<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>
