's prior written consent.

          (e) With respect to any subletting to which Lessor has consented,
Lessor agrees to deliver a copy of any notice of default by Lessee to the
subiessee. Such sublessee shall have the right to cure a default of Lessee
within three (3) days after service of said notice of default upon such
sublessee, and the sublessee shall have a right of reimbursament and offset from
and against Lessee for any such defaults cured by the sublessee.

     12.5 LESSOR'S EXPENSES. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable costs and expenses incurred in
connection therewith, including attorneys', architects', engineers' or other
consultants' fees.

     12.6 CONDITIONS TO CONSENT. Lessor reserves the right to condition any
approval to assign or sublet upon Lessors determination that (a) the proposed
assignee or sublessee shall copduct a business on the Premise of a quality
substantially equal to that of Lessee and consistent with the general character
of the other occupants of the Office Building Project and not in violation of
any exclusives or rights then held by other tenants, and (b) the proposed
assignee or sublessee be at least as financially responsible as Lessee was
expected to be at the time of the execution of this Lease or of such assignment
or subletting, whichever is greater.

13. DEFAULT; REMEDIES.

     13.1 DEFAULT. The occurrence of any one or more of the following events
shall constitute a material default of this Lease by Lessee:

          (a) The vacation or abandonment of the Premises by Lessee. Vacation of
the Premises shall include the failure to occupy the Premises for a continuous
period of sixty (60) days or more, whether or not the rent is paid.

          (b) The breach by Lessee of any of the covenants, conditions or
provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment or
subletting), 13.1(a) (vacation or abandonment), 13.1(e) (insolvency), 13.1(f)
(false statement), 16(a)(estoppel certificate), 30(b) (subordination), 33
(auctions), or 41.1 (easements), all of which are hereby deemed to be material,
non-curable defaults without the necessity of any notice by Lessor to Lessee
thereof.

          (c) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of three (3) days after written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a
Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes
such Notice to Pay Rent or Quit shall also constitute the notice required by
this subparagraph.

          (d) The failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by Lessee
other than those referenced in subparagraphs (b) and (c), above, where such
failure shall continue for a period of thirty (30) days after written notice
thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's
noncompliance is such that more than thirty (30) days are reasonably required
for its cure, then Lessee shall not be deemed to be in default if Lessee
commenced such cure within said thirty (30) day period and thereafter diligently
pursues such cure to completion. To the extent permitted by law, such thirty
(30) day notice shall constitute the sole and exclusive notice required to be
given to Lessee under applicable Unlawful Detainer statutes.

          (e)(i) The making by Lessee of any general arrangement or general
assignment for the benefit of creditors; (ii) Lessee becoming a "debtor" as
defined in 11 U.S.C. ss. 101 or any successor statute thereto (unless, in the
case of a petition filed against Lessee, the same is dismissed within sixty (60)
days; (iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within thirty
(30) days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged within thirty (30)
days. In the event that any provision of this paragraph 13.1(e) is contrary to
any applicable law, such provision shall be of no force or effect.

          (f) The discovery by Lessor that any financial statement given to
Lessor by Lessee, or its successor in interest or by any guarantor of Lessee's
obligation hereunder, was materially false.

     13.2 REMEDIES. In the event of any material default or breach of this Lease
by Lessee, Lessor may at any time thereafter, with or without notice or demand
and without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such default:

          (a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee all damages incurred by
Lessor by reason of Lessee's default including, but not limited to, the cost of
recovering possession of the Premises; expenses of retetting, including
necessary renovation and alteration of the Premises, reasonable attorneys' fees,
and any real estate commission actually paid; the worth at the time of award by
the court having jurisdiction thereof the amount by which the unpaid rent for
the balance of the term after the time of such award exceeds the amount of such
rental loss for the same period that Lessee proves could be reasonably avoided;
that portion of the leasing commission paid by Lessor pursuant to paragraph 15
applicable to the unexpired term of this Lease.

          (b) Maintain Lessee's right to possession in which case this Lease
shall continue in effect whether or not Lessee shall have vacated or abandoned
the Premises. In such event Lessor shall be entitiad to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent as
it becomes due hereunder.

          (c) Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the state wherein the Premises are located.
Unpaid installments of rent and other unpaid monetary obligations of Lessee
under the terms of this Lease shall bear interest from the date due at the
maximum rate then allowable by law.

     13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor fails
to perform obligations required of Lessor within a reasonable time, but in no
event later than thirty (30) days after written notice by Lessee to Lessor and
to the holder of any first mortgage or deed of trust covering the Premises whose
name and address shall have theretofore been furnished to Lessee in writing,
specifying wherein Lessor has failed to perform such obligation; provided,
however, that if the nature of Lessors obilgation is such that more than thirty
(30) days are required for performance than Lessor shall not be in default if
Lessor commences performance within such 30-day period and thereafter diligently
pursues the same to completion.

     13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
to Lessor of Base Rent, Lessee's Share of Operating Expenses or other sums due
hereunder will cause Lessor to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing end accounting charges, and late
charges which may be imposed on Lessor by the terms of any mortgage or trust
deed covering the Office Buliding Project. Accordingly, if any installment of
Base Rent, Operating Expenses, or any other sum due from Lessee shall not be
received by Lessor or Lessees designee within ten (10) days after such amount
shall be due, then without any requirement for notice to Lessee, Lessee shall
pay to Lessor a late charge equal to 3% of such overdue amount. The parties
hereby agree that such late charge represents a fair and reasonable estimate of
the costs Lessor will incur by reason of late payment by Lessee. Acceptance of
such late charge by Lessor shall in no event constitute a waiver of Lessee's
default with respect to such overdue amount, nor prevent Lessor from exercising
any of the other rights and remedies granted hereunder.

14. CONDEMNATION. If the Premises or any portion thereof or the Office Building
project are taken under the power of eminent domain, or sold under the threat of
the exercise of said power (all of which are herein called "condemnation"), this
Lease shall terminate as to the part so taken as of the date the condemning
authority takes title or possession, whichever first occurs; provided that if so
much of the Premises or the Office Builiding Project are taken by such
condemnation as would substantially and adversely affect the operation and
profitability of Lessee's business conducted from the Premises, Lessee shall
have the option, to be exercised only in writing within thirty (30) days after
Lessor shall have given Lessee written notice of such taking (or in the absence
of such notice, withing thirty (30) days after the condemning authority shall
have taken possession), to terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the poriton of the Premises remaining, except that the rent and Lessee's
Share of Operating Expenses shall be reduced in the proportion that the floor
area of the premises taken bears to the total floor area of the Premises. Common
Areas taken shall be excluded from the Common Areas usable by Lessee and no
reduction of rent shall occur with respect thereto or by reason thereof. Lessor
shall have the option in its sole discretion to terminate this Lease as of the
taking of possession by the condemning authority, by giving written notice to
Lessee of such election within thirty (30) days after receipt of notice of a
taking by condemnation of any part of the Premises or the Office Building
Project. Any award for the taking of all or any part of the Premises or the
Office Building Project under the power of eminent domain or any payment made
under threat of the exercise of such power hall be the property of


                                  Page 7 of 12
<PAGE>

Lessor, whether such award shall be made as compensation for diminution in value
of the leasehold or for the taking of the fee, or as severance damages;
provided, however, that Lessee shall be entitled to any separate award for loss
of the damage to Lessee's trade fixtures, removable personal property and
unamortized tenant improvements that have been paid for by Lessee. For that
purpose the cost of such improvements shall be amortized over the original term
of this Lease excluding any options. In the event that this lease is not
terminated by reason of such condemnation, Lessor shall to the extent of
severance damages received by Lessor in connection with such condemnation,
repair any damage to the Premises caused by such condemnation except to the
extent that Lessee has been reimbursed therefor by the condemning authority.
Lessee shall pay any amount in excess of such severance damages required to
complete such repair.

15. BROKER'S FEE.

     (a) The brokers involved in this transaction are NOT applicable as "listing
broker" and Not applicable as "cooperating broker", licensed real estate
broker(s). A "cooperating broker" is defined as any broker other than the
listing broker entitled to a share of any commission arising under this Lease.
Upon execution of this Lease by both parties, Lessor shall pay to said brokers
jointly, or in such separate shares as they may mutually designate in writing, a
fee as set forth in a separate agreement between Lessor and said broker(s), or
in the event there is no separate agreement between Lessor and said broker(s),
the sum of $Not applicable, for brokerage services rendered by said broker(s) to
Lessor in this transaction.

     (b) Lessor further agrees that (i) if Lessee exercises any Option, as
defined in paragraph 39.1 of this Lease, which is granted to Lessee under this
Lease, or any subsequently granted option which is substantially similar to an
Option granted to Lessee under this Lease, or (ii) if Lessee acquires any rights
to the Premises or other premises described in this Lease which are
substantially similar to what Lessee would have acquired had an Option herein
granted to Lessee been exercised, or (iii) if Lessee remains in possession of
the Premises after the expiration of the term of this Lease after having failed
to exercise an Option, or (iv) if said broker(s) are the procuring cause of any
other lease or ssie entered into between the parties pertaining to the Premises
and/or any adjacent property in which Lessor has an interest, or (v) if the Base
Rent is increased, whether by agreement or operation of an escalation clause
contained herein, then as to any of said transactions or rent increases, Lessor
shall pay said broker(s) a fee in accordance with the schedule of said broker(s)
in effect at the time of execution of this Lease. Said fee shall be paid at the
time of such increased rental is determined.

     (c) Lessor agrees to pay said fee not only on behalf of Lessor but also on
behalf of any person, corporation, association, or other entity having an
ownership interest in said real property or any part thereof, when such fee is
due hereunder. Any transferee of Lessor's interest in this Lease, whether such
transfer is by agreement or by operation of law, shall be deemed to have assumed
Lessors obligation under this paragraph 15. Each listing and cooperating broker
shall be a third party beneficiary of the provisions of this paragraph 15 to the
extent of their interest in any commission arising under this Lease and may
enforce that right directly against Lessor; provided, however, that all brokers
having a right to any part of such total commission shall be a necessary party
to any suit with respect thereto.

     (d) Lessee and Lessor each represent and warrant to the other that neither
has had any dealings with any person, firm, broker or finder (other than the
persons(s), if any, whose names are set forth in paragraph 15(a), above) in
connection with the negotiation of this Lease and/or the consummation of the
transaction contemplated hereby, and no other broker or other person, firm or
entity is entitled to any commission or finders fee in connection with said
transaction and Lessee and Lessor do each hereby indemnify and hold the other
harmless from and against any costs, expenses, attomeys' fees or liability for
compensation or charges which may be claimed by any such unnamed broker, finder
or other similar party by reason of any dealings or actions of the indemnifying
party.

16. ESTOPPEL CERTIFICATE.

     (a) Each party (as "responding party") shall at any time upon not less than
ten (10) days' prior written notice from the other party ("requesting party")
execute, acknowledge and deliver to the requesting party a statement in writing
(i) certlfylng that this Lease is unmodified and in full force and effect (or,
if modified, stating the nature of such modification and certifying that this
Lease, as so modified, is in full force and effect) and the date to which the
rent and other charges are paid in advance, if any, and (ii) acknowledging that
there are not, to the responding party's knowledge, any uncured defaults on the
part of the requesting party, or specifying such defaults if any are claimed.
Any such statement may be conclusively relied upon by any prospective purchaser
or encumbrancer of the Office Building Project or of the business of Lessee.

     (b) At the requesting party's option, the failure to deliver such statement
within such time shall be a material default of this Lease by the party who is
to respond, without any further notice to such party, or it shall be conclusive
upon such party that (i) this Lease is in full force and affect, without
modification except as may be represented by the requesting party, (ii) there
are no uncured defaults in the requesting party's performance, and (iii) if
Lessor is the requesting party, not more than one month's rent has been paid in
advance.

     (c) if Lessor desires to finance, refinance, or sell the Office Building
Project, or any part thereof, Lessee hereby agrees to deliver to any lender or
purchaser designated by Lessor such financial statements of Lessee as may be
reasonably required by such lender or purchaser. Such statements shall include
the past three (3) years' financial statements of Lessee. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.

17. LESSER'S LIABILITY. The term "Lessor" as used herein shall mean only the
owner or owners, at the time in question, of the fee title or a lessee's
interest in a ground lease of the Office Building Project, and except as
expressly provided in paragraph 15, in the event of any transfer of such title
or interest, Lessor herein named (and in case of any subsequent transfers then
the grantor) shall be relieved from and after the date of such transfer of all
liability as respects Lessors obligations thereafter to be performed, provided
that any funds in the hands of Lessor or the then grantor at the time of such
transfer, in which Lessee has an interest, shall be delivered to the grantee.
The obligations contained in this Lease to be performed by Lessor shall, subject
as aforesaid, be binding on Lessors successors and assigns, only during their
respective periods of ownership.

18. SEVERABILITY. The invalidity of any provision of this Lease as determined by
a court of competent jurisdiction shall in no way affect the validity of any
other provision hereof.

19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any
amount due to Lessor not paid when due shall bear interest at the 8% APR which
shall commence after sixty (60) days from the due date. Payment of such interest
shall not excuse or cure any default by Lessee under this Lease; provided,
however, that Interest shall not be payable on late charges incurred by Lessee
nor on any amounts upon which late charges are paid by Lessee.

20. TIME OF ESSENCE. Time is of the essence with respect to the obligations to
be performed under this Lease.

21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the
terms of this Lease, including but not limited to Lessee's Share of Operating
Expenses and any other expenses payable by Lessee hereunder shall be deemed to
be rent.

22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all
agreements of the parties with respect to any matter mention herein. No prior or
contemporaneous agreement or understanding pertaining to any such matter shall
be effective. This Lease may be modified in writing only, signed by the parties
in interest at the time of the modification. Except as otherwise stated in this
Lease, Lessee hereby acknowledges that neither the real estate broker listed in
paragraph 15 hereof nor any cooperating broker on this transaction nor the
Lessor or any employee or agents of any of said persons has made any oral or
written warranties or representations to Lessee relative to the condition or use
by Lessee of the Premises or the Office Building Project and Lessee acknowledges
that Lessee assumes all responsibility regarding the Occupational Safety Health
Act, the legal use and adaptability of the Premises and the compliance thereof
with all applicable laws and regulations in effect during the term of this
Lease.

23. NOTICES. Any notice required or permitted to be given hereunder shall be in
writing and may be given by personal delivery or by certified or registered
mail, and shall be deemed sufficiently given if delivered or addressed to Lessee
or to Lessor at the address noted below or adjacent to the signature of the
respective parties, as the case may be. Mailed notices shall be deemed given
upon actual receipt at the address required, or forty-eight hours following


                                  Page 8 of 12

<PAGE>

deposit in the mall, postage prepald, whichever first occurs. Either party may
by notice to the other specify a different address for notice purposes except
that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for notice purposes. A copy of all notices required
or permitted to be given to Lessor hereunder shall be concurrently transmitted
to such party or parties at such addresses as Lessor may from time to time
hereafter designate by notice to Lessee.

24. WAIVERS. No waiver by Lessor of any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessors consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor's consent to
or approval of any subsequent act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so accepted,
regardless of Lessor's knowledge of such preceding breach at the time of
acceptance of such rent.

25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of this
Lease for recording purposes.

26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of the
Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of this
Lease pertaining to the obligations of Lessee, except that the rent payable
shall be two hundred percent (200%) of the rent payable immediately lately
preceding the termination date of this Lease, and all Options, if any, granted
under the terms of this Lease shall be deemed terminated and be of no further
effect during said month to month tenancy.

27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.

28. COVENANTS END CONDITIONS. Each provision of this Lease performable by Lessee
shall be deemed both a covenant and a condition.

29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting
assignment or subletting by Lessee and subject to the provisions of paragraph
17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State
where the Office Building Project is located and any litigation concerning this
Lease between the parties hereto shall be initiated in the county in which the
Office Building Project is located.

30. SUBORDINATION.

     (a) This Lease, and any Option or right of first refusal granted hereby, at
Lessors option, shall be subordinate to any ground lease, mortgage, deed of
trust, or any other hypothecation or security now or hereafter placed upon the
Office Building Project and to any and all advances made on the security thereof
and to all renewals, modifications, consolidations, replacements and extensions
thereof. Notwithstanding such subordination, Lessee's right to quiet possession
of the Premises shall not be disturbed if Lessee is not in default and so long
as Lessee shall pay the rent and observe and perform all of the provisions of
this Lease, unless this Lease is otherwise terminated pursuant to its terms. If
any mortgagee, trustee or ground lessor shall elect to have this Lease and any
Options granted hereby prior to the lien of its mortgage, deed of trust or
ground lease, and shall give written notice thereof to Lessee, this Lease and
such Options shall be deemed prior to such mortgage, deed of trust or ground
lease, whether this Lease or such Options are dated prior or subsequent to the
date of said mortgage, deed of trust or ground lease or the date of recording
thereof.

     (b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination, or to make this Lease or any Option granted herein
prior to the lien of any mortgage, deed of trust or ground lease, as the case
may be. Lessee's failure to execute such documents within ten (10) days after
written demand shall constitute a material default by Lessee hereunder without
further notice to Lessee or, at Lessor's option, Lessor shall execute such
documents on behalf of Lessee as Lessee's attorney-in-fact Lessee does hereby
make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and
in Lessee's name, place and stead, to execute such documents in accordance with
this paragraph 30(b).

31. ATTORNEYS' FEES.

     31.1 If either party or the broker(s) named herein bring an action to
enforce the terms hereof or declare rights hereunder, the prevailing party in
any such action, trial, or appeal thereon, shall be entitled to his reasonable
attorneys' fees to be paid by the losing party as fixed by the court in the same
or separate suit, and whether or not such aotlon is pursued to decision or
judgment. The provision of this paragraph shall inure to the benefit of the
broker named herein who seeks to enforce a right hereundar.

     31.2 The attorneys' fee award shall not be computed in accordance with any
court fee schedule, but shall be such as to fully reimburse all attorneys' fees
reasonably incurred in good faith.

     31.3 Lessor shall be entitled to reasonable attorneys' fees and all other
costs and expenses incurred in the preparation and service of notices of default
and consultations in connection therewith, whether or not a legal action is
subsequently commenced in connection with such default.

32. LESSORS ACCESS.

     32.1 Lessor and Lessors agents shall have the right to enter the Premises
at reasonable times for the purposes of inspecting the same, perrorming any
services required of Lessor, showing the same to prospeotive purchasers,
lenders, or lessees, taking such safety measures, erecting such scaffolding or
other necessary structures, making such alterations, repairs, improvements or
additions to the Premises or to the Office Building Project as Lessor may
reasonably deem necessary or desirable and the erecting, using and maintaining
of utilities, services, pipes and conduits through the Premises and/or other
premises as long as there is no material adverse effect to Lessee's use of the
Premises. Lessor may at any time place on or about the Premises or the Building
any ordinary "For Sale" signs and Lessor may at any time during the last 120
days of the term hereof place on or about the Premises any ordinary "For Lease"
signs.

     32.2 All activities of Lessor pursuant to this paragraph shall be without
abatement of rent, nor shall Lessor have any liability to Lessee for the same.

     32.3 Lessor shall have the right to retain keys to the Premises and to
unlock all doors in or upon the Premises other than to files, vaults and safes,
and in the case of emergency to enter the Premises by any reasonably appropriate
means, and any such entry shall not be deemed a forcible or unlawful entry or
detainer of the Premises or an eviction. Lessee waives any charges for damages
or injuries or interference with Lessee's property or business in connection
therewith.

33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises or the Common Areas
without first having obtained Lessor's prior written consent. Notwithstanding
anything to the contrary in this Lease, Lessor shall not be obligated to
exercise any standard nf reasonableness in determining whether to grant such
consent. The holding oa any auction on the Premises or Common Areas in violation
of this paragraph shall constitute a material default of this Lease.

34. SIGNS. Lessee shall not place any sign upon the Premises or the Office
Building Project without Lessor's prior written consent. Under no circumstances
shall Lessee place a sign on any roof of the Office Building Project.

35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.

36. CONSENTS. Except for paragraphs 33 (auctions) and 34 (signs) hereof,
wherever in this Lease the consent of one party is required to an act of the
other party such consent shall not be unreasonably withheld or delayed.

37. GUARANTOR. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.


                                  Page 9 of 12

<PAGE>


38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and observing
and performing all of the covenants, conditions and provisions on Lessee's part
to be observed and performed hereunder, Lessee shall have quiet possession of
the Premises for the entire term hereof subject to all of the provisions of this
Lease. The individuals executing this Lease on behalf of Lessar represent and
warrant to Lessee that they are fully authorized and legally capable of
executing this Lease on behalf of Lessor and that such execution is binding upon
all parties holding an ownership interest in the Office Building Project.

39.  OPTIONS. NOT APPLICABLE

     39.1 DEFINITION. As used in this paragraph the word "Option" has the
following meaning: (1) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (2) the option or right of first refusal to lease the
Premises or the right of first offer to lease the Premises or the right of first
refusal to lease other space within the Office Building Project or other
property of Lessor or the right of first offer to lease other space within the
Office Building Project or other property of Lessor, (3) the right or option to
purchase the Premises or the Office Building Project, or the right of first
refusal to purchase the Premises or the Office Building Project or the right of
first offer to purchase the Premises or the Office Building Project, or the
right or option to purchase other property of Lessor, or the right of first
refusal to purchase other property of Lessor or the right of first offer to
purchase other property of Lessor.

     39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease is
personal to the original Lessee and may be exercised only by the original Lessee
while occupying the Premises who does so without the intent of thereafter
assigning this Lease or subletting the Premises or any portion thereof, and may
not be exercised or be assigned, voluntarily or involuntarily, by or to any
person or entity other than Lessee; provided, however, that an Option may be
exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of
this Lease. The Options, if any, herein granted to Lessee are not assignable
separate and apart from this Lease, nor may any Option be separated from this
Lease in any manner, either by reservation or otherwise.

     39.3 MUITIPLE OPTIONS. in the event that Lessee has any multiple options to
extend or renew this Lease a later option cannot be exercised unless the prior
option to extend or renew this Lease has been so exercised.

     39.4 EFFECT OF DEFAULT ON OPTIONS.

          (a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary, (i) during the time
commencing from the date Lessor gives to Lessee a notice of default pursuant to
paragraph 13.1(c) or 13.1(d) and continuing until the noncompliance alleged in
said notice of default is cured, or (ii) during the period of time commencing on
the day after a monetary obligation to Lessor is due from Lessee and unpaid
(without any necessity for notice thereof to Lessee) and continuing until the
obligation is paid, or (iii) in the event that Lessor has given to Lessee three
or more notices of default under paragraph 13.1(c), or paragraph 13.1(d),
whether or not the defaults are cured, during the 12 month period of time
immediately prior to the time that Lessee attempts to exercise the subject
Option, (iv) if Lessee has committed any non-curable breach, including without
limitation those described in paragraph 13.1(b), or is otherwise in default of
any of the terms, covenants or conditions of this Lease.

          (b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of paragraph 39.4(a).

          (c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to
commence to cure a default specified in paragraph 13.1(d) within thirty (30)
days after the date that Lesser gives notice to Lessee of such default and/or
Lessee fails thereafter to diligently prosecute said cure to completion, (iii)
Lessor gives to Lessee three or more notices of default under paragraph 13.1(c),
or paragraph 13.1(d), whether or not the defaults are cured, or (iv) if Lessee
has committed any, non-curable breach, including without limitation those
described in paragraph 13.1(b), or is otherwise in default of any of the terms,
covenants and conditions of this Lease.

40. SECURITY MEASURES - LESSORS RESERVATIONS.

     40.1 Lessee hereby acknowledges that Lessor shall have no obligation
whatsoever to provide guard service or other security measures for the benefit
of the Premises or the Office Building Project. Lessee assumes all
responsibility for the protection of Lessee, its agents, and invitees and the
property of Lessee and of Lessee's agents and invitees from acts of third
parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option,
from providing security protection for the Office Building Project or any part
thereof, in which event the cost thereof shall be included within the definition
of Operating Expenses, as set forth in paragraph 4.2(b).

     40.2 Lessor shall have the following rights:

          (a) To change the name, address or title of the Office Building
Project or building in which the Premises are located upon not less than 90 days
prior written notice;

          (b) To, at Lessee's expense, provide and install Building standard
graphics on the door of the Premises and such portions of the Common Areas as
Lessor shall reasonably deem appropriate;

          (c) to permit any lessee the exclusive right to conduct any business
as long as such exclusive does not conflict with any rights expressly given
herein;

          (d) To place such signs, notices or displays as Lessor reasonably
deems necessary or advisable upon the roof, exterior of the buildings or the
Office Building Project or on pole signs in the Common Areas;

     40.3 Lessee shall not:

          (a) Use a representation (photographic or otherwise) of the Building
or the Office Building Project or their name(s) in connection with Lessee's
business;

          (b) Suffer or permit anyone, except in emergency, to go upon the roof
of the Building.

41. EASEMENTS.

     41.1 Lessor reserves to itself the right, from time to time, to grant such
easements, rights and dedications that Lessor deems necessary or desirable, and
to cause the recordation of Parcel Maps and restrictions, so long as such
easements, rights, dedications, Maps and restrictions do not unreasonably
interfere with the use of the Premises by Lessee. Lessee shall sign any of the
aforementioned documents upon request of Lessor and failure to do so shall
constitute a material default of this Lease by Lessee without the need for
further notice to Lessee.

     41.2 The obstruction of Lessee's view, air, or light by any structure
erected in the vicinity of the Building, whether by Lessor or third parties,
shall in no way affect this Lease or impose any liability upon Lessor.

42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one party to the other under the provisions
hereof, the party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment, and there shall survive the right on the part
of said party to institute suit for recovery of such sum. If it shall be
adjudged that there was no legal obligation on the part of said party to pay
such sum or any part thereof, said party shall be entitled to recover such sum
or so much thereof as it was not legally required to pay under the provisions of
this Lease.

43. AUTHORITY. If Lessee is a corporation, trust, or general or limited
partnership, Lessee, and each individual executing this Lease on behalf of such
entity, represent and warrant that such individual is duly authorized to execute
and deliver this Lease on behalf of said entity. If Lessee is a corporation,
trust or partnership, Lessee shall, within thirty (30) days after execution of
this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.

44. CONFLICT. Any conflict between the printed provisions, Exhibits or Addenda
of this Lease and the typewritten or handwritten provisions, if any, shall be
controlled by the typewritten or handwritten provisions.

45. NO OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee hsall not be deemed an offer to Lessee to lease.
This Lease shall become binding upon Lessor and Lessee only when fully executed
by both parties.

46. LENDER MODIFICATION. Lessee agrees to make such reasonable modifications to
this Lease as may be reasonably required by an institutional lender in
connection with the obtaining of normal financing or refinancing of the Office
Building Project.


                                 Page 10 of 12



<PAGE>

47. MULTIPLE PARTIES. if more than one person or entity is named as either
Lessor or Lessee herein, except as otherwise expressly provided herein, the
obligations of the Lessor or Lessee herein shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee,
respectively.

48. WORK LETTER. This Lease is supplemented by that certain Work Letter of even
date executed by Lessor and Lessee attached hereto as Exhibit C and incorporated
herein by this reference.

49. ATTACHMENTS. Attached hereto are the following documents which constitute a
part of this Lease:












LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.

           IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION
           TO YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR
           RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE
           ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES
           AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF
           THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES SHALL
           RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE
           LEGAL AND TAX CONSEQUENCES OF THIS LEASE.



          LESSOR                                        LESSEE
ILSE SULTANIMT & JSJ MANAGEMENT            BIOMERICA, INC.,
- -------------------------------------      -------------------------------------
                                           A DELAWARE CORPORATION


By /s/ Janet Moore Irani                   By /s/ Francis Capitanio
- -------------------------------------      -------------------------------------
   Janet Irani                                Francis Capitanio
Its Principal                              Its President
- -------------------------------------      -------------------------------------

By /s/ Jennifer Irani  /s/ Suan H. Irani   By
- -------------------------------------      -------------------------------------
  Jennifer Irani       Susan H. Irani
Its Principal                              Its
- -------------------------------------      -------------------------------------

By /s/ Ilse Sultanian
- -------------------------------------
   Ilse Sultanian
Its Co-onwer
- -------------------------------------

Executed at                                Executed at
- -------------------------------------      -------------------------------------

on                                         on
- -------------------------------------      -------------------------------------

Address                                    Address
- -------------------------------------      -------------------------------------








                                 Page 11 of 12
<PAGE>




NOTE:   These forms are often modified to meet changing requirements of law and
        needs of the Industry. Always write or call to make sure you are
        utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE
        ASSOCIATION, 100 South Flower Street, Suite 600, Los Angeles, CA 90017.
        (213) 687-8777.


















                                 Page 12 of 12
<PAGE>


                                ADDENDUM TO LEASE
                                -----------------


          THE FOLLOWING SHALL BE DEEMED ADDED TO THE LEASE DATED OCTOBER 1,
          2001, BY AND BETWEEN ILSE SUJTANTIAN & JSJ MANAGEMENT, JOINTLY
          REFERRED TO AS "LESSOR", AND BIOMERICA, INC., A DELAWARE CORPORATION,
          AS "LESSEE".

50.  Base rent schedule and escalations.
     -----------------------------------

     The Base Rent shall be escalated on September 1, 2003 by the amount
     equating to 3% of the Base Rent.

     Management allows Biomerica, Inc. to sublet approximately 1/2 of the 2nd
     story of front Building commonly known as 1527 Monrovia Avenue, however any
     proceeds collected from such activity will first be applied to any back
     rents due, if any.

51.  Security deposit.
     -----------------

     The Security deposit amount shall remain at zero.

52.  Real Estate Brokers.
     --------------------

     No real estate brokers are a part of this transaction.

53.  Operating Expenses.
     -------------------

     In addition to Paragraph 4.2, Lessee agrees to pay all Operating Expenses
     associated with its occupancy of the Premises ("NNN" lease"), including its
     own utility costs and janitorial services associated with Lessee's use,
     building liability and hazard insurance, and property taxes, with the
     exception of the space associated with the 1527 building which will be on a
     "gross" basis excluding electricity.

     Due to the 1527 building's shared electrical metering (and therefore one
     utility bill), the monthly invoice will be divided on a prorata basis per
     the Lessee's electrical usage. The Lessee's prorata amount will be
     determined in comparison to previous periods during which the Premises was
     occupied only by Lessee; the differential between the invoice amount during
     the period of the third floor vacancy and the period of Lessee's occupancy
     will be paid by the Lessee. Once invoiced by Lessor, the subject electrical
     payments will be made in a timely manner by Lessee. (Only if applicable)

54.  Property Tax Reassessment.
     --------------------------

     Lessor agrees to pay the assessed differential in any adjustment in the
     annual Property Tax bill associated with a change in ownership due to the
     sale of all or any part the Premises.

55.  Lease Termination.
     ------------------

     At the end of 18 months of occupancy after commencement of lease or
     thereafter, lessee has the option of providing lessor a LETTER OF INTENT TO
     VACATE with a minimum of a six (6) month notice delivered to lessor of this
     intent. Upon notice, Lessor will then grant lessee to vacate premises
     without penalty given all rents/misc. Lease expenses are paid current at
     time of delivery of notice.

56.  Trash.
     ------

     Disposal service fees to be split between lessor and lessee - each entity
     responsible for 50% of total billing when it comes due.



<PAGE>


57.  Common area maintenance.
     ------------------------

     Lessor will be responsible for the common area maintenance with respect to
     the following improvements: roofing, air conditioning units and elevators
     in front building, walkways, stairwells and roadways.






CONFIRMED AND ACCEPTED:

LESSOR:                                    LESSEE:

ILSE SULTANIAN & JSJ MANAGEMENT            BIOMERICA, INC.,
                                           A DELAWARE CORPORATION

By: /s/ Janet Irani                        By: /s/ Francis Capitanio
- -------------------------------------      -------------------------------------
    Janet Irani                                Francis Capitanio

Its: Principal, JSJ Management             Its: President
- -------------------------------------      -------------------------------------

By: /s/ Jennifer Irani
- -------------------------------------
    Jennifer Irani

Its: Principal, JSJ Management
- -------------------------------------

By: /s/ Ilse Sultanian
- -------------------------------------
   Ilse Sultanian

Its" Co-owner
- -------------------------------------

Date: 10/20/01                             Date: October 17, 2001
- -------------------------------------      -------------------------------------


/s/ Susan H. Irani
Susan H. Irani
Principal, JSJ Management


<PAGE>


                             STANDARD OFFICE LEASE
                                   FLOOR PLAN









                                   EXHIBIT A
<PAGE>

                            RULES AND REGULATIONS FOR
                              STANDARD OFFICE LEASE


Dated: October 1, 2001

By and Between Ilse Sultanian & JSJ Management and Biomerica. Inc., a Delaware
Corporation


                                  GENERAL RULES

     1. Lessee shall not suffer or permit the obstruction of any Common Areas,
including driveways, walkways and stairways.

     2. Lessor reserve the right to refuse access to any persons Lessor in good
faith judges to be a threat to the safety, reputation, or property of the Office
Building Project and its occupants.

     3. Lessee shall not make or permit any noise or odors that annoy or
interfere with other lessees or persons having business within the Office
Building Project.

     4. Lessee shall not keep animals or birds within the Office Building
Project, and shail not bring bicycles, motorcycles or other vehicies into areas
not designated as authorized for same.

     5. Lessee shall not make, suffer or permit litter except in appropriate
receptacles for that purpose.

     6. Lessee shall not alter any lock or install new or additional locks or
bolts.

     7. Lessee shah be responsible for the inappropriate use of any toilet
rooms, plumbing or other utilities. No foreign substances of any kind are to be
inserted therein.

     8. Lessee shall not deface the walls, partitions or other surfaces of the
Premises or Office Building Project.

     9. Lessee shall not suffer or permit anything in or around the Premises or
Building that causes excessive vibration or floor loading in any part of the
Office Building Project.

     10. Furniture, significant freight and equipment shall be moved into or out
of the building only with the Lessor's knowledge end consent, and subject to
such reasonable limitations, techniques and timing, as may be designated by
Lessor. Lessee shah be responsible for any damage to the Office Building Project
arising from any such activity.

     11. Lessee shall not employ any service or contractor for services or work
to be performed in the Building, except as approved by Lessor.

     12. Lessor reserves the right to close and lock the Building on Saturdays,
Sundays and legal holidays, and on other days between the hours of 7:00 P.M. and
7:00 A.M. of the following day. If Lessee uses the Premises during such periods,
Lessee shall be responsible for securely locking any doors it may have opened
for entry.

     13. Lessee shall return all keys at the termination of its tenancy and
shall be responsible for the cost of repiacing any keys that are lost.

     14. No window coverings, shades or awnings shall be installed or used by
Lessee.

     15. No Lessee, employee or invitee shall go upon the roof of the Building.

     16. Lessee shall not suffer or permit smoking or carrying of lighted cigars
or cigarettes in areas reasonably designated by Lessor or by applicable
governmental agencies as non-smoking areas.

     17. Lessee shall not use any method of heating or air conditioning other
than as provided by Lessor.

     18. Lessee shall not install, maintain or operate any vending machines upon
the Premises without Lessors written consent.

     19. The Premises shall not be used for lodging or manufacturing, cooking or
food preparation.

     20. Lessee shall comply with at safety, fire protection and evacuation
regulations established by Lessor or any applicable governmental agency.

     21. Lessor reserves the right to waive any one of these rules or
regulations, and/or as to any particular Lessee, and any such waiver shall not
constitute a waiver of any other rule or regulation or any subsequent
application thereof to such Lessee.

     22. Lessee assumes all risks from theft or vandalism and agrees to keep its
Premises locked as may be required.

     23. Lessor reserves the right to make such other reasonable rules and
regulations as it may from time to time deem necessary for the appropriate
operation and safety of the Office Buliding Project and its occupants. Lessse
agrees to abide by these and such rules and regulations.

                                  PARKING RULES

     1. Parking areas shall be used only for parking by vehicles no longer than
full size, passenger automobiles herein called "Permitted Size Vehicles."
Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized
Vehicles."

     2. Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or
invitees to be loaded, unloaded, or parked in areas other than those designated
by Lessor for such activities.

     3. Parking stickers or identification devices shall be the property of
Lessor and be returned to Lessor by the holder thereof upon termination of the
holder's parking privileges. Lessee will pay such replacement charge as is
reasonably established by Lessor for the loss of such devices.

     4. Lessor reserves the right to refuse the sale of monthly identification
devices to any person or entity that willfully refuses to comply with the
applicable rules, reguiations, laws and/or agreements.

     5. Lessor reserves the right to relocate all or a part of parking spaces
from floor to floor, within one floor, and/or to reasonably adjacent offsite
location(s), and to reasonabiy allocate them between compact and standard size
spaces, as long as the same complies with applicable laws, ordinances and
regulations.

     6. Users of the parking area will obey all posted signs and park only in
the areas designated for vehicle parking.

     7. Unless otherwise instructed, every person using the parking area is
required to park and lock his own vehicle. Lessor will not be responsible for
any damage to vehicles, injury to persons or loss of property, all of which
risks are assumed by the party using the parking area.

     8. Validation, if established, will be permissible only by such method or
methods as Lesser and/or its licensee may establish at rates generally
applicable to visitor parking.

     9. The maintenance, washing, waxing or cleaning of vehicles in the parking
structure or Common Areas is prohibited.

     10. Lessee shall be responsible for seeing that all of its employees,
agents and invitees comply with the applicable parking rules, regulations, laws
and agreements.

     11. Lessor reserves the right to modify these rules and/or adopt such other
reasonable and non-discriminatory rules and regulations as it may deem necessary
for the proper operation of the parking area.

     12. Such parking use as is herein provided is intended merely as a license
only and no bailment is intended or shall be created hereby.



                                   EXHIBIT B


                                  Page 1 of 1


<PAGE>


                      WORK LETTER TO STANDARD OFFICE LEASE

Dated: ___________________________________


By and between: ________________________________________________________________

The premises shall be constructed in accordance with Lessor's Standard
Improvements, as follows:

1.   PARTITIONS
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

2. WALL SURFACES
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

3. DRAPERIES
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

4. CARPETING
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

5. DOORS
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

6. ELECTRICAL AND TELEPHONE OUTLETS
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

7. CEILING
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

8. LIGHTING
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

9. HEATING AND AIR CONDITIONING DUCTS
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

10. SOUND PROOFING
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

11. PLUMBING
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

12. ENTRANCE DOORS
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

13. COMPLETION OF IMPROVEMENTS
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________



<PAGE>

cannot in good faith be modified within ten (10) days after such rejection to be
acceptable to Lessor and Lessee, this Lease shall terminate and neither party
shall thereafter be obligated to the other party for any reason whatsoever
having to do with this Lease, except that Lessee shah be refunded any security
deposit or prepaid rent. The plans and specifications, when approved by Lessee,
shall supersede any prior agreement concerning the improvements.

15. CONSTRUCTION.

     If Lessor's cost of constructing the improvements in the Premises exceeds
Lessor's Standard improvements, Lessee shall pay to Lessor in cash before the
commencement of such construction a sum equal to such excess.

     If the final plans and specifications are approved by Lessor and Lessee and
Lessee pays Lessor for such excess, then Lessor shall, at its sole cost and
expense, construct the Improvements substantially in accordance with said
approved final plans and specifications and all applicable rules, regulations,
laws or ordinances.

16. COMPLETION.

     16.1 Lessor shall obtain a building permit to construct the improvements as
soon as possible.

     16.2 Lessor shall complete the construction of the improvements as soon as
reasonably possible after the obtaining of necessary building permits.

     16.3 The term "Completion", as used in this Work Letter, is hereby defined
to mean the date the building department of the municipality having jurisdiction
of the Premises shall have made a final Inspection of the Improvements and
authorized a final release of restrictions on the use of public utilities in
connection therewith and the same are in a broom-clean condition.

     16.4 Lessor shall use its best efforts to achieve Completion of the
improvements on or before the Commencement Date set forth in paragraph 1.5 of
the Basic Lease Provisions or within one hundred eight (180) days after Lessor
obtains the building permit from the applicable building department, whichever
is later.

     16.5 In the event that the improvements or any portion thereof have not
reached Completion by the Commencement Date, this Lease shall not be invalid,
but rather Lessor shall complete the same as soon thereafter as is possible and
Lessor shall not be liable to Lessee for damages in any respect whatsoever.

     16.6 If Lessor shall be delayed at any time in the progress of the
construction of the Improvements or any portion thereof by extra work, changes
in construction ordered by Lessee, or by strikes, lockouts, fire, delay in
transportation, unavoidable casualties, rain or weather conditions, governmental
procedures or delay, or by any other cause beyond Lessor's control, then the
Commencement Date established in paragraph 1.5 of the Lease shall be extended by
the period of such delay.

17. TERM

     Upon Completion of the Improvements as defined in paragraph 16.3 above,
Lessor and Lessee shall execute an amendment to the Lease selling forth the date
of tender of possession as defined in paragraph 3.2.1 of the Lease or of actual
taking of possession, whichever first occurs, as the Commencement Date of this
Lease.

18. WORK DONE BY LESSEE.

     Any work done by Lessee shall be done only with Lessor's prior written
consent and in conformity with a valid building permit and all applicable rules,
regulations, laws and ordinances, and be done in a good and workmanlike manner
of good and sufficient materials. All work shall be done only with union labor
and only by contractors approved by Lessor, it being understood that all
plumbing, mechanical, electrical wiring and coiling work are to be done only by
contractors designated by Lessor.

19. TAKING OF POSSESSION OF PREMISES.

     Lessor shall notify Lessee of the Estimated Completion Date at least ten
(10) days before said date. Lessee shall thereafter have the right to enter the
Premises to commence construction of any Improvements Lessee is to construct and
to equip and fixturize the Premises, as long as such entry does net interfere
with Lessor's work. Lessee shall take possession of the Premises upon the tender
thereof as provided in paragraph 3.2.1 of the Lease to which this Work Letter is
attached. Any entry by Lessee of the Premises under this paragraph shall be
under all of the terms and provisions of the Lease to which this Work Letter is
attached.

20. ACCEPTANCE OF PREMISES

     Lessee shall notify Lessor in writing of any items that Lessee deems
incomplete or incorrect in order for the Premises to be acceptable to Lessee
within ten (10) days following Tender of Possession as set forth in paragraph
3.2.1 of the Lease to which this Work Letter is attached. Lessee shall be deemed
to have accepted the Premises and approved construction if Lessee does not
deliver such a list to Lessor within said number of days.


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>4
<FILENAME>biomerica_10kex99-1.txt
<TEXT>
<PAGE>
EXHIBIT 99.1


                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report on Form 10-KSB of Biomerica Inc. for the
annual period ended May 31, 2002 (the Report) as filed with the Securities and
Exchange Commission on the date hereof, I, Janet Moore, Chief Financial Officer
of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to
ss.906 of the Sarbanes-Oxley Act of 2002, that:

         (1)  The Report fully complies with the requirements of Section 13(a)
              or 15(d) of the Securities Exchange Act of 1934; and

         (2)  The information contained in the Report fairly presents, in all
              material respects, the financial condition and results of
              operations of the Company.








                                              /s/ Janet Moore
                                              --------------------------
                                              Janet Moore
                                              Chief Financial Officer


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2
<SEQUENCE>5
<FILENAME>biomerica_10kex99-2.txt
<TEXT>
<PAGE>
EXHIBIT 99.2


                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report on Form 10-KSB of Biomerica Inc. for the
annual period ended May 31, 2002 (the Report) as filed with the Securities and
Exchange Commission on the date hereof, I, Zackary S. Irani, Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that:

         (1)  The Report fully complies with the requirements of Section 13(a)
              or 15(d) of the Securities Exchange Act of 1934; and

         (2)  The information contained in the Report fairly presents, in all
              material respects, the financial condition and results of
              operations of the Company.








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


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.3
<SEQUENCE>6
<FILENAME>biomerica_10kex99-3.txt
<TEXT>
<PAGE>
EXHIBIT 99.3


                        BIOMERICA, INC. AND SUBSIDIARIES


                                    CONTENTS

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





 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                         FS-2


 CONSOLIDATED FINANCIAL STATEMENTS

     Consolidated Balance Sheet as of May 31, 2002                          FS-3

     Consolidated Statements of Operations and
       Comprehensive Loss for the Years Ended
       May 31, 2002 and 2001, respectively                           FS-4 - FS-5

     Consolidated Statements of Shareholders' Equity
       for  the Years Ended May 31, 2002 and 2001                    FS-6 - FS-7

     Consolidated Statements of Cash Flows for the
       Years Ended May 31, 2002 and 2001                             FS-8 - FS-9


     Notes to Consolidated Financial Statements                    FS-10 - FS-51



<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, 2002, and the related
consolidated statements of operations and comprehensive loss, shareholders'
equity and cash flows for the years ended May 31, 2002 and 2001. 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, 2002, and the results of their operations and their
cash flows for the years ended May 31, 2002 and 2001, 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.




                                                            /a/ BDO SEIDMAN, LLP

Costa Mesa, California
August 9, 2002



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

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

MAY 31,                                                               2002
- --------------------------------------------------------------------------------

ASSETS

CURRENT ASSETS
   Cash and cash equivalents                                         $ 329,277
   Available for-sale securities                                         2,532
   Accounts receivable, less allowance for doubtful
     accounts and sales returns of $196,452                          1,504,344
   Inventories, net                                                  2,921,012
   Notes receivable                                                      2,419
   Prepaid expenses and other                                          122,474
- --------------------------------------------------------------------------------

Total current assets                                                 4,882,058
- --------------------------------------------------------------------------------

INVENTORIES, non-current                                                15,000
- --------------------------------------------------------------------------------

PROPERTY AND EQUIPMENT, at cost
   Equipment                                                         2,895,169
   Construction in progress                                              7,400
   Furniture, fixtures and leasehold improvements                      407,683
- --------------------------------------------------------------------------------
                                                                     3,310,252

ACCUMULATED DEPRECIATION AND AMORTIZATION                           (3,082,411)
- --------------------------------------------------------------------------------

Net property and equipment                                             227,841

INTANGIBLE ASSETS, net of accumulated amortization                     116,181

OTHER ASSETS                                                            35,546
- --------------------------------------------------------------------------------

                                                                   $ 5,276,626
================================================================================


LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
   Line of credit                                                  $    65,669
   Accounts payable and accrued expenses                               906,190
   Accrued compensation                                                307,982
   Current portion of shareholder loans                                 30,000
   Net liabilities from discontinued operations                        326,187
- --------------------------------------------------------------------------------

Total current liabilities                                            1,636,028
- --------------------------------------------------------------------------------

SHAREHOLDER LOANS, net of current portion                              345,000

MINORITY INTEREST                                                    2,084,892
- --------------------------------------------------------------------------------

SHAREHOLDERS' EQUITY
   Common stock, $.08 par value; 25,000,000 shares
     authorized; 5,172,364 shares issued and
     outstanding and 28,333 shares subscribed                          437,538
   Additional paid in capital                                       16,981,982
   Accumulated other comprehensive loss                                (20,237)
   Accumulated deficit                                             (16,188,577)
- --------------------------------------------------------------------------------

Total shareholders' equity                                           1,210,706
- --------------------------------------------------------------------------------

                                                                   $ 5,276,626
================================================================================

                    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,                                               2002            2001
- ------------------------------------------------------------------------------------------
<S>                                                            <C>            <C>
NET SALES                                                      $ 8,598,054    $ 8,839,252

Cost of sales                                                    6,062,462      6,042,918
- ------------------------------------------------------------------------------------------

GROSS PROFIT                                                     2,535,592      2,796,334
- ------------------------------------------------------------------------------------------

OPERATING EXPENSES
   Selling, general and administrative                           2,841,255      3,092,059
   Research and development                                        159,758        322,121
- ------------------------------------------------------------------------------------------

Total operating expenses                                         3,001,013      3,414,180
- ------------------------------------------------------------------------------------------

OPERATING LOSS FROM CONTINUING OPERATIONS                         (465,421)      (617,846)

OTHER INCOME (EXPENSE)
   Interest expense, net of interest income                        (40,370)       (25,442)
   Other income (expense), net                                     (32,667)        47,762
- ------------------------------------------------------------------------------------------

LOSS FROM CONTINUING OPERATIONS, before minority interest
   in net loss of consolidated subsidiaries and income taxes      (538,458)      (595,526)

MINORITY INTEREST IN NET (INCOME) LOSS OF
   CONSOLIDATED SUBSIDIARIES                                       (26,154)        80,894
- ------------------------------------------------------------------------------------------

LOSS FROM CONTINUING OPERATIONS, before income taxes              (564,612)      (514,632)

INCOME TAX EXPENSE                                                   2,060          1,600
- ------------------------------------------------------------------------------------------

NET LOSS FROM CONTINUING OPERATIONS                               (566,672)      (516,232)

DISCONTINUED OPERATIONS
   Income (loss) from discontinued operations, net                 (78,544)    (2,156,086)
   Gain on sale, net of tax of $0                                  224,481             --
- ------------------------------------------------------------------------------------------

NET LOSS                                                          (420,735)    (2,672,318)


                                           FS-4
<PAGE>

                                                          BIOMERICA, INC. AND SUBSIDIARIES

                                                 CONSOLIDATED STATEMENTS OF OPERATIONS AND
                                                            COMPREHENSIVE LOSS (CONTINUED)
==========================================================================================


YEARS ENDED MAY 31,                                                  2002         2001
- ------------------------------------------------------------------------------------------

OTHER COMPREHENSIVE LOSS, net of tax
   Unrealized loss on available-for-sale securities                 (9,948)        (5,966)
- ------------------------------------------------------------------------------------------

COMPREHENSIVE LOSS                                             $  (430,683)   $(2,678,284)
==========================================================================================

BASIC NET LOSS PER COMMON SHARE:
   Net loss from continuing operations                         $     (0.11)   $     (0.11)
   Net income (loss) from discontinued operations                     0.03          (0.44)
- ------------------------------------------------------------------------------------------

Basic net loss per common share                                $     (0.08)   $     (0.55)
==========================================================================================

DILUTED NET LOSS PER COMMON SHARE:
   Net loss from continuing operations                         $     (0.11)   $     (0.11)
   Net income (loss) from discontinued operations                     0.03          (0.44)
- ------------------------------------------------------------------------------------------

Diluted net loss per common share                              $     (0.08)   $     (0.55)
==========================================================================================

WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
  EQUIVALENT SHARES
    Basic                                                        5,100,719      4,814,790
==========================================================================================

    Diluted                                                      5,100,719      4,814,790
==========================================================================================


                              See accompanying notes to consolidated financial statements.


                                           FS-5
</TABLE>

<PAGE>
<TABLE>

                                                                                                    BIOMERICA, INC. AND SUBSIDIARIES

                                                                                     CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
====================================================================================================================================
<CAPTION>

                                                                      COMMON STOCK        ACCUMULATED
                               COMMON STOCK        ADDITIONAL           SUBSCRIBED            OTHER
                           ----------------------    PAID-IN      ----------------------  COMPREHENSIVE  ACCUMULATED
                            SHARES      AMOUNT       CAPITAL        SHARES       AMOUNT    INCOME (LOSS)   DEFICIT        TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------

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

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


                                                                FS-6
<PAGE>

                                                                                                    BIOMERICA, INC. AND SUBSIDIARIES

                                                                         CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
====================================================================================================================================

                                                                      COMMON STOCK        ACCUMULATED
                               COMMON STOCK        ADDITIONAL           SUBSCRIBED            OTHER
                           ----------------------    PAID-IN      ----------------------  COMPREHENSIVE  ACCUMULATED
                            SHARES      AMOUNT       CAPITAL        SHARES       AMOUNT    INCOME (LOSS)   DEFICIT        TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------

Issuance of subscribed
  shares                     126,075      10,086         80,688     (126,075)    (90,774)          --              --            --

Private placement             14,166       1,133          9,067           --          --           --              --        10,200

Change in unrealized
  gain (loss) on
  available-for-sale
  securities                      --          --             --           --          --       (9,948)             --        (9,948)

Common stock issued
  for compensation            31,819       2,545         15,194           --          --           --              --        17,739

Exercise of stock options      1,625         130            998           --          --           --              --         1,128

Common stock issued
  for consulting
  services rendered          108,000       8,640         55,560           --          --           --              --        64,200

Compensation expense in
  connection with options
  and warrants granted            --          --         71,507           --          --           --              --        71,507

Common stock subscribed
  for services rendered           --          --             --        8,333       3,750           --              --         3,750

Net loss                          --          --             --           --          --           --        (420,735)     (420,735)
- ------------------------------------------------------------------------------------------------------------------------------------

Balances, May 31, 2002     5,172,364  $  413,788   $ 16,981,982       28,333    $ 23,750    $ (20,237)   $(16,188,577)  $ 1,210,706
====================================================================================================================================


                                                                        See accompanying notes to consolidated financial statements.

                                                                FS-7
</TABLE>
<PAGE>
<TABLE>

                                                             BIOMERICA, INC. AND SUBSIDIARIES

                                                        CONSOLIDATED STATEMENTS OF CASH FLOWS
=============================================================================================

 FOR THE YEARS ENDED MAY 31,                                             2002        2001
- ---------------------------------------------------------------------------------------------
<S>                                                                   <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss from continuing operations                                $(566,672)   $(516,232)
   Adjustments to reconcile net loss to net cash (used in)
    provided by continuing operating activities:
     Depreciation and amortization                                      192,418      207,510
     Provision for losses on accounts receivable                          3,893       (4,235)
     Provision for losses on inventory                                   32,683      129,034
     Realized gain on sale of available-for-sale securities             (10,026)     (34,427)
     Write-off of intangibles                                           100,320           --
     Write-off of notes receivable                                        7,800           --
     Warrants and options issued for services rendered                   71,507       89,336
     Common stock issued or subscribed for services rendered             85,689      265,625
     Net loss on sale of property and equipment                              --        2,000
     Minority interest in net profits (loss) of consolidated
       subsidiaries                                                      26,154      (80,894)
     Changes in current liabilities and assets
       Accounts receivable                                                9,544      176,385
       Inventories                                                      (91,508)    (128,909)
       Prepaid expenses and other                                       (36,705)      53,807
       Accounts payable and other accrued liabilities                   (13,042)      74,319
       Accrued compensation                                              52,880      (67,743)
       Other assets                                                       3,992           --
- ---------------------------------------------------------------------------------------------

Net cash (used in) provided by operating activities                    (131,073)     165,576
- ---------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Sales of available-for-sale securities                                39,116       85,665
   Decrease in notes receivable                                              --       16,600
   Purchases of property and equipment                                  (11,728)     (61,858)
   Increase in intangible assets                                        (20,436)     (20,090)
   Other assets                                                              --      (19,446)
   Proceeds from sale of subsidiary                                     212,500           --
- ---------------------------------------------------------------------------------------------

Net cash provided by investing activities                               219,452          871
- ---------------------------------------------------------------------------------------------



                                             FS-8
<PAGE>


                                                             BIOMERICA, INC. AND SUBSIDIARIES


                                            CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
=============================================================================================



 FOR THE YEARS ENDED MAY 31,                                             2002        2001
- ---------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net decrease under line of credit agreement                          (74,331)     (20,000)
   Increase in shareholder loan                                         280,000       95,000
   Change in of minority interests                                       11,782       15,682
   Exercise of stock options                                              1,128        6,768
   Sale of common stock, net of offering expenses                        10,200      242,212
- ---------------------------------------------------------------------------------------------

Net cash provided by financing activities                               228,779      339,662
- ---------------------------------------------------------------------------------------------

Net cash used in discontinued operations                               (114,725)    (991,719)
- ---------------------------------------------------------------------------------------------

Net change in cash and cash equivalents                                 202,433     (485,610)

CASH AND CASH EQUIVALENTS, beginning of year                            126,844      612,454
- ---------------------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS, end of year                                $ 329,277    $ 126,844
=============================================================================================

SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION
 CASH PAID DURING THE YEAR FOR:
     Interest                                                         $  17,539    $  19,931
=============================================================================================

     Income taxes                                                     $   2,060    $   1,600
=============================================================================================

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
 FINANCING ACTIVITIES
   Change in unrealized holding gain (loss) on
     available-for-sale securities                                    $  (9,948)   $   5,966
=============================================================================================

                                 See accompanying notes to consolidated financial statements.

                                             FS-9
</TABLE>

<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


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 and the
                    design, manufacture and distribution of various orthodontic
                    products.

                    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 and Allergy Immuno
                    Technologies, Inc. was sold in May 2002 (see Notes 2 and
                    13). ReadyScript and Allergy Immuno Technologies, Inc. were
                    contributors to the Company's losses. The Company has also
                    obtained a line of credit from a shareholder/officer (Note
                    6) which it has and will continue to rely on to help fund
                    operations. The Company has reduced operating costs through
                    certain cost reduction efforts and plans to concentrate on
                    its core business in Lancer and Biomerica to increase sales.
                    Management believes that cash flows from operations and its
                    available credit coupled with reduced costs and anticipated
                    increased sales will enable the Company to fund operations
                    for at least the next twelve months. There can be no
                    assurances that the Company will be able to become
                    profitable, generate positive cash flows from operations or
                    obtain the necessary equity or debt financing to fund and
                    sustain operations in the future.


2. SUMMARY OF       PRINCIPLES OF CONSOLIDATION
   SIGNIFICANT
   ACCOUNTING       The consolidated financial statements for the years ended
   POLICIES         May 31, 2002 and 2001 (see Note 3) include the accounts of
                    Biomerica, Inc. ("Biomerica"), Lancer Orthodontics, Inc.
                    ("Lancer"), Allergy Immuno Technologies, Inc. ("AIT") (as
                    discontinued operations) and ReadyScript, Inc. (as
                    discontinued operations). All significant intercompany
                    accounts and transactions have been eliminated in
                    consolidation.


                                     FS-10
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


2. SUMMARY OF       ACCOUNTING ESTIMATES
   SIGNIFICANT
   ACCOUNTING       The preparation of financial statements in conformity with
   POLICIES         accounting principles generally accepted in the United
   (CONTINUED)      States of America requires management to make estimates and
                    assumptions that affect the reported amounts of assets and
                    liabilities and disclosure of contingent assets and
                    liabilities at the date of the financial statements, and the
                    reported amounts of revenues and expenses during the
                    reported period. Actual results could materially differ from
                    those estimates.

                    FAIR VALUE OF FINANCIAL INSTRUMENTS

                    The Company has financial instruments whereby the fair
                    market value of the financial instruments could be different
                    than that recorded on a historical basis. The Company's
                    financial instruments consist of its cash and cash
                    equivalents, accounts receivable, notes receivable, line of
                    credit and accounts payable. The carrying amounts of the
                    Company's financial instruments approximate their fair
                    values at May 31, 2002.

                    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. No one customer
                    accounted for 10% or more of gross accounts receivable for
                    the year ended May 31, 2002. No one customer accounted for
                    10% or more of revenues for the years ended May 31, 2002 and
                    2001.


                                     FS-11
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


2. SUMMARY OF       At May 31, 2002, one company accounted for 17.3% of accounts
   SIGNIFICANT      payable. No company accounted for more than 10% of purchases
   ACCOUNTING       for the years ended May 31, 2002 and 2001.
   POLICIES
   (CONTINUED)
                    CASH EQUIVALENTS

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

                    AVAILABLE-FOR-SALE SECURITIES

                    The Company accounts for investments in accordance with
                    Statement of Financial Accounting Standards No. 115 (SFAS
                    115), "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
                    SECURITIES." This statement addresses the accounting and
                    reporting for investments in equity securities which have
                    readily determinable fair values and all investments in debt
                    securities. The Company's marketable equity securities are
                    classified as available-for-sale under SFAS 115 and reported
                    at fair value, with changes in the unrealized holding gain
                    or loss included in shareholders' equity. Available-for-sale
                    securities consist of common stock of unrelated
                    publicly-traded companies and are stated at market value in
                    accordance with SFAS 115. Cost for purposes of computing
                    realized gains and losses is computed on a specific
                    identification basis. The proceeds from the sale of
                    available-for-sale securities during fiscal 2002 and 2001
                    totaled $39,116 and $85,665, 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 $(9,948)
                    and $(5,966) for the years ended May 31, 2002 and 2001,
                    respectively.




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

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


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

                    Inventories consist of the following:

                    MAY 31,                                            2002
                    ------------------------------------------------------------

                    Raw materials                                  $    782,210
                    Work in progress                                    437,217
                    Finished products                                 1,988,469
                    Inventory reserve                                  (286,884)
                    ------------------------------------------------------------

                                                                   $  2,921,012
                    ============================================================

                    Approximately $1,858,000 of Lancer's gross inventory is
                    located at its manufacturing facility in Mexico as of May
                    31, 2002.

                    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.


                                     FS-13
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


2. SUMMARY OF       Depreciation and amortization are provided over the
   SIGNIFICANT      estimated useful lives of the related assets, ranging from 3
   ACCOUNTING       to 12 years, using straight-line and declining-balance
   POLICIES         methods. Leasehold improvements are amortized over the
   (CONTINUED)      lesser of the estimated useful life of the asset or the term
                    of the lease. Depreciation expense amounted to $101,968 and
                    $119,325 for the years ended May 31, 2002 and 2001,
                    respectively. At May 31, 2002, approximately $26,500 of
                    property and equipment, net of accumulated depreciation and
                    amortization, is located at Lancer's manufacturing facility
                    in Mexico.

                    Management of the Company assesses the recoverability of
                    property and equipment by determining whether the
                    depreciation and amortization of such assets over their
                    remaining lives can be recovered through projected
                    undiscounted cash flows. The amount of impairment, if any,
                    is measured based on fair value (projected discounted cash
                    flows) and is charged to operations in the period in which
                    such impairment is determined by management. Management has
                    determined that there is no impairment of property and
                    equipment at May 31, 2002.

                    INTANGIBLE ASSETS

                    Intangible assets are being amortized using the
                    straight-line method over the useful life, not to exceed 18
                    years for marketing and distribution rights and purchased
                    technology use rights, and 17 years for patents. Marketing
                    and distribution rights include repurchased sales
                    territories. Technology use rights consists of the purchase
                    of manufacturing assets and technology. Amortization
                    amounted to $90,450 and $88,463 for the years ended May 31,
                    2002 and 2001, 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. During the year ended May 31,
                    2002, management determined that a license had been impaired
                    as Biomerica no longer manufactured the product covered by
                    the license. The Company recorded an impairment expense for
                    the unamortized balance of the license in the amount of
                    $100,320 which is reflected in cost of sales in the
                    accompanying statement of operations for the year ended May
                    31, 2002.


                                     FS-14
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


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 parties.
   (CONTINUED)      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 the Company'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, 2002 AND 2001
================================================================================


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

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

                    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.


                                     FS-16
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


2. SUMMARY OF       Lancer is subject to the same risks of product liability.
   SIGNIFICANT      Lancer currently has product liability insurance. Lancer
   ACCOUNTING       also is subject to the risk of loss of its product liability
   POLICIES         insurance and the consequent exposure to liability.
   (CONTINUED)
                    HAZARDOUS MATERIALS - Biomerica's manufacturing and research
                    and development involves the controlled use of hazardous
                    materials and chemicals. Although Biomerica believes that
                    safety procedures for handling and disposing of such
                    materials comply with the standards prescribed by state and
                    Federal regulations, the risk of accidental contamination or
                    injury from these materials cannot be completely eliminated.
                    In the event of such an accident, the Company could be held
                    liable for any damages that result and any such liability
                    could exceed the resources of the Company. The Company may
                    incur substantial costs to comply with environmental
                    regulations.

                    STOCK-BASED COMPENSATION

                    During 1995, the Financial Accounting Standards Board issued
                    Statement of Financial Accounting Standards No. 123 ("SFAS
                    123"), "ACCOUNTING FOR STOCK-BASED COMPENSATION," which
                    defines a fair value based method of accounting for
                    stock-based compensation. However, SFAS 123 allows an entity
                    to continue to measure compensation cost related to stock
                    and stock options issued to employees using the intrinsic
                    method of accounting prescribed by Accounting Principles
                    Board Opinion No. 25 ("APB 25"), "ACCOUNTING FOR STOCK
                    ISSUED TO EMPLOYEES." Entities electing to remain with the
                    accounting method of APB 25 must make pro forma disclosures
                    of net (loss) income and (loss) earnings per share, as if
                    the fair value method of accounting defined in SFAS 123 had
                    been applied (see Note 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,
                    2002, Biomerica owned 31.63% of Lancer and 88.9% of
                    ReadyScript. Biomerica sold its interest in AIT on May 30,
                    2002 (see Notes 3 and 13).


                                     FS-17
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


2. SUMMARY OF       REVENUE RECOGNITION
   SIGNIFICANT
   ACCOUNTING       Revenues from product sales are recognized at the time the
   POLICIES         product is shipped, at which point title passes. An
   (CONTINUED)      allowance is established for estimated returns as revenue is
                    recognized.

                    RESEARCH AND DEVELOPMENT

                    Research and development expenses are expensed as incurred.
                    The Company expensed approximately $160,000 and $322,000 of
                    research and development expenses during the years ended May
                    31, 2002 and 2001, 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 and Lancer file separate income tax returns for
                    Federal and state income tax purposes.


                                     FS-18
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


2. SUMMARY OF       ADVERTISING COSTS
   SIGNIFICANT
   ACCOUNTING       The Company reports the cost of all advertising as expense
   POLICIES         in the period in which those costs are incurred. Advertising
   (CONTINUED)      costs were approximately $27,000 and $50,000 for the years
                    ended May 31, 2002 and 2001, respectively.

                    LOSS PER SHARE

                    In February 1997, the Financial Accounting Standards Board
                    ("FASB") issued Statement of Financial Accounting Standards
                    No. 128 ("SFAS 128"), "EARNINGS PER SHARE" ("EPS"). SFAS 128
                    requires dual presentation of basic EPS and diluted EPS on
                    the face of all income statements issued after December 15,
                    1997 for all entities with complex capital structures. Basic
                    EPS is computed as net loss 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,
                                                    ----------------------------
                                                         2002          2001
                    ------------------------------------------------------------

                    Numerator:
                      Loss from continuing
                        operations                  $   (566,672)  $   (516,232)
                      Gain (loss) from
                        discontinued operations          145,937     (2,156,086)
                    ------------------------------------------------------------

                    Numerator for basic and diluted net
                      loss per
                      common share                  $   (420,735)  $ (2,672,318)
                    ============================================================



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

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


2. SUMMARY OF                                       For the Years Ended May 31,
   SIGNIFICANT                                      ----------------------------
   ACCOUNTING                                            2002          2001
   POLICIES         ------------------------------------------------------------
   (CONTINUED)      Denominator for basic net loss
                      per common share                 5,100,719      4,814,790
                    Effect of dilutive securities:
                      Options and warrants                    --             --
                    ------------------------------------------------------------

                    Denominator for diluted net loss
                      per common share                 5,100,719      4,814,790
                    ============================================================


                    Basic net loss per common share:
                      Loss from continuing
                        operations                  $      (0.11)  $      (0.11)
                      Gain (loss) from
                        discontinued operations             0.03          (0.44)
                    ------------------------------------------------------------

                    Basic net loss per common share $      (0.08)  $      (0.55)
                    ============================================================


                    Diluted net loss per common share:
                      Loss from continuing
                        operations                  $      (0.11)  $      (0.11)
                      Gain (loss) from
                        discontinued operations             0.03          (0.44)
                    ------------------------------------------------------------

                    Diluted net loss per common
                      share                         $      (0.08)  $      (0.55)
                    ============================================================

                    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, 2002, there was a total of 3,084,886 potential
                    dilutive shares of common stock.


                                     FS-20
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


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.

                    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 July 2001, the Financial Accounting Standards Board
                    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 adopted SFAS 141 effective July 1,
                    2002.


                                     FS-21
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


2. SUMMARY OF       In July 2001, the FASB issued Statement of Financial
   SIGNIFICANT      Accounting Standards No. 142 ("SFAS 142"), "Goodwill and
   ACCOUNTING       Intangible Assets", which revises the accounting for
   POLICIES         purchased goodwill and intangible assets. Under SFAS 142,
   (CONTINUED)      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.

                    In August 2001, the FASB issued Statement of Financial
                    Accounting Standards FAS No. 143 ("SFAS 143"), "Accounting
                    for Asset Retirement Obligations." This statement addresses
                    financial accounting and reporting for obligations
                    associated with the retirement of tangible long-lived assets
                    and the associated asset retirement costs. It applies to all
                    entities and legal obligations associated with the
                    retirement of long-lived assets that result from the
                    acquisition, construction, development and/or normal
                    operation of long-lived assets, except for certain
                    obligations of lessees. This statement is effective for
                    financial statements issued for fiscal years beginning after
                    June 15, 2002. Management has not yet determined the impact
                    of the adoption of SFAS No. 143 on the Company's financial
                    position or results of operations.

                    In October 2001, the FASB issued Statement of Financial
                    Accounting Standards No. 144 ("SFAS 144"), "Accounting for
                    the Impairment or Disposal of Long-Lived Assets," or SFAS
                    144. SFAS No. 144 requires that those long-lived assets be
                    measured at the lower of carrying amount or fair value less
                    cost to sell, whether reported in continuing operations or
                    in discontinued operations. Therefore, discontinued
                    operations will no longer be measured at net realizable
                    value or include amounts for operating losses that have not
                    yet occurred. SFAS No. 144 is effective for financial
                    statements issued for fiscal years beginning after December
                    15, 2001 and, generally, is to be applied prospectively. The
                    Company does not expect SFAS 144 will have a material impact
                    on the Company's financial position or results of
                    operations.


                                     FS-22
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


2. SUMMARY OF       In April 2002, the FASB issued Statement of Financial
   SIGNIFICANT      Accounting Standards No. 145 ("SFAS 145"), "Rescission of
   ACCOUNTING       SFAS No. 44 and 64, Amendment of SFAS No. 13, and Technical
   POLICIES         Corrections," to update, clarify and simplify existing
   (CONTINUED)      accounting pronouncements. SFAS No. 4, which required all
                    gains and losses from debt extinguishment to be aggregated
                    and, if material, classified as an extraordinary item, net
                    of related tax effect, was rescinded. Consequently, SFAS No.
                    64, which amended SFAS No. 4, was rescinded because it was
                    no longer necessary. We do not expect the adoption of this
                    statement to have a material effect on the Company's
                    financial statements.

                    In June 2002, the FASB issued Statement of Financial
                    Accounting Standards No. 146 ("SFAS 146"), "Accounting for
                    Costs Associated with Exit or Disposal Activities." SFAS 146
                    addresses accounting and reporting for costs associated with
                    exit or disposal activities and nullifies Emerging Issues
                    Task Force Issue No. 94-3, "Liability Recognition for
                    Certain Employee Termination Benefits and Other Costs to
                    Exit an Activity (Including Certain Costs Incurred in a
                    Restructuring)." SFAS No. 146 requires that a liability for
                    a cost associated with an exit or disposal activity be
                    recognized and measured initially at fair value when the
                    liability is incurred. SFAS No. 146 is effective for exit or
                    disposal activities that are initiated after December 31,
                    2002, with early application encouraged. We do not expect
                    the adoption of this statement to have a material effect on
                    the Company's financial statements.

                    RECLASSIFICATIONS

                    Certain reclassifications have been made to the 2001
                    conosolidated balances to conform to the 2002 presentation.


3. CONSOLIDATED     Lancer is engaged in the design, manufacture and
   SUBSIDIARIES     distribution of orthodontic products. During 2002, Lancer
                    issued 37,595 shares to Biomerica as reimbursement for
                    expenses paid on Lancer's behalf. The Company valued these
                    shares at $8,271. Biomerica's direct ownership percentage of
                    Lancer is 31.63% and its direct and indirect (via agreements
                    with certain shareholders) voting control over Lancer is
                    greater than 50% as of May 31, 2002.


                                     FS-23
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


3. CONSOLIDATED     AIT provided immune allergy testing and products to
   SUBSIDIARIES     physicians and medical institutions. On May 30, 2002,
   (CONTINUED)      Biomerica received $212,500 for primarily all its interest
                    in AIT and recorded a gain of $224,481 on the sale.
                    Subsequent to the sale, Biomerica held 1.4% of the
                    outstanding shares of AIT. The gain and loss from operations
                    are included in discontinued operations in the accompanying
                    consolidated statement of operations for the year ended May
                    31, 2002 (See Note 13).

                    The Company's fiscal 2001 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 included in the
                    accompanying consolidated financial statements as
                    discontinued operations and are held for sale.








                                     FS-24


<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


3. CONSOLIDATED     Operating results for Lancer, AIT and ReadyScript in the
   SUBSIDIARIES     aggregate for the years ended May 31, 2002 and 2001, which
   (CONTINUED)      are included in the consolidated operating results of the
                    Company, are as follows:

                                                         2002          2001
                    ------------------------------------------------------------

                    Net sales                         $ 6,022,331   $ 5,927,603
                    Cost of sales                       4,159,048     3,994,161
                    ------------------------------------------------------------

                        Gross profit                    1,863,283     1,933,442
                    ------------------------------------------------------------

                    Operating expenses:
                       Selling, general and
                         administrative                 1,759,920     1,959,539
                       Research and development             3,842        71,505
                    ------------------------------------------------------------

                         Total operating expenses       1,763,762     2,031,044
                    ------------------------------------------------------------

                    Other income (expense):
                       Interest expense, net              (17,182)      (19,931)
                       Other income, net                  (43,295)        1,474
                    ------------------------------------------------------------

                                                          (60,477)      (18,457)
                    ------------------------------------------------------------

                    Income (loss) from continuing
                       operations before income taxes      39,044      (116,059)

                    Income tax expense                      1,260           800
                    ------------------------------------------------------------

                    Net income (loss) from
                       continuing operations               37,784      (116,859)

                    Discontinued operations of AIT
                     and ReadyScript:
                       Income (loss) from
                         discontinued operations, net     (78,544)   (2,156,086)
                    ------------------------------------------------------------

                    Net income (loss)                 $    40,760   $(2,272,945)
                    ============================================================


                                     FS-25
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


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


                    MAY 31,                                            2002
                    ------------------------------------------------------------

                    Marketing and distribution rights             $     442,750
                    Technology use rights                               858,328
                    Patents and other intangibles                        33,225
                    ------------------------------------------------------------
                                                                      1,334,303

                    Less accumulated amortization                    (1,218,122)
                    ------------------------------------------------------------

                                                                  $     116,181
                    ============================================================

                    Included in marketing and distribution rights
                    are repurchased sales territories by Lancer
                    which are being amortized straight-line over
                    the estimated useful life of eighteen years.
                    In each of the fiscal years 2002 and 2001,
                    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 straight-line over the
                    estimated useful life of eighteen years. Lancer recorded
                    amortization expense of $48,696 for each of the years ended
                    May 31, 2002 and 2001 related to these assets.

                    During the year ended May 31, 2002, management determined
                    that a license had been impaired as Biomerica no longer
                    manufactured the product covered by the license. The Company
                    recorded an impairment expense for the unamortized balance
                    of the license in the amount of $100,320 which is reflected
                    in cost of sales in the accompanying statement of operations
                    for the year ended May 31, 2002. Amortization expense
                    related to licenses and other intangibles which is included
                    in the accompanying consolidated statements of operations
                    amounted to $16,854 and $14,867 for the years ended May 31,
                    2002 and 2001, respectively.


                                     FS-26
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


5. LINE OF          At May 31, 2001, Lancer had a line of credit with a bank for
   CREDIT           borrowings up to $300,000. The line of credit bore interest
                    at prime plus 1.25% per annum (8.25% at May 31, 2001).
                    Allowable borrowings were limited to specified percentages
                    of eligible accounts receivable. The line of credit
                    terminated on October 24, 2001.

                    Effective October 24, 2001, Lancer obtained a new line of
                    credit with a new lender for borrowing up to $400,000 which
                    is limited to specified percentages of eligible accounts
                    receivable. The outstanding balance at May 31, 2002 was
                    $65,669. The initial drawings were used to pay off in full
                    the outstanding balance on the previous line of credit. The
                    unused portion available under the line of credit at May 31,
                    2002, was approximately $229,000. The new line of credit
                    bears interest at prime plus 2% per annum, but in no event
                    shall it be lower than 8% (8.00% at May 31, 2002). In
                    addition to interest, a management fee of 0.25% on the
                    average monthly outstanding loan balance and an unused
                    balance fee of 0.0425% on the average monthly unused portion
                    available are required. The line of credit expires on
                    October 24, 2003.

                    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 of $2,100,000, and prohibits the
                    advancing of funds to Biomerica. Lancer is not required to
                    maintain compensating balances in connection with this
                    lending agreement. The Company was in compliance with its
                    debt covenants at May 31, 2002.





                                     FS-27
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


5. LINE OF          The following summarizes information on short-term
   CREDIT           borrowings for the year ended May 31, 2002:

                    MAY 31,                                          2002
                    ------------------------------------------------------------

                    Average month end balance                       $   165,125
                    Maximum balance outstanding at any month end    $   223,103
                    Weighted average interest rate (computed by
                      dividing interest expense by average
                      monthly balance)                                     10.6%
                    Interest rate at year end                               8.0%
                    ============================================================


6. RELATED PARTY    SHAREHOLDER LINE OF CREDIT
   TRANSACTIONS

                    Biomerica, Inc. entered into an agreement 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 13, 2003. There was
                    $365,000 outstanding under this line of credit at May 31,
                    2002, of which $30,000 was repaid subsequent to May 31,
                    2002.

                    SHAREHOLDER LOAN

                    During 2002 a shareholder advanced the Company $10,000. The
                    loan bears interest at 8%.

                    During 2002 and 2001, the Company incurred $19,661 and
                    $1,051, respectively, in interest expense related to the
                    shareholder line of credit and loan, all of which is accrued
                    as of May 31, 2002.




                                     FS-28
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


6. RELATED PARTY    ACCRUED COMPENSATION
   TRANSACTIONS
                    Two officers, who are also shareholders of the Company
                    agreed to defer a portion of their salaries. At May 31, 2002
                    approximately $63,000 of deferred officer's salary is
                    included in accrued compensation in the accompanying
                    consolidated financial statements. Approximately $121,000 of
                    the total accrued compensation is due to the former chief
                    executive officer's estate.


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



                                     FS-29
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


7. SHAREHOLDERS'    On June 3, 1999, the Company, issued 8,000 shares of common
   EQUITY           stock to a consultant for services provided. The Company
   (CONTINUED)      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.

                    In August 1999, the Company adopted a stock option and
                    restricted stock plan (the "1999 Plan") which provides that
                    non-qualified options and incentive stock options and
                    restricted stock covering an aggregate of 1,000,000 of the
                    Company's unissued common stock may be granted to
                    affiliates, employees or consultants of the Company. As of
                    January 1, of each calendar year, commencing January 1,
                    2000, this amount is subject to automatic annual increases
                    equal 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.


                                     FS-30
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


7. SHAREHOLDERS'    During 2000, the Company agreed to grant warrants to three
   EQUITY           medical groups in exchange for services. During 2001, the
   (CONTINUED)      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. These warrants were canceled during
                    the year ended May 31, 2002.

                    During each of the years ended May 31, 2002 and 2001, the
                    Company recorded compensation expense of $1,207 related to
                    the amortization of the fair value of options to purchase
                    common stock issued prior to June 1, 1999.

                    During 2001, the Company granted 257,000 and 6,000 options
                    to purchase shares of the Company's stock to employees and
                    non-employees, respectively. The purchase price of the
                    options range from $0.50 to $1.50 per share. Management
                    recorded $0 and $18,720, respectively, during the years
                    ended May 31, 2002 and 2001 of expense related to the
                    granting of options to employees. Management recorded $1,386
                    during each of the years ended May 31, 2002 and 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.

                    During 2002, the Company granted approximately 229,000
                    options to purchase shares of the Company's stock to
                    employees. The purchase price of the options ranges from
                    $0.42 to $0.90 per share. Management recorded $1,612 during
                    the year ended May 31, 2002 of expense related to the
                    granting of options to employees.



                                     FS-31
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


7. SHAREHOLDERS'    Activity as to stock options and warrants under the 1991,
   EQUITY           1995 and 1999 plans are as follows:
   (CONTINUED)
<TABLE>
<CAPTION>

                                                                                           WEIGHTED
                                                              NUMBER                       AVERAGE
                                                              OF STOCK     PRICE RANGE     EXERCISE
                                                              OPTIONS       PER SHARE       PRICE
                    --------------------------------------------------------------------------------
<S>                                                          <C>          <C>              <C>
                    Options outstanding at
                      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 outstanding at
                      May 31, 2001                           3,144,234    $  .50 - $3.25   $  2.58
                    Options granted                            229,254    $   .42 - $.90   $   .59
                    Warrants granted                                 -    $            -   $     -
                    Options exercised                           (1,625)   $   .50 - $.86   $   .69
                    Options canceled or expired               (286,977)   $  .50 - $3.25   $  1.49
                    --------------------------------------------------------------------------------

                    Options and warrants outstanding at
                       May 31, 2002                          3,084,886    $  .42 - $3.00   $  2.53
                    ================================================================================

                    Options and warrants exercisable at
                       May 31, 2002                          2,198,755    $  .42 - $3.00   $  2.43
                    ================================================================================
</TABLE>

                    The weighted average fair value of options and warrants
                    granted during 2002 and 2001 was $0.40 and $0.93,
                    respectively.


                                     FS-32-
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


7. SHAREHOLDERS'    The following summarizes information about the Company's
   EQUITY           stock options and warrants outstanding at May 31, 2002:
   (CONTINUED)
<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, 2002      YEARS       PRICE       2000        PRICE
                    -------------------------------------------------------------------------------
<S>                 <C>                <C>              <C>       <C>        <C>           <C>
                    $   .42 - $.90       469,511        3.55      $  .65       421,354     $  .66
                    $ 1.09 - $1.91       267,375        2.19      $ 1.63       192,625     $ 1.71
                    $ 2.62 - $3.00     2,348,000        2.06      $ 2.99     1,584,776     $ 2.99

                    ===============================================================================
</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, 2002 and 2001; risk free interest rates
                    ranging from 3.14% 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 105% 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-33
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


7. SHAREHOLDERS'    For purposes of pro forma disclosures, the estimated fair
   EQUITY           value of the options is amortized to expense over the option
   (CONTINUED)      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,                                2002          2001
                    ------------------------------------------------------------

                    Net loss from continuing
                      operations, as reported         $  (566,672)  $  (516,232)
                    Adjustment to compensation
                      expense under SFAS 123             (629,098)   (1,094,095)
                    ------------------------------------------------------------

                    Net loss from continuing
                      operations, pro forma           $(1,195,770)  $(1,610,327)
                    ============================================================

                    Pro forma net loss from
                      continuing operations
                      per share - basic               $     (0.23)  $     (0.33)
                    ============================================================

                    Pro forma net loss from
                      continuing operations
                      per share - diluted             $     (0.23)  $     (0.33)
                    ============================================================

                    MAY 31,                                2002          2001
                    ------------------------------------------------------------

                    Net income (loss) from
                      discontinued operations,
                      as reported                     $   145,937   $(2,156,086)
                    Adjustment to compensation
                      expense under SFAS 123                   --            --
                    ------------------------------------------------------------

                    Net loss from discontinued
                       operations, pro forma          $   145,937   $(2,156,086)
                    ============================================================

                    Pro forma net loss from
                      discontinued operations
                      per share - basic               $       .03   $     (0.45)
                    ============================================================

                    Pro forma net loss from
                      discontinued operations
                      per share - diluted             $       .03   $     (0.45)
                    ============================================================


                                     FS-34
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


7. SHAREHOLDERS'    STOCK ACTIVITY
   EQUITY
   (CONTINUED)      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, 2002, the shares have not been issued and accordingly
                    have been classified as common stock subscribed.

                    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 had been
                    issued. The remaining 126,075 shares valued at $90,774 were
                    issued during 2002.

                    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.

                    During 2002, the Company sold 14,166 shares of its common
                    stock at a selling price of $0.72 per share. Proceeds to the
                    Company were $10,200.

                    During 2002, the Company, issued 108,000 shares of common
                    stock to various consultants for services provided. The
                    Company valued these shares at $64,200.

                    During 2002, the Company, issued 31,819 shares of common
                    stock to employees as compensation. The Company valued these
                    shares at $17,739.

                    During 2002, the Company agreed to issue 8,333 shares of
                    common stock to an employee as compensation. The Company
                    valued these subscribed shares at $3,750. As of May 31,
                    2002, the shares have not been issued and accordingly have
                    been classified as common stock subscribed.


                                     FS-35
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


7. SHAREHOLDERS'    SUBSIDIARY OPTIONS AND WARRANTS
   EQUITY
   (CONTINUED)      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.

                    During 2001, Lancer granted options to purchase 177,000
                    shares of its common stock at an exercise prices of $0.25 to
                    $0.875 to employees.

                    During the year ended May 31, 2002, Lancer granted 20,000
                    options to purchase shares of the Lancer's common stock at
                    an exercise price of $0.40 to an employee of the Lancer,
                    which have a term of one year.

                    There were 239,000 options outstanding and exercisable (at a
                    weighted average exercise price of $.83) to acquire Lancer
                    common stock at May 31, 2002.

                    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.




                                     FS-36
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


8. INCOME TAXES     Income tax expense from continuing operations for the years
                    ended May 31, 2002 and 2001 consists of the following
                    current provisions:


                    MAY 31,                                   2002       2001
                    ------------------------------------------------------------

                    U.S. Federal                          $      --    $     --

                    State and local                           2,060       1,600
                    ------------------------------------------------------------

                                                          $   2,060    $  1,600
                    ============================================================

                    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,                                 2002        2001
                    ------------------------------------------------------------

                    Computed "expected" tax
                      benefit                           $ (197,614)  $ (180,121)
                    Increase (reduction) in income
                      taxes resulting from:
                       Meals and entertainment               5,363        8,684
                       Change in valuation allowance       168,831      131,868
                       Equity in earnings of affiliates
                         not subject to taxation
                         because of dividends-
                         received deduction
                         for tax purposes                   23,420       39,569
                       State income taxes                    2,060        1,600
                    ------------------------------------------------------------

                                                        $    2,060   $    1,600
                    ============================================================



                                     FS-37
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


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


                    MAY 31,                                            2002
                    ------------------------------------------------------------

                    Deferred tax assets:
                      Accounts receivable, principally
                        due to allowance for doubtful
                        accounts and sales returns                  $    79,000
                      Inventories, principally due to
                        additional costs inventoried for
                      tax purposes pursuant to the Tax
                        Reform Act of 1986 and
                        allowance for inventory
                        obsolescence                                    143,000
                      Compensated absences and
                        deferred payroll, principally due
                        to accrual for financial reporting
                        purposes                                        101,000
                      Net operating loss
                        carryforwards                                 2,593,000
                      Tax credit carryforwards                          166,000
                      Investment in affiliates                          390,000
                    ------------------------------------------------------------

                                                                      3,472,000

                    Less valuation allowance                         (3,398,000)
                    ------------------------------------------------------------

                    Net deferred tax asset                               74,000

                    Deferred tax liability:
                      Marketing rights, principally due
                        to amortization                                 (74,000)
                    ------------------------------------------------------------

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



                                     FS-38
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


8. INCOME TAXES     The Company has provided a valuation allowance with respect
   (CONTINUED)      to substantially all of its deferred tax assets as of May
                    31, 2002 and 2001. 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, 2002, Biomerica had net tax operating loss
                    carryforwards of approximately $5,171,000 and investment tax
                    and research and development credits of approximately
                    $62,000, which are available to offset future Federal tax
                    liabilities. The carryforwards expire at varying dates from
                    2002 to 2022. As of May 31, 2002, Biomerica has net
                    operating tax loss carryforwards of approximately $1,152,000
                    available to offset future state income tax liabilities,
                    which expire through 2012.

                    As of May 31, 2002, Lancer had net tax operating loss
                    carryforwards of approximately $2,037,000 and business tax
                    credits of approximately $80,000 available to offset future
                    Federal tax liabilities. The carryforwards expire through
                    2021. As of May 31, 2002, Lancer has net tax operating loss
                    carryforwards of approximately $185,000 and business tax
                    credits of approximately $24,000 available to offset future
                    state income tax liabilities. The state carryforwards expire
                    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-39
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


9. INSURANCE        Management of Lancer completed an assessment of two
   CLAIM            occurrences of theft of inventory located at its
   RECEIVABLE       wholly-owned and consolidated subsidiary, Lancer De Mexico,
                    in January and April of 2002. The carrying value of the
                    inventory stolen approximated $82,000, valued at standard
                    cost, which has been reflected in the accompanying financial
                    statements as a reduction in inventories and an addition to
                    insurance claim receivable. Subsequent to year-end, the
                    Company received $51,000 as an initial payment on the claim.
                    The Company expects to receive an aggregate amount above
                    cost representing the value of the stolen inventory at net
                    average selling price, less commissions and royalties.


10. BUSINESS        Reportable business segments for the years ended May 31,
    SEGMENTS        2002 and 2001 are as follows:

                                                         2002          2001
                    ------------------------------------------------------------

                    Domestic sales:
                       Orthodontic products           $ 3,031,000   $ 3,018,000
                    ============================================================

                       Medical diagnostic products    $ 1,223,000   $ 1,581,000
                    ============================================================

                    Foreign sales:
                       Orthodontic products           $ 2,991,000   $ 2,910,000
                    ============================================================

                       Medical diagnostic products    $ 1,353,000   $ 1,330,000
                    ============================================================

                    Net sales:
                       Orthodontic products           $ 6,022,000   $ 5,928,000
                       Medical diagnostic products      2,576,000     2,911,000
                    ------------------------------------------------------------

                    Total                             $ 8,598,000   $ 8,839,000
                    ============================================================

                    Operating profit (loss):
                       Orthodontic products           $    99,000   $   (98,000)
                       Medical diagnostic products       (565,000)     (520,000)
                    ------------------------------------------------------------

                    Total                             $  (466,000)  $  (618,000)
                    ============================================================

                    Operating loss from discontinued
                     segment:
                       AIT                            $   (75,790)  $   (62,654)
                       ReadyScript                         (2,754)   (2,093,432)
                    ------------------------------------------------------------

                    Total                             $   (78,544)  $(2,156,086)
                    ============================================================



                                     FS-40
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


10.  BUSINESS SEGMENTS
     (CONTINUED)                                          2002          2002
                                                      ==========================
                    Domestic long-lived assets:
                       Orthodontic products           $   110,000   $   196,000
                       Medical diagnostic products        208,000       364,000
                    ------------------------------------------------------------

                    Total                             $   318,000   $   560,000
                    ============================================================

                    Foreign long-lived assets:
                       Orthodontic products           $    27,000   $    45,000
                       Medical diagnostic products             --            --
                    ------------------------------------------------------------

                    Total                             $    27,000   $    45,000
                    ============================================================

                    Total assets:
                       Orthodontic products           $ 3,646,000   $ 3,737,000
                       Medical diagnostic products      1,631,000     1,575,000
                    ------------------------------------------------------------

                    Total                             $ 5,277,000   $ 5,312,000
                    ============================================================


                    Depreciation and amortization
                     expense:
                       Orthodontic products           $    85,000   $   122,000
                       Medical diagnostic products        107,000        86,000
                    ------------------------------------------------------------

                    Total                             $   192,000   $   208,000
                    ============================================================

                    Capital expenditures:
                       Orthodontic products           $     4,000   $     9,000
                       Medical diagnostic products          8,000        53,000
                    ------------------------------------------------------------

                    Total                             $    12,000   $    62,000
                    ============================================================

                    The net sales as reflected above consist of sales to
                    unaffiliated customers only as there were no significant
                    intersegment sales during fiscal years 2002 and 2001. No
                    customer accounted for more than 10% of net sales during
                    fiscal years 2002 and 2001.



                                     FS-41
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


10. BUSINESS        Geographic information regarding net sales and operating
    SEGMENTS        loss is as follows:

                                                          2002          2001
                    ------------------------------------------------------------

                    Net sales:
                       United States                  $ 4,254,000   $ 4,599,000
                       Europe                           2,313,000     2,207,000
                       South America                      498,000       558,000
                       Asia                               199,000       221,000
                       Other foreign                    1,334,000     1,254,000
                    ------------------------------------------------------------

                    Total net sales                   $ 8,598,000   $ 8,839,000
                    ============================================================

                    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.


11. COMMITMENTS     OPERATING LEASES
    AND
    CONTINGENCIES   Biomerica leases its primary facility under a non-cancelable
                    operating lease expiring October 31, 2005, with monthly base
                    rent of $15,000 with a 3% increase effective September 1,
                    2003. These facilities are owned and operated by four of the
                    Company's shareholders. Total rent expense for this facility
                    was approximately $179,000 and $169,000 during the years
                    ended May 31, 2002 and 2001, respectively.

                    Biomerica subleased a portion of the facility under a
                    non-cancelable operating lease expiring May 16, 2003, with
                    monthly base rental income of $1,642.

                    Biomerica entered into a non-cancelable operating lease for
                    a copier in November 2001 which expires November 2006, which
                    requires monthly rentals of $279. Total expense for the
                    copier was approximately $2,000 during the year ended May
                    31, 2002.



                                     FS-42
<PAGE>

11. COMMITMENTS     Lancer leases its main facility under a non-cancelable
    AND             operating lease expiring December 31, 2003, as extended,
    CONTINGENCIES   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 $8,894 at May 31,
                    2002, and is included in accrued liabilities in the
                    accompanying consolidated balance sheet. Total rental
                    expense for this facility for each of the years ended May
                    31, 2002 and 2001 was approximately $69,000.

                    Lancer entered into a non-cancelable operating lease for its
                    Mexico subsidiary which expires March 2006, which requires
                    average monthly rentals of approximately $6,000. Total
                    expense for this facility was approximately $69,000 and
                    $74,000 during the years ended May 31, 2002 and 2001,
                    respectively.

                    Lancer entered into a non-cancelable operating lease for a
                    copier in February 2002 which expires February 2006, which
                    requires monthly rentals of $189. Total expense for the
                    copier was approximately $2,000 during the year ended May
                    31, 2002.

                    Rental expense for all operating leases amounted to
                    approximately $321,000 and $332,000 for the years ended May
                    31, 2002 and 2001, respectively. The future annual minimum
                    payments, net of sublease income, are as follows:

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

                    2003                                            $   307,793
                    2004                                                302,057
                    2005                                                259,188
                    2006                                                139,298
                    2007                                                  1,674
                    ------------------------------------------------------------

                    Minimum lease payments, net                     $ 1,010,010
                    ------------------------------------------------------------


                                     FS-43
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


11. COMMITMENTS     MANUFACTURING AGREEMENT
    AND
    CONTINGENCIES   In May 1990, the Company entered into a manufacturing
    (CONTINUED)     subcontractor agreement (the "Manufacturing Agreement"),
                    whereby the subcontractor agreed to provide manufacturing
                    services to the Company through its affiliated entities
                    located in Mexicali, B.C., Mexico. Effective April 1, 1996,
                    the Company leased the Mexicali facility under a separate
                    arrangement, as discussed in above under LEASES. Since
                    October 2000, the manufacturing agreement was operated on a
                    month-to-month basis. During fiscal 2002, the operations in
                    Mexico were transferred into a newly created Mexican
                    corporation (Lancer de Mexico) and became a wholly-owned and
                    consolidated subsidiary of the Company. This subsidiary now
                    also administers services previously provided by an
                    independent manufacturing contractor. Should the company
                    discontinue operations in Mexico, it is responsible for the
                    accumulated employee seniority obligation as prescribed by
                    Mexican law. At May 31, 2002, this obligation was
                    approximately $365,000. Such obligation is contingent in
                    nature and accordingly has not been accrued in the
                    accompanying consolidated balance sheet.

                    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.



                                     FS-44
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


11. COMMITMENTS     RETIREMENT SAVINGS PLAN
    AND
    CONTINGENCIES   Effective September 1, 1986, the Company established a
    (CONTINUED)     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.

                    NASDAQ SMALL CAP MARKET LISTING REQUIREMENTS

                    The Company was notified by NASDAQ that it was no longer in
                    compliance with either the minimum $2,000,000 net tangible
                    assets or $2,500,000 stockholders' equity requirement for
                    continued listing on the NASDAQ Small Cap Market under
                    Marketplace rule 4310(c)(2)(B). Effective June 20, 2002, the
                    Company was delisted. The Company's securities were
                    immediately eligible for trade on the OTC Bulletin Board.



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

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


12. CONDENSED       Lancer's line-of-credit prohibits the transfer or dividend
    FINANCIAL       of funds to Biomerica, Inc. As a result, the following
    INFORMATION     condensed unconsolidated balance sheet for Biomerica, Inc.
    OF PARENT       as of May 31, 2002, and the condensed unconsolidated
    COMPANY         statements of operations and cash flows for the years ended
                    May 31, 2002 and 2001 have been provided. No cash dividends
                    were paid by the consolidated subsidiaries (see Note 3)
                    during the years ended May 31, 2002 and 2001.

                                 CONDENSED UNCONSOLIDATED BALANCE SHEET

                     MAY 31,                                        2002
                    ------------------------------------------------------------

                                                ASSETS

                    CURRENT ASSETS:
                         CASH                                       $   200,692
                         AVAILABLE-FOR-SALE SECURITIES                    2,532
                         ACCOUNTS RECEIVABLE, NET                       300,651
                         INVENTORIES                                    833,253
                         NOTES RECEIVABLE                                 2,419
                         PREPAID EXPENSES AND OTHER                      68,199
                    ------------------------------------------------------------

                    TOTAL CURRENT ASSETS                              1,407,746

                    INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED
                      SUBSIDIARY, RESTRICTED                            960,763
                    INVENTORY, NON-CURRENT                               15,000
                    PROPERTY AND EQUIPMENT, NET                         180,255
                    INTANGIBLE ASSETS                                    27,625
                    OTHER                                                    --
                    ------------------------------------------------------------

                                                                    $ 2,591,389
                    ============================================================






                                      FS-46
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


12. CONDENSED       CONDENSED UNCONSOLIDATED BALANCE SHEET (CONTINUED)
    FINANCIAL
    INFORMATION     MAY 31,                                           2002
    OF PARENT       ------------------------------------------------------------
    COMPANY
    (CONTINUED)              LIABILITIES AND SHAREHOLDERS' EQUITY

                    CURRENT LIABILITIES:
                      ACCOUNTS PAYABLE AND ACCRUED LIABILITIES      $   466,507
                      ACCRUED COMPENSATION                              212,989
                      CURRENT PORTION OF SHAREHOLDERS LOANS              30,000
                    ------------------------------------------------------------

                    TOTAL CURRENT LIABILITIES                           709,496
                    ------------------------------------------------------------

                    SHAREHOLDER LOANS, NET OF CURRENT PORTION           345,000

                    EQUITY IN LOSSES OF UNCONSOLIDATED
                      SUBSIDIARIES, NET OF ADVANCES,
                      UNRESTRICTED                                      326,187
                    ------------------------------------------------------------

                    SHAREHOLDERS' EQUITY:
                      COMMON STOCK                                      437,538
                      ADDITIONAL PAID-IN CAPITAL                     16,981,982
                      ACCUMULATED OTHER COMPREHENSIVE LOSS              (20,237)
                      ACCUMULATED DEFICIT                           (16,188,577)
                    ------------------------------------------------------------

                    TOTAL SHAREHOLDERS' EQUITY                        1,210,706
                    ------------------------------------------------------------

                                                                    $ 2,591,389
                    ============================================================


                                     FS-47
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


12. CONDENSED             CONDENSED UNCONSOLIDATED STATEMENTS OF OPERATIONS
    FINANCIAL
    INFORMATION     MAY 31,                                2002         2001
    OF PARENT       ------------------------------------------------------------
    COMPANY
    (CONTINUED)     NET REVENUES                       $ 2,575,723   $ 2,911,649
                    COST OF SALES                        1,903,414     2,048,757
                    ------------------------------------------------------------

                        GROSS PROFIT                       672,309       862,892
                    ------------------------------------------------------------

                    OPERATING EXPENSES:
                    SELLING, GENERAL AND
                      ADMINISTRATIVE                     1,081,335    1,132,519
                    RESEARCH AND DEVELOPMENT               155,916      250,616
                    ------------------------------------------------------------

                    TOTAL OPERATING EXPENSES             1,237,251    1,383,135
                    ------------------------------------------------------------

                        OPERATING LOSS                    (564,942)    (520,243)

                    OTHER INCOME/(EXPENSE)                 (12,560)      40,776
                    ------------------------------------------------------------

                    LOSS FROM OPERATIONS BEFORE INTEREST
                        IN NET INCOME OF CONSOLIDATED
                        SUBSIDIARIES AND INCOME TAXES     (577,502)    (479,467)

                    INTEREST IN NET INCOME (LOSS) OF
                    CONSOLIDATED SUBSIDIARIES               11,630      (35,965)

                    INTEREST IN NET LOSS OF CONSOLIDATED
                        SUBSIDIARIES - DISCONTINUED
                        OPERATIONS                         (78,544)  (2,156,086)
                    GAIN ON SALE OF SUBSIDIARY             224,481           --
                    ------------------------------------------------------------

                    LOSS FROM OPERATIONS BEFORE INCOME
                        TAXES                             (419,935)  (2,671,518)

                    INCOME TAX EXPENSE                         800          800
                    ------------------------------------------------------------

                    NET LOSS                           $  (420,735) $(2,672,318)
                    ============================================================


                                     FS-48
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================

<TABLE>
<CAPTION>
<S>                         <C>                                   <C>           <C>
12. CONDENSED               CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS
    FINANCIAL
    INFORMATION             FOR THE YEARS ENDED MAY 31,               2002         2001
    OF PARENT               ----------------------------------------------------------------
    COMPANY
    (CONTINUED)             CASH FLOWS FROM OPERATING ACTIVITIES:
                              NET LOSS FROM CONTINUING
                                OPERATIONS                        $  (420,735)  $(2,672,318)
                              ADJUSTMENTS TO RECONCILE NET
                                INCOME TO NET CASH (USED IN)
                                PROVIDED BY OPERATING
                                ACTIVITIES:
                                DEPRECIATION AND AMORTIZATION          84,648       76,311
                             REALIZED (GAIN) LOSS ON
                                SALE OF AVAILABLE-FOR-SALE
                                SECURITIES                           (10,026)       (34,427)
                             LOSS OF SUBSIDIARIES                      66,914     2,192,051
                             OPTIONS AND WARRANTS ISSUED
                                FOR SERVICES RENDERED                  71,507        89,336
                             COMMON STOCK ISSUED OR
                                SUBSCRIBED FOR SERVICES
                                RENDERED                               85,689       265,625
                             LOSS ON DISPOSAL OF ASSETS                    --         2,000
                                GAIN ON SALE OF SUBSIDIARY           (224,481)           --
                             INCREASE IN INVESTMENT IN
                                AND ADVANCES TO
                                CONSOLIDATED SUBSIDIARIES            (153,637)   (1,020,476)
                             WRITE-OFF OF INTANGIBLES                 100,320            --
                             WRITE-OFF OF NOTES RECEIVABLE              7,800            --
                             NET CHANGE IN OTHER CURRENT
                                ASSETS AND CURRENT
                                LIABILITIES                           78,526        166,406
                             ---------------------------------------------------------------

                             NET CASH USED IN OPERATING ACTIVITIES   (313,475)     (935,492)
                             ---------------------------------------------------------------

                             CASH FLOWS FROM INVESTING ACTIVITIES:
                               SALES OF AVAILABLE-FOR-SALE
                                 SECURITIES                            39,116        85,665
                               PRINCIPAL PAYMENTS RECEIVED ON
                                 NOTES RECEIVABLE                          --        16,600
                               INCREASE IN INTANGIBLE ASSETS          (20,436)      (20,000)
                               PROCEEDS FROM SALE OF SUBSIDIARY       212,500            --
                               PURCHASE OF PROPERTY AND EQUIPMENT      (8,341)           --
                             ---------------------------------------------------------------

                             NET CASH PROVIDED BY INVESTING
                               ACTIVITIES                             222,839        82,265
                             ---------------------------------------------------------------


                                     FS-49
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


12. CONDENSED               CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS,
    FINANCIAL                                      CONTINUED
    INFORMATION
    OF PARENT       FOR THE YEARS ENDED MAY 31,                         2002        2001
    COMPANY         ------------------------------------------------------------------------
    (CONTINUED)
                    CASH FLOWS FROM FINANCING ACTIVITIES:
                        EXERCISE OF STOCK OPTIONS                       1,128        6,768
                        PROCEEDS FROM SALE OF STOCK                    10,200       242,212
                        INCREASE IN SHAREHOLDER LOAN                  280,000        95,000
                    ------------------------------------------------------------------------

                    NET CASH PROVIDED BY FINANCING
                        ACTIVITIES                                    291,328       343,980
                    ------------------------------------------------------------------------

                    NET CHANGE IN CASH AND CASH
                        EQUIVALENTS                                   200,692      (509,247)

                    CASH AND CASH EQUIVALENTS AT
                        BEGINNING OF YEAR                                  --       509,247
                    ------------------------------------------------------------------------

                    CASH AND CASH EQUIVALENTS AT END OF
                        YEAR                                      $   200,692   $        --
                    ------------------------------------------------------------------------

                    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                               $    (9,948)  $     5,966
                    ========================================================================
</TABLE>






                                      F-50
<PAGE>
                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2002 AND 2001
================================================================================


13. DISCONTINUED    The following summarizes the net liabilities of the
    OPERATIONS      discontinued operations ReadyScript and AIT as of May 31,
                    2002 and the results of its operations for each of the years
                    in the two-year period ended May 31, 2002.

                     Balance sheet items:

                    MAY 31,                                            2002
                    ------------------------------------------------------------

                    Assets:
                        Prepaid expenses and other                  $     2,436
                        Other assets                                     43,508
                    ------------------------------------------------------------

                                                                         45,944

                    Less liabilities:
                        Accrued liabilities                            (372,131)
                    ------------------------------------------------------------

                    Net liabilities                                 $   326,187
                    ============================================================

                    Results of its operations items:

                    YEARS ENDED MAY 31,                    2002         2001
                    ------------------------------------------------------------

                    Revenues                            $  46,417   $   100,270

                    Cost and expenses:
                        Cost of Sales                     (63,434)       86,982
                        General and administrative        (61,527)   (1,913,129)
                        Research and development               --      (256,245)
                    ------------------------------------------------------------

                    Total costs                          (124,961)   (2,156,086)
                    ------------------------------------------------------------

                    Loss from operations                $ (78,544)  $(2,156,086)
                    ============================================================


                                     FS-51

</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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