-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
 MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
 TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
 MKn9Hw0OH+rpB41MriwMimJyV53GTd4THxZdUc4ESvVIw2tObrfKq4FG1TKMCI5G
 NHynTV+WOcyJeJdvUy8bgQ==

<SEC-DOCUMENT>0001019687-03-001893.txt : 20030915
<SEC-HEADER>0001019687-03-001893.hdr.sgml : 20030915
<ACCEPTANCE-DATETIME>20030915171527
ACCESSION NUMBER:		0001019687-03-001893
CONFORMED SUBMISSION TYPE:	10KSB
PUBLIC DOCUMENT COUNT:		8
CONFORMED PERIOD OF REPORT:	20030531
FILED AS OF DATE:		20030915

FILER:

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

	FILING VALUES:
		FORM TYPE:		10KSB
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-08765
		FILM NUMBER:		03896287

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

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

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

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

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	NUCLEAR INSTRUMENTS INC
		DATE OF NAME CHANGE:	19720508
</SEC-HEADER>
<DOCUMENT>
<TYPE>10KSB
<SEQUENCE>1
<FILENAME>biomerica_10k-053103.txt
<TEXT>
<PAGE>

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

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

                                   FORM 10-KSB

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

FOR THE FISCAL YEAR ENDED MAY 31, 2003        COMMISSION FILE NUMBER: 0-8765
- --------------------------------------        ------------------------------

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

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

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

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

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

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

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

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

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

                                 Yes       No   X
                                     -----    -----

State issuer's revenues for its most recent fiscal year:  $9,059,938.

State the aggregate market value of the voting and non-voting stock held by
non-affiliates of the issuer (based upon 4,748,660 shares held by non-
affiliates and the closing price of $0.25 per share for Common Stock in the
over-the-counter market as of Nov. 30, 2003): $1,187,165.

Number of shares of the issuer's common stock, par value $0.08, outstanding as
of August 27, 2003: 5,742,431.

DOCUMENTS INCORPORATED BY REFERENCE: none

Transitional Small Business Disclosure Format              YES         NO  X
- --------------------------------------------------------------------------------

<PAGE>

                                     PART I*

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



                                    BUSINESS

                                    OVERVIEW

THE COMPANY

     Biomerica, Inc. ("Biomerica", the "Company", "we" or "our") was
incorporated in Delaware in September 1971 as Nuclear Medical Systems, Inc.
We changed our corporate name in February 1983 to NMS Pharmaceuticals, Inc.,
and in November 1987 to Biomerica, Inc. During fiscal 2003 we had two
subsidiaries, Lancer Orthodontics, Inc. ("Lancer"), an international
manufacturer of orthodontics products, and ReadyScript, Inc. ("ReadyScript"),
which developed a wireless handheld point of care system for physicians, but
which operations were discontinued during fiscal 2001. On May 30, 2002,
Biomerica sold its controlling interest in a third subsidiary, Allergy Immuno
Technologies (AIT). All subsidiaries are majority-controlled subsidiaries.

     Lancer is engaged in the design, manufacture and distribution of
orthodontic products. During 2002, Lancer issued 37,595 additional 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 31.12% and its direct and indirect (via agreements with certain shareholders)
voting control over Lancer is greater than 50% as of May 31, 2003. The parties
to the voting agreements consist of the Biomerica directors.

   In June 1999, we raised $2 million in equity to develop the infrastructure of
our e-health business, now incorporated as ReadyScript, Inc. From June 1999
until April 2001 we used the proceeds for developing an on-line drugstore and
ReadyScript's infrastructure (a wireless medication management system that
enables physicians to wirelessly transmit legible, pre-qualified
formulary-compliant prescription orders directly to the patient's choice of
pharmacy).

     The Company adopted a formal plan in April 2001 to discontinue operations
of its ReadyScript subsidiary. Management is currently responding
to any inquiries about the possible purchase of the ReadyScript technology and
has presented the ReadyScript technology to companies which might use such
technology, but does not have a buyer at the current time. Management will
continue to offer the technology for sale, but believes that the chances of
selling it at this time are unlikely due to technological changes in the
marketplace and lack of support available from ReadyScript. These assets have
not been valued on the balance sheet since they were obtained through research
and development, which was expensed at the time it was incurred. Biomerica has
not recognized any losses in revenues as a result of the decision to discontinue
the ReadyScript operation because it was a development-stage company with no
revenues. Certain assets were written off during the closure and subsequent to
then which were recorded as losses in the consolidated financial statements. The
subsidiary is being reported in the financial statements as a discontinued
operation because it is no longer an operating entity.

     The Company adopted a formal plan in March, 2002, to discontinue operations
of AIT. Biomerica was issued 808,558 shares of AIT common stock in April of 2002
for liabilities it assumed from AIT. The shares were valued at $.015 per share
since the stock had been trading at that time between $.01 and $.02 per share.
On May 30, 2002, we sold 13,350,000 shares of AIT common stock held by us,
representing 98.1% of the shares we owned in AIT, to a third party in exchange
for $212,500, which management believes approximated fair market value at the
time of the sale. A non-interest bearing loan was transferred to the purchaser
of the AIT shares as part of the sale. Biomerica assumed the assets and
liabilities of AIT with the exception of the note evidencing the loan. The
amount of the transferred loan to the purchaser of AIT was $225,282. The note
was due on demand and no payments were made on the note. The operations of AIT
were being reported in fiscal 2002 in the financial statements as discontinued
operations. During fiscal 2003 there were no operations of AIT reported in
discontinued operations. We retained 255,575 shares of AIT common stock and sold
13,350,000 shares since that was the amount of shares that the purchaser wanted
to buy. In June 2002 the Company agreed to the transfer of 75,000 of those
shares of AIT common stock to a company in lieu of $10,000 cash for services
rendered.

                                       2
<PAGE>

     Prior to the transaction Biomerica assumed all assets and liabilities of
AIT, which included cash ($803), inventory ($2,600), patents ($9,608), accounts
payable ($27,463),net receivables ($1,375), prepaids ($747) and net fixed assets
($213). There were no other terms in the agreement which were material. AIT was
the holder of a 10,000 share option in Hollister- Stier, a privately held
company. Based on information received from Hollister-Stier regarding valuation
of the options, these options were transferred to Biomerica in exchange for the
reduction of a note payable to Biomerica by $108,100.

OUR MEDICAL DEVICE BUSINESS

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

BIOMERICA - DIAGNOSTIC PRODUCTS

     Biomerica develops, manufactures, and markets medical diagnostic products
designed for the early detection and monitoring of chronic diseases and medical
conditions. The Company's medical diagnostic products are sold in three markets:
1) clinical laboratories, 2) physicians offices and 3) over- the-counter
(drugstores). Our diagnostic test kits are used to analyze blood or urine from
patients in the diagnosis of various diseases and other medical complications,
or to measure the level of specific hormones, antibodies, antigens or other
substances which may exist in the human body in extremely small concentrations.

     Technological advances in medical diagnostics have made it possible to
perform diagnostic tests within the home and the physician's office, rather than
in the clinical laboratory. One of our main objectives has been to develop and
market rapid diagnostic tests that are accurate, employ easily obtained
specimens, and are simple to perform without instrumentation. Our
over-the-counter and professional rapid diagnostic products help to manage
existing medical conditions and may save lives through prompt diagnosis and
early detection. Until recently, tests of this kind required the services of
medical technologists and sophisticated instrumentation. Frequently, results
were not available until at least the following day. We believe that rapid point
of care tests are as accurate as laboratory tests when used properly, require no
instrumentation, give reliable results in minutes and can be performed with
confidence in the home or the physician's office. The majority of our
over-the-counter rapid tests are FDA cleared.

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

     During fiscal 2002 we introduced the Aware Breast Self-Examination Pad,
which is a patented, FDA-cleared polyurethane pad containing a silicone
lubricant. The pad is designed to enhance the sense of touch by reducing
friction between the fingers and the skin. The pad is packaged with an
instructional video which teaches the proper techniques for performing breast
self-examination. The target markets for the product include retail, catalog,
multi-level marketing channels, and the medical community.

     During fiscal 2003 we entered into an agreement with Sangui Bio Tech, Inc.,
whereby we acquired intellectual assets along with ancillary tangible assets
such as fixed assets and inventory. The intellectual assets consisted of five
clinical laboratory products. Two Sangui employees became employees of
Biomerica.

LANCER ORTHODONTICS, INC. -- ORTHODONTIC PRODUCTS

     Lancer is engaged in developing, manufacturing, and selling orthodontic
products. Its products are sold worldwide through a direct sales force and
distributors.

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


                                       3
<PAGE>

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

DISCONTINUED OPERATIONS

     The Company's fiscal 2003 and 2002 losses were partially the result of its
investment in ReadyScript. The ReadyScript subsidiary was a development- stage
enterprise and required the raising of a significant amount of capital to fund
its short-term working capital needs. The ReadyScript operations were
discontinued in May 2001. The net liabilities and operating results of
ReadyScript are shown separately in the accompanying consolidated financial
statements as discontinued operations.

     On May 30, 2002, Biomerica received $212,500 for its interest in AIT and
recorded a gain of $224,481 on the sale. The gain from sale and loss from
operations are included in discontinued operations in the accompanying statement
of operations for the year ended May 31, 2002.

LIQUIDITY AND GOING CONCERN

     These consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has operating and
liquidity concerns due to historically reporting net losses and negative cash
flows from operations. Biomerica's shareholder's line of credit (Note 6) expires
on September 13, 2003 and will not be renewed. The unpaid principal and interest
will be converted into a note payable bearing interest at 8% and payable in
monthly installments over four years.

     Biomerica has suffered substantial recurring losses from operations over
the last couple of years. Biomerica 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 3 and 13). ReadyScript and Allergy Immuno Technologies, Inc.
were contributors to the Company's losses. In the fiscal year 2003, the Company
reduced operating costs through certain cost reduction efforts and plans to
concentrate on its core business in Lancer and Biomerica to increase sales.
Additional cost reductions were made in the first quarter of fiscal 2004.
Management believes that cash flows from operations coupled with reduced costs
and anticipated increased sales will enable the Company to fund operations for
at least the next twelve months. Should the Company be unable to reduce costs
adequately or should the Company be unable to secure additional financing, the
result for the Company could be the inability to continue as a going concern.

     The Company will continue to have limited cash resources. Although the
Company's management recognizes the imminent need to secure additional financing
there can be no assurance that the Company will be successful in consummating
any such transaction or, if the Company does consummate such a transaction, that
the terms and conditions of such financing will not be unfavorable to us.

     Our independent certified public accountants have concluded that these
factors, among others, raise substantial doubt as to the Company's ability to
continue as a going concern for a reasonable period of time, and have, therefore
modified their report in the form of an explanatory paragraph describing the
events that have given rise to this uncertainty. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.

PRODUCTION

     Most of our diagnostic test kits are processed and assembled at our
facilities in Newport Beach, California. During fiscal 2003 we established a
manufacturing facility in Mexicali, Mexico, in a building that we share with
Lancer Orthodontics. We are in the process of moving some of the manufacturing
to that facility. We subcontract with Lancer to provide labor and other
services. Production of diagnostic tests can involve formulating component
antibodies and antigens in specified concentrations, attaching a tracer to the
antigen, filling components into vials, packaging and labeling. We continually
engage in quality control procedures to assure the consistency and quality of
our products and to comply with applicable FDA regulations.

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

                                       4
<PAGE>

     During fiscal 2002, the Lancer facility in Mexico was incorporated as
Lancer Orthodontics de Mexico ("Lancer de Mexico"), a wholly-owned subsidiary of
Lancer. This subsidiary now administers services previously provided by an
independent manufacturing contractor. A lease was negotiated effective April 1,
2001, for the 16,000 square foot facility already in use for Lancer's Mexican
operations. Mexican utility and vendor obligations were also converted to the
Lancer de Mexico name. This conversion eliminated the expense of an
administrative fee and is expected to provide better control in meeting future
obligations. The conversion had no material effect on manufacturing operations.
The potential impact for the use of Lancer's own facility, in terms of a
corporate entity with legal standing in Mexico, is that over a fiscal year
Lancer would save approximately $100,000 in service fees over a Mexican
contracted corporate entity.

     Should Lancer discontinue operations in Mexico, it is responsible for
accumulated employee seniority obligations as prescribed by Mexican law. At May
31, 2003, this obligation was approximately $401,000. Such obligation is
contingent in nature and accordingly has not been accrued in either company's
financial statements.

RESEARCH AND DEVELOPMENT

     Biomerica is engaged in research and development to broaden its diagnostic
product line in specific areas. Research and development expenses include the
costs of materials, supplies, personnel, facilities and equipment. Lancer is
engaged in development programs to improve and expand its orthodontic products
and production techniques. Lancer consults frequently with practicing
orthodontists. The dental amalgam development was terminated because of poor
sales. This termination did not impact other expenses or revenues.

     Consolidated research and development expenses incurred by Biomerica for
the years ended May 31, 2003 and 2002 aggregated approximately $263,000 and
$160,000, respectively. Lancer is also engaged in, and intends to continue
development programs directed toward improving its orthodontics products and
production techniques. Of the above expenses approximately $107,000 and $4,000
for fiscal 2003 and 2002, respectively, are for Lancer's product development.

MARKETS AND METHODS OF DISTRIBUTION

     Biomerica has approximately 400 current customers for its diagnostic
business, of which approximately 60 are distributors and the balance are
hospital and clinical laboratories, medical research institutions, medical
schools, pharmaceutical companies, chain drugstores, wholesalers and physicians'
offices.

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

     Lancer sells its products directly to orthodontists through company-paid
sales representatives in the United States. At the end of its fiscal year,
Lancer had six sales representatives, all in the United States, all of whom are
employees of Lancer. We believe that all Lancer products sold in the U.S. comply
with FDA regulations.

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

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

                                       5
<PAGE>

     On a consolidated basis no customer accounted for 10% or more of the
consolidated sales in the fiscal years ended May 31, 2003 and 2002. No customer
accounted for 10% or more of Lancer Orthodontics' sales. On an unconsolidated
basis Biomerica has two customers who each account for greater than 10% of its
sales.

BACKLOG

     At May 31, 2003 and 2002 Biomerica had a backlog of approximately $110,000
and $122,000 respectively. As of May 31, 2003 and 2002, Lancer had a backlog of
approximately $35,000 and $84,000, respectively. Lancer had decreased backorders
in fiscal 2003 compared to fiscal 2002. The change in Lancer's backlog was
attributable to improved planning (better forecasting of demand and softened
summer demand).

RAW MATERIALS

     The principal raw materials utilized by us consist of various chemicals,
serums, reagents, radioactive isotopes and packaging supplies. Almost all of our
raw materials are available from several sources, and we are not dependent upon
any single source of supply or a few suppliers. No company accounted for more
than 10% of purchases for the years ended May 31, 2003 and 2002.

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

     The principal raw materials used by Lancer in the manufacture of its
products include: stainless steel, which is available from several commercial
sources; nickel titanium, which is available from three sources; and lucolux
translucent ceramic, which is currently only available from one source, General
Electric, and is purchased on open account. Ceramic material similar to General
Electric's lucolux translucent ceramic is available from other sources. Lancer
had no difficulty in obtaining an adequate supply of raw materials during its
2003 fiscal year, and does not anticipate that there will be any interruption or
cessation of supply in the future.

COMPETITION

     Immunodiagnostic products are currently produced by more than 100
companies, a majority of which are located within the United States. Biomerica
and its subsidiaries are not a significant factor in the market.

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

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

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

     Lancer encounters intense competition in the sale of orthodontic products.
Lancer's management believes that Lancer's six major competitors
are: Unitek, a subsidiary or division of 3M; Ormco, a subsidiary or division of
Sybron Dental Specialities; RMO Inc., a private company; American Orthodontics,
a private company; GAC, a division of Dentsply; and Dentaurum, a foreign
company. Lancer estimates that these six competitors account for approximately
70-80% of the orthodontic products manufactured and sold in the United States.
Lancer's management also believes that each of these six competitors is larger
than Lancer, has more diversified product lines and has financial resources
exceeding those of Lancer. While there is no assurance that Lancer will be
successful in meeting the competition of these six major competitors or other
competitors, Lancer has, in the past, successfully competed in the orthodontic
market and has achieved wide recognition of both its name and its products.



                                       6
<PAGE>

GOVERNMENT REGULATION OF OUR DIAGNOSTIC BUSINESS

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

     The Food, Drug & Cosmetic Act of 1938 (the "FDCA") regulates medical
devices in the United States by classifying them into one of three classes based
on the extent of regulation believed necessary to ensure safety and
effectiveness. Class I devices are those devices for which safety and
effectiveness can reasonably be ensured through general controls, such as device
listing, adequate labeling, pre-market notification and adherence to the Quality
System Regulation ("QSR") as well as Medical Device Reporting (MDR), labeling
and other regulatory requirements. Some Class I medical devices are exempt from
the requirement of Pre-Market Approval ("PMA") or clearance. Class II devices
are those devices for which safety and effectiveness can reasonably be ensured
through the use of special controls, such as performance standards, post-market
surveillance and patient registries, as well as adherence to the general
controls provisions applicable to Class I devices. Class III devices are devices
that generally must receive pre-market approval by the FDA pursuant to a
pre-market approval application to ensure their safety and effectiveness.
Generally, Class III devices are limited to life-sustaining, life-supporting or
implantable devices. However, this classification can also apply to novel
technology or new intended uses or applications for existing devices. The
Company's products are primarily either Class I or Class II medical devices. The
following is a breakdown of the Biomerica products by class:

Class I - Fortel(TM)Ovulation test, EZ-LH(TM)Rapid Ovulation test, Strep A Rapid
Test

Class II - GAP(tm) IgG H. Pylori ELISA kit, IgG, T3 EIA kit, T4 EIA kit, TSH
ELISA kit, Anti-thyroglobulin ELISA kit, anti-TPO ELISA kit, Free T4 ELISA kit,
Neo-TSH RIA kit, PTH (intact) ELISA kit, Calcitonin ELISA kit, Erythropoietin
ELISA kit, ACTH ELISA kit, Fortel Ultra Midstream (OTC and plastic stick),
EZ-HCG(tm) Rapid Pregnancy test (professional and dipstick), EZ Detect(tm) Fecal
Occult Blood test (Physician's dispenser pack), EZ-PSA Rapid test
(professional), Aware(tm) Breast Self-Examination, drugs of abuse rapid tests,
EZ-HP Professional, PTH (intact) IRMA kit

Class III - GAP(tm) IgM H. Pylori ELISA kit, GAP(tm) IgA H. Pylori ELISA kit,
Isletest(tm) GAD ELISA kit, Isletest(tm) ICA ELISA kit, Isletest(tm) IAA ELISA
kit, Allerquant(tm) IgG Food Allergy ELISA kit, Allerquant(tm) Med90G,
Allerquant(tm) 14 Foods, Custom Food Allergy Kit, Candiquant(tm) IgG ELISA kit,
Candiquant(tm) IgM ELISA kit, Candiquant(tm) IgA ELISA kit, Free Alpha Subunit
RIA kit, EZ-HP OTC.

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

     Pursuant to FDA requirement, we have registered our manufacturing facility
with the FDA as a medical device manufacturer, and listed the medical devices we
manufacture. We are also subject to inspection on a routine basis for compliance
with FDA regulations. This includes the Quality System Requirements, which,
requires that we manufacture our products and maintain our documents in a


                                       7
<PAGE>

prescribed manner with respect to issues such as design controls, manufacturing,
testing and validation activities. Further, we are required to comply with other
FDA requirements with respect to labeling, and the Medical Device Reporting
(MDR) regulation which requires that we provide information to the FDA on deaths
or serious injuries alleged to have been associated with the use of our
products, as well as product malfunctions that are likely to cause or contribute
to death or serious injury if the malfunction were to recur. We believe that we
are currently in material compliance with all relevant QSR and MDR requirements.

     In addition, our facility is required to have a California Medical Device
Manufacturing License. The license is not transferable and must be renewed
annually. Approval of the license requires that we be in compliance with QSR,
labeling and MDR regulations. Our license expires on March 16, 2004. We are also
registered with the Department of Health and Human Services, Public Health
Service of the FDA as a Device establishment. This registration expires on
December 31, 2004. We also hold two radioactive materials licenses from the
State of California (both expiring on June 20, 2008), and one permit from the
USDA, expiring on August 25, 2004. These licenses are renewed periodically, and
to date we have never failed to obtain a renewal.

     Through compliance with FDA and California regulations, we can market our
medical devices throughout the United States. International sales of medical
devices are also subject to the regulatory requirements of each country. In
Europe, the regulations of the European Union require that a device have a "CE
Mark" in order to be sold in EU countries. The directive goes into effect
beginning December 7, 2003. The Company has completed most of the process for
complying with the "CE Mark" directives, In Vitro Directive 98/79/EC, ISO 13485
for medical devices, and Medical Device Directive 93/42/EEC, and believes it
will be in full compliance by the December 7, 2003 deadline. At present the
regulatory international review process varies from country to country. We, in
general, rely upon our distributors and sales representatives in the foreign
countries in which we market our products to ensure that we comply with the
regulatory laws of such countries. We believe that our international sales to
date have been in compliance with the laws of the foreign countries in which we
have made sales. Exports of most medical devices are also subject to certain FDA
regulatory controls.

     The following products are FDA-cleared and may be sold to clinical
laboratories, physician laboratories and/or retail outlets in the United States
as well as internationally:

T3 EIA KIT
T4 EIA KIT
TSH ELISA KIT
Anti-thyroglobulin ELISA kit
Anti-TPO ELISA Kit
Free T4 EIA Kit
Neo TSH RIA Kit
GAP IgG H. Pylori ELISA Kit
PTH (Intact) ELISA Kit
Calcitonin ELISA Kit
Erythropoietin ELISA Kit
ACTH ELISA Kit
Midstream Pregnancy Test
EZ-HCG Rapid Pregnancy Test
EZ-LH(tm) Rapid Ovulation Test
EZ Detect(tm) Fecal Occult Blood Test (Physician's package, OTC package)
Strep A Rapid Test
AWARE(tm) Breast Self-Examination Kit
Drugs-of-Abuse Rapid Tests

The following products are not FDA-cleared.  These are sold internationally
and can be sold in the U.S. "FOR RESEARCH ONLY":

GAP(tm) IgM H. Pylori ELISA Kit
GAP(tm) IgA H. Pylori ELISA Kit
PTH (intact) RIA Kit
Isletest(tm) GAD ELISA Kit
Isletest(tm) ICA ELISA Kit
Isletest(tm) IAA ELISA Kit
Allerquant(tm) IgG Food Allergy ELISA Kit (90-foods, 14-foods, custom kits)
Candiquant(tm) IgG, IgM, and IgA ELISA Kits for Candida Albicans antibodies
Free Alpha Subunit RIA kit
Fortel(tm) Ultra Midstream Pregnancy Test
Fortel(tm) Ovulation Test
EZ-PSA Rapid Test

                                       8
<PAGE>


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

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

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

     With ISO 9002, EN 46002, and the Product Technical Files, Lancer applied
for and was granted certification under ISO 9002, EN 46002, and CE. With the CE
certification, Lancer is now permitted to sell its products within the European
Community. The international ISO 9002 and EN 46002
standards will become obsolete in December 2003. As a result, Lancer is
currently in the process of updating its Quality Management System for
conformance to the new ISO 9000: 2000 international quality system standards, as
well as the ISO 13485 standard for medical devices. Compliance with and
certification to both ISO 9000:2000 and ISO 13485 will be implemented by
December 2003.


SEASONALITY OF BUSINESS

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

INTERNATIONAL BUSINESS

     Most of Biomerica's fixed assets are located within southern California.
The Company currently has a minor amount of fixed assets located in Mexico.
Lancer has a greater number of fixed assets located there due to their larger
manufacturing volume in Mexico at this time. The following table sets forth the
dollar volume of revenue attributable to sales to domestic customers and foreign
customers during the last two fiscal years for the Biomerica and its
consolidated subsidiaries:

                                                 Year Ended May 31,
                                                 ------------------
                                             2003                 2002
                                             ----                 ----
     U.S. Customers                   $4,609,000/50.9%        $4,254,000/49.5%
     Asia                                 228,000/2.5%           199,000/ 2.3%
     Europe                            2,393,000/26.4%         2,313,000/26.9%
     Middle East                          321,000/3.6%           449,000/ 5.2%
     Oceania                              452,000/5.0%           393,000/ 4.6%
     S. America                           460,000/5.1%           498,000/ 5.8%
     Other foreign                        596,000/6.5%           492,000/ 5.7%
                                      ----------------        ----------------

                Total Revenues         $9,059,000/100%         $8,598,000/100%

     We recognize that our foreign sales could be subject to some special or
unusual risks which are not present in the ordinary course of business in the
United States. Changes in economic factors, government regulations and import
restrictions all could impact sales within certain foreign countries. Foreign
countries have licensing requirements applicable to the sale of diagnostic


                                       9
<PAGE>

products which vary substantially from domestic requirements; depending upon the
product and the foreign country, these may be more or less restrictive than
requirements within the United States. We cannot predict the impact that
conversion to the Euro in the European countries may have on Biomerica or
Lancer, if any.

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

INTELLECTUAL PROPERTY

     We regard the protection of our copyrights, service marks, trademarks and
trade secrets as critical to our future success. We rely on a combination of
copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect our proprietary rights in products and
services. We have entered into confidentiality and invention assignment
agreements with our employees and contractors, and nondisclosure agreements with
most of our vendors, fulfillment partners and strategic partners to limit access
to and disclosure of proprietary information. We cannot be certain that these
contractual arrangements or the other steps taken by us to protect our
intellectual property will prevent misappropriation of our
technology. We have licensed in the past, and expect that we may license in the
future, certain of our proprietary rights, such as trademarks or copyrighted
material, to third parties. While we attempt to ensure that the quality of our
product brands is maintained by such licensees, we cannot be certain that such
licensees will not take actions that might hurt the value of our proprietary
rights or reputation.

     Lancer has certain license agreements as a licensee for three products.
These licenses expire at varying dates from 4/21/04 until 10/12/10. As a
licensor they have licenses on the design of a nickel titanium orthodontic
archwire. These licenses expire on 4/4/06. All but one of the agreements
requires royalty payment on a percentage of net sales dollars sold over a
specified period. One specific license specifies a royalty payment based upon
the number of units sold. All of such license agreements to which Lancer
currently is a party, are for fixed terms which will expire after ten years from
the commencement of the agreement or upon the expiration of the underlying
patents. After the expiration of the agreements of the patents, Lancer is free
to use the technology that had been licensed.

BRANDS, TRADEMARKS, PATENTS

     We registered the tradenames "Fortel," "Isletest," "Nimbus" and "GAP" with
the Office of Patents and Trademarks on December 31, 1985. Our unregistered
tradenames are "EZ-Detect," "CAST," "COT," "EquistiK," "FelistiK," "Tri-Level
Controls," "Tru-Level Controls," "T-Marker Controls," "AllerHalt," "Candiquant,"
"Candigen," "EZ-H.P." and "EZ-PSA." A trademark for "Aware" was issued and
assigned in January, 2002.

     The Company held a license for a diagnostic test for CAG-A as of May 31,
2001. Since that time, the Company decided not to market the product. At May 31,
2002, the Company recorded an impairment expense for the unamortized balance of
the license in the amount of $100,320, which was reflected in the cost of sales
in the year ended May 31, 2002.

     On April 4, 1989, Lancer was granted a patent on its CounterForce design of
a nickel titanium orthodontic archwire. On August 1, 1989, Lancer was granted a
patent on its bracket design used in the manufacturing of interline and Intrigue
orthodontic brackets. On September 17, 1996, Lancer was granted a patent on its
method of laser annealing marking of orthodontic appliances. On March 4, 1997,
Lancer was granted a patent on an orthodontic bracket and method of mounting.
All of the patents are for a duration of 17 years. Lancer has entered into
license agreements expiring in 2006 whereby, for cash consideration, the counter
party has obtained the rights to manufacture and market certain products
patented by Lancer. Lancer has also entered into a number of license and/or
royalty agreements pursuant to which it has obtained rights to certain of the
products which it manufactures and/or markets. The patents and agreements have
had a favorable effect on Lancer's image in the orthodontic marketplace and
Lancer's sales. Lancer has license agreements as a licensee with three products.
As a licensor Lancer has licenses on the design of a nickel titanium orthodontic
archwire. All but one of the agreements requires royalty payments on a
percentage of net sales dollars sold over a specified period. One specific
license specifies a royalty payment based upon the number of units sold.

                                       10
<PAGE>

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

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

EMPLOYEES

     As of August 14, 2003, the Company and its subsidiaries employed 62
full-time employees and 2 part-time employees in the United States. The number
of employees between the two companies decreased over the previous year
according to the following breakdown between departments:

                                          Total
                                     2003       2002
                                     ----       ----
Administrative                        11         11
Marketing & sales                     17         19
Research & development                 2          1
Production and operations             32         32
                                     ----       ----
Total                                 62         63

     In addition, Lancer, through its Mexican subsidiary, employs approximately
120 people. Biomerica employs 8 people at its Mexican facility. We also engage
the services of various outside Ph.D. and M.D. consultants as well as medical
institutions for technical support on a regular basis. We are not a party to any
collective bargaining agreement and have never experienced a work stoppage. We
consider our employee relations to be good.


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

     During fiscal 2002 the company entered into a lease of the existing
facilities of approximately 21,000 square feet of space in Newport Beach,
California for a four year term which expires October 31, 2005. Pursuant to the
lease we pay an annual base rent of approximately $180,000 plus all real estate
taxes and insurance costs. During fiscal 2003 the Company incurred a total of
$182,400 in rent expense for approximately 21,800 square feet of space. As of
May 31, 2003, the Company owed $86,938 in rent expense and as of August 20, 2003
the Company owed a balance of $86,848 for past rent. In May and June 2003 the
Company issued 60,000 shares of Biomerica restricted common stock plus warrants
to purchase an additional 60,000 shares of Biomerica restricted common stock at
the purchase price of $.25 for payment of $15,000 in accrued rent. The rent
shall escalate by 3% on September 1, 2003. These facilities are used for
diagnostic test kit research and development, manufacturing, marketing and
administration. Management believes that the rent for the facilities in Newport
Beach, CA is consistent with current market values for comparable property in
the area. Management believes that the lease terms are the same as could be
obtained in an arm's length transaction.

     The facilities are leased from Mrs. Ilse Sultanian and JSJ Management. Ms.
Janet Moore, an officer, director and shareholder of our Company, is a partner
in JSJ Management. Mrs. Ilse Sultanian and the other partners of JSJ Management,
Susan Irani and Jennifer Irani, are shareholders of the Company.

     At May 31, 2003, future aggregate minimum lease payments for Biomerica are
as follows:

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

                                  2004    184,050
                                  2005    185,400
                                  2006     77,250
                                         ---------
                                         $446,700

                                       11
<PAGE>

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

     Lancer leases its main facility under a non-cancelable operating lease
expiring December 31, 2003, as extended, which requires monthly rentals that
increase annually, from $2,900 per month in 1994 to $6,317 per month in 2004.
The lease expense is being recognized on a straight-line basis over the term of
the lease. The excess of the expense recognized over the cash paid aggregates
$3,903 at May 31, 2003, and is included in accrued liabilities in the
accompanying balance sheet. Total rental expense for this facility for each of
the years ended May 31, 2003 and 2002 was approximately $69,000.

     Effective December 1, 2002, Lancer Orthodontics de Mexico entered into a
non-cancelable operating lease for its Mexico facility through March 31, 2009.
The new lease encompasses the approximately 16,000 square feet of the previous
lease, plus additional square footage of approximately 10,000, for a total of
approximately 26,000 square feet. Lancer Orthodontics de Mexico will provide
subcontracted manufacturing services to Biomerica, Inc., using a portion of the
additional square footage. The new lease requires four monthly lease payments of
approximately $5,300 through March 2003, and seventy-two monthly payments of
approximately $9,600 through March 2009. An agreement has been negotiated
between Lancer Orthodontics de Mexico and Biomerica for lease reimbursement of
approximately $2,000 per month. The remainder of approximately $7,600 monthly
lease expense will be borne by Lancer. Total rent expense for this facility for
the year ended May 31, 2003 and 2002, was approximately $74,000 and $69,000,
respectively.

     The new Lancer Orthodontics de Mexico lease also requires an additional
refundable security deposit of $26,550, payable over twelve months beginning
January 2003. Lancer Orthodontics, Inc., is paying half and Biomerica, Inc. the
other half. At May 31, 2003 and 2002, other assets on the balance sheet includes
approximately $39,000 and $31,000, respectively of security deposit paid by
Lancer on the Mexico location.

     Future aggregate minimum annual cash lease payments for Lancer are as
follows:


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

                             2004                     $ 173,950
                             2005                       132,003
                             2006                       131,148
                             2007                       129,438
                             2008                       127,767
                             2009                       105,776
                                                      ----------
                       Total                          $ 800,082


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

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table summarizes the Company's obligations and commitments as of
May 31, 2003:

<TABLE>
                                        Payments Due by Period

<CAPTION>
Contractual Cash      Total       Less than 1 year        1-3 years      4-5 years    After 5 years
Obligations

<S>                <C>              <C>                   <C>            <C>               <C>
Line of credit            426              426                   --             --         --
Shareholder debt   $  347,835       $   59,048            $ 163,803      $ 124,984         --
Operating Leases   $1,181,994       $  349,277            $ 504,099      $ 328,618         --
Employment
Agreements         $  135,000       $  135,000                   --             --         --

Total              $1,665,255       $  543,751            $ 667,902      $ 453,602         --
</TABLE>

                                       12
<PAGE>

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

     Inapplicable.


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

     The 2002 Annual Meeting of the Company's stockholders was held on September
2, 2003. Two matters were voted on at the meeting, as set forth in the proxy
statement dated June 26, 2003, as filed with the Securities and Exchange
Commission pursuant to Rule 14 under the Securities Exchange Act of 1934. The
following summarizes the voting:

Proposal No. 1:  Election of Directors

Name                        For                         Votes Withheld

Barbieri                    4,745,095                   230,842
Cano                        4,745,095                   230,842
Irani                       4,744,305                   232,184
Moore                       4,744,705                   231,232
Orlando                     4,745,095                   230,842

All directors were elected.

Proposal No. 2: Proposal to Ratify and Approve the Company's 2002 Stock
Incentive Plan

                            For            Against      Abstain

                            1,870,275      400,481      70,483

Proposal No. 2 did not receive a plurality of the votes and therefore was not
approved.


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

                                       13
<PAGE>

                                     PART II

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

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

     On January 15, 2002, the Company received a Nasdaq Staff Determination
indicating that the Company failed to comply with the net tangible assets or
shareholders' equity requirements for continued listing set forth in Marketplace
Rule 4310(c)(2)(B), and that its securities were, therefore, subject to
delisting from the Nasdaq SmallCap Market effective January 23, 2002. The
Company requested a hearing before a Nasdaq Listing Qualifications Panel to
review the Staff Determination. The request for a hearing stayed the delisting
of the Company's securities pending the Panel's decision. On February 21, 2002,
the hearing took place. In response to the hearing, on March 25, 2002, the
Company received a Nasdaq Staff Determination Letter stating their decision with
respect to the continued listing of the Company's securities. The Panel
determined to continue the listing of the Company's securities on the Nasdaq
SmallCap Market via an exception from the net tangible assets requirement. While
the Company failed to meet this requirement, the Company was granted a temporary
exception from the standard subject to the Company meeting certain conditions by
specified deadlines.

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

     On February 14, 2002, the Company received a Nasdaq Staff Determination
Letter indicating that the Company failed to comply with the minimum $1.00 per
share requirement for continued inclusion of its common stock under Marketplace
Rule 4310(c)(4), and therefore was subject to delisting from the Nasdaq SmallCap
Market. In accordance with Marketplace Rule 4310(c)(8)(D), the Company would
have been provided 180 calendar days, or until August 13, 2002, to regain
compliance. However, prior to that time, the Company was delisted according to
the above mentioned reasons.

     Shares traded on the OTC Bulletin Board are not as liquid as those traded
on Nasdaq National market or the Nasdaq SmallCap market.

     The following table shows the high and low bid prices for Biomerica's
common stock over the last two years based upon data reported by NASDAQ for the
fiscal year ended May 31, 2002 and as reported by Yahoo for the period ended May
31, 2003.

                                                        Bid Prices
                                              ---------------------------
                                                  High            Low
                                              --------------  -----------
Quarter ended:
 May 31, 2003.............................        $0.52          $0.20
 February 28, 2003........................        $0.51          $0.17
 November 30, 2002........................        $0.49          $0.18
 August 31, 2002..........................        $0.60          $0.33
 May 31, 2002.............................        $0.70          $0.41
 February 29, 2002........................        $0.74          $0.45
 November 30, 2001........................        $1.13          $0.35
 August 31, 2001..........................        $0.95          $0.52

     As of August 21, 2003, the number of holders of record of Biomerica's
common stock was approximately 985, excluding stock held in street name. The
number of record holders does not bear any relationship to the number of
beneficial owners of the Common Stock.

     The Company has not paid any cash dividends on its Common Stock in the past
and does not plan to pay any cash dividends on its Common Stock in the
foreseeable future. The Company's Board of Directors intends, for the
foreseeable future, to retain any earnings to finance the continued operation
and expansion of the Company's business.

                                       14
<PAGE>

     On April 10, 2002, the Company filed a Form S-4 for the proposed
registration of between 488,200 and 984,274 shares of Biomerica common stock.
The shares were to be issued for the purchase of the assets of the subsidiary
Lancer Orthodontics, Inc. Due to market conditions, both boards of directors
have agreed not to proceed with the proposed purchase and Biomerica requested in
July 2002 that the registration statement be withdrawn. In addition, since
Biomerica was unable to remain on the Nasdaq Small Cap Market, Lancer
shareholders would not have had increased liquidity. This request was filed by
EDGAR on September 27, 2002. The Company has seen no affect on operations as a
result of the announcement that we would not be proceeding with the purchase.
Fees associated with the proposed asset purchase were approximately $57,500.

     With respect to the one-for-three reverse stock split that was approved at
the last shareholders' meeting, the purpose of the reverse stock split would
have been to try to meet the minimum bid price as required by Nasdaq in order to
maintain listing. Therefore, the board will not effect the one-for-three reverse
stock split.

     The following is information on issuances of securities during the past
three fiscal years:

                    Class or   Persons                 Price per
Date     Title      Amount     Sold To                 Share      Total

9/00     common     113,375    insiders & qualified
                               investors               $1.34      $151,438

5/01     common      34,643    qualified investors     $1.11      $ 38,615

4/01     common     126,075    insiders & qualified
                               investors               $0.72      $ 90,774

6/01     common      14,166    insiders & qualified
                               investors               $0.72      $ 10,200

3/02     common      17,000    insiders & qualified    $0.50      $  8,500
                               investors

3/02     common       6,250    qualified investor      $0.61      $  3,813

9/02     common      87,778    insiders & qualified    $0.45      $ 51,417
                               investors

2/03     common     100,000    qualified investor      $0.25      $ 25,000

3/03     common      98,182    insiders & qualified    $0.22      $ 21,600
                               investors

5/03     common      22,107    qualified investor      $0.45      $ 20,611

5/03     common      60,000    insider & qualified     $0.25      $ 15,000
                               investors

     The exemption relied upon for the issuance of the unregistered shares was
that the shares were issued to accredited investors within the meaning of
Securities and Exchange Commission Rule 501 of Regulation D.

     EQUITY COMPENSATION PLANS

     The table below provides information relating to our equity compensation
plans as of May 31, 2003:


                                       15
<PAGE>
<TABLE>
<CAPTION>
                                                                                Number of
                                                                                Securities
                                                                                Remaining Avail-
                                                                                able for Future
                                                                                Issuance Under
                         Number of Securities                                   Compensations Plans
                         To be issued upon         Weighted-Average             (Excluding Securities
Plan                     Exercise of outstanding   Exercise Price of            Reflected in First
Category                 Options                   Outstanding Options          Column)

<S>                           <C>                        <C>                        <C>
Equity compensations          1,053,786                  $1.14                      513,813
Plans approved by
Securities holders

Total
</TABLE>


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

     EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS IN THIS
FORM 10-KSB ARE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INVOLVE
KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES WHICH MAY CAUSE BIOMERICA'S AND
LANCER'S RESULTS IN FUTURE PERIODS TO DIFFER FROM FORECASTED RESULTS. THESE
RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHER THINGS, THE CONTINUED DEMAND FOR
THE COMPANIES' PRODUCTS, AVAILABILITY OF RAW MATERIALS AND THE STATE OF THE
ECONOMY. THESE AND OTHER RISKS ARE DESCRIBED IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-KSB AND IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.

LIQUIDITY AND GOING CONCERN

     These consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has operating and
liquidity concerns due to historically reporting net losses and negative cash
flows from operations. Biomerica's shareholder's line of credit (Note 6) expires
on September 13, 2003 and will not be renewed. The unpaid principal and interest
will be converted into a note payable bearing interest at 8% and payable in
monthly installments over four years.

     Biomerica has suffered substantial recurring losses from operations over
the last couple of years. Biomerica 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 3 and 13). ReadyScript and Allergy Immuno Technologies, Inc.
were contributors to the Company's losses. In the fiscal year 2003, the Company
reduced operating costs through certain cost reduction efforts and plans to
concentrate on its core business in Lancer and Biomerica to increase sales.
Additional cost reductions were made in the first quarter of fiscal 2004.
Management believes that cash flows from operations coupled with reduced costs
and anticipated increased sales will enable the Company to fund operations for
at least the next twelve months. Should the Company be unable to reduce costs
adequately or should the Company be unable to secure additional financing, the
result for the Company could be the inability to continue as a going concern.

     The Company will continue to have limited cash resources. Although the
Company's management recognizes the imminent need to secure additional financing
there can be no assurance that the Company will be successful in consummating
any such transaction or, if the Company does consummate such a transaction, that
the terms and conditions of such financing will not be unfavorable to us.

     Our independent certified public accountants have concluded that these
factors, among others, raise substantial doubt as to the Company's ability to
continue as a going concern for a reasonable period of time, and have, therefore
modified their report in the form of an explanatory paragraph describing the
events that have given rise to this uncertainty. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.



                                       16
<PAGE>

RESULTS OF OPERATIONS

     We currently have one active subsidiary, Lancer Orthodontics, Inc.
("Lancer"), which is engaged in manufacturing, sales and development of
orthodontic products. We own approximately 31.12% of the outstanding stock of
Lancer. We exercise effective control of over 50% over Lancer via voting
agreements with certain shareholders. As a result of our control and ownership,
our financial statements are consolidated with those of Lancer. Lancer is a
public company whose common stock is traded on the bulletin board system under
the symbol "LANZ,". On May 30, 2002, Biomerica sold its controlling interest in
Allergy Immuno Technologies, Inc. The operations of AIT for fiscal 2002 were
reported as discontinued operations as a result of this sale.

     The ReadyScript subsidiary was a development-stage enterprise and required
the raising of a significant amount of capital to fund its short- term working
capital needs. The ReadyScript operations were discontinued in May 2001. The
sale of some of the ReadyScript intangible assets is being discussed with
various parties, however at this time there is no purchaser for these assets.
The subsidiary is being reported in the financial statements as a discontinued
operation because it is no longer an operating entity.

Fiscal 2003 Compared to Fiscal 2002

     Our consolidated net sales were $9,059,938 for fiscal 2003 compared to
$8,598,054 for fiscal 2002. This represents an increase of $461,884, or 5.4% for
fiscal 2003. Of the total consolidated net sales for fiscal 2003, $5,887,898 is
attributable to Lancer, and $3,172,040 to Biomerica. Lancer's sales decreased by
$134,433 or 2.2%, while Biomerica showed a sales increase of $596,317, or 22.7%.
The decrease at Lancer was attributable to decreased international sales of
$242,273, particularly in South and Central America. Domestic sales at Lancer
increased by $112,985. The increase in sales at Biomerica was due to increased
screening programs of the EZ Detect product and increased sales of certain of
its laboratory products.

     Cost of sales in fiscal 2003 as compared to fiscal 2002 increased by
$99,023 or 1.6%. Lancer's cost of sales as a percentage of sales increased from
69.1% to 70.3% in fiscal 2003 as compared to fiscal 2002. The increase was
primarily attributable to expansion costs in Mexico. Biomerica had a decrease in
cost of sales as a percentage of sales from 73.9% to 63.6% in fiscal 2003 as
compared to fiscal 2002. The decrease was due to the Company recording an
impairment expense for the unamortized balance of a license in the amount of
$100,320 which is reflected in cost of sales in the accompanying statement of
operations for the year ended May 31, 2002.

     Selling, general and administrative costs increased in fiscal 2003 as
compared to fiscal 2002 by $4,240 or 1.0%. Lancer had a decrease of $139,918 in
these costs due to decreases in labor costs and travel expenses which was offset
by higher insurance expenses. Biomerica had an increase in fiscal 2003 as
compared to fiscal 2002 of $144,156, primarily due to higher commissions and
wages.

     Research and development expense increased in fiscal 2003 as compared to
fiscal 2002 by $103,083 or 64.5%. Of this, Lancer had an increase of $103,528,
as a result of increased labor costs and supplies associated with development of
new products. Biomerica had a decrease in research and development expenses of
$445.

     Interest expense net of interest income, decreased in fiscal 2003 as
compared to fiscal 2002 by $8,103 or 20.1%, due to a decrease of such expense at
Lancer of $13,723 which was offset by an increase at Biomerica of $5,620.
Lancer's interest expense decreased because the average line of credit balance
was lower due to an increase in cash, primarily from cash flows and insurance
proceeds. Biomerica's interest expense increased due to a higher average line of
credit balance.

     Other income increased by $102,193 or 312.8% in fiscal 2003 as compared to
fiscal 2002. Of this, Lancer had an increase in other income of $102,821 due to
other income of $62,655 from the insurance claim settlement of $144,413 for the
theft of inventory at Lancer's Mexicali facility, less $81,758 of inventory
related thereto.

     As of May 31, 2003, Biomerica had net tax operating loss carryforwards of
approximately $4,384,000 and investment tax and research and development credits
of approximately $62,000, which are available to offset future federal tax
liabilities. These carryforwards expire at varying dates from 2003 to 2022. As


                                       17
<PAGE>

of May 31, 2003, Biomerica had net operating tax loss carryforwards of
approximately $1,177,000 available to offset future state income tax
liabilities, which expire through 2012. As of May 31, 2003, Lancer had net
operating loss carryforwards of approximately $2,059,000 and business tax
credits of approximately $64,000 available to offset future Federal tax
liabilities. The Lancer federal carryforwards expire through 2021. As of May 31,
2002, Lancer had net tax operating loss carryforwards of approximately $70,000
and business tax credits of approximately $10,000 available to offset future
state income tax liabilities. The state carryforwards expire through the year
2011.

Liquidity, Capital Resources and Going Concern

     As of May 31, 2003, we had cash and available for sale securities of
$538,279 (see Note 1 of Notes to Consolidated Financial Statements) and current
working capital of $2,964,391. Of the current working capital, $2,813,672 is
attributable to the Lancer subsidiary, which is restricted from distribution of
any assets (except for reimbursement of expenses on behalf of Lancer or for
services rendered for Biomerica). During 2002, cash used in operations was
$131,073. During 2003, cash provided by operations was $523,536. During fiscal
2003, cash used in investing activities was $239,285, primarily due to the
purchase of property and equipment. During 2003, cash used for financing
activities of $74,548 was primarily a result of paydowns on the shareholder line
of credit. During 2002, cash generated from investing activities amounted to
$219,452 primarily from the sale of AIT. During 2002 the Company generated
$228,774 primarily as a result of increases in shareholder line of credit.

     On an unconsolidated basis, the Biomerica used cash in operating activities
of $126,954 in fiscal 2003 as compared to $313,475 in fiscal 2002. Net cash
provided by investing activities for the years ended May 31, 2003 and 2002 were
$38,528 and $222,839, respectively. Net cash used in and provided by financing
activities was $2,450 for fiscal 2003 and $291,328 for fiscal 2002. See Note 12
to the Notes to Consolidated Financial Statements.

     These consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has operating and
liquidity concerns due to historically reporting net losses and negative cash
flows from operations. Biomerica's shareholder's line of credit (Note 6) expires
on September 13, 2003 and will not be renewed. The unpaid principal and interest
will be converted into a note payable bearing interest at 8% and payable in
monthly installments over four years.

     Biomerica has suffered substantial recurring losses from operations over
the last couple of years. Biomerica 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 3 and 13). ReadyScript and Allergy Immuno Technologies, Inc.
were contributors to the Company's losses. In the fiscal year 2003, the Company
reduced operating costs through certain cost reduction efforts and plans to
concentrate on its core business in Lancer and Biomerica to increase sales.
Additional cost reductions were made in the first quarter of fiscal 2004.
Management believes that cash flows from operations coupled with reduced costs
and anticipated increased sales will enable the Company to fund operations for
at least the next twelve months. Should the Company be unable to reduce costs
adequately or should the Company be unable to secure additional financing, the
result for the Company could be the inability to continue as a going concern.

     The Company will continue to have limited cash resources. Although the
Company's management recognizes the imminent need to secure additional financing
there can be no assurance that the Company will be successful in consummating
any such transaction or, if the Company does consummate such a transaction, that
the terms and conditions of such financing will not be unfavorable to us.

     Our independent certified public accountants have concluded that these
factors, among others, raise substantial doubt as to the Company's ability to
continue as a going concern for a reasonable period of time, and have, therefore
modified their report in the form of an explanatory paragraph describing the
events that have given rise to this uncertainty. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.

                                       18
<PAGE>

     During fiscal 2001 Lancer management negotiated a new line of credit with
GE Capital Healthcare Financial Services through October 24, 2003. The line of
credit allows for borrowings up to $400,000 and is limited to 80% of accounts
receivable less than 90 days old with a liquidity factor of 94%. The outstanding
balance at May 31, 2003 was $426. The unused portion available under the line of
credit at May 31, 2003, was approximately $365,000. Borrowings bear interest at
prime plus 2.00% per annum, but not lower than 8% (6.25% at May 31, 2003). 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 is collateralized by substantially all the assets of
Lancer, including inventories, receivables, and equipment. The lending agreement
for the line of credit requires, among other things, that Lancer maintain a
tangible net worth ratio of $2,100,000, which was met, and that receivables'
payments be sent to a controlled lockbox. In addition to interest, a management
fee of .25% of the average monthly outstanding loan balance and an unused
balance fee of .0425% on the average monthly unused portion available are
required. Lancer is not required to maintain compensating balances in connection
with this lending agreement. Lancer is restricted from distribution of any
assets to Biomerica except for reimbursement of expenses on behalf of Lancer or
for services rendered.

     The debt covenant violations that existed at May 31, 2001 did not affect
the bank line of credit that was replaced by the GE Capital line in October
2001. There were no covenant violations at May 31, 2003.

     Lancer instituted a price increase in fiscal 2002. The 5% increase had no
material effect on operations or on demand from material customers.

     Lancer's inventory and sales practices affect its financing requirements,
however, management believes that the working capital relating to these are
within normal ranges for Lancer's business.

     Lancer's management believes that it will be able to finance Lancer's
operations through cash flow and available borrowings through the current fiscal
year and ensuing fiscal years based upon a level of demand for their products
approximately consistent or in excess of prior years.

     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
bore interest at 8%, was secured by accounts receivable and inventory, and
expires September 13, 2003. The outstanding principal and interest on September
12, 2003 was $337,835, including principal of $288,850 and interest of $48,985,
all of which will be converted into a note payable bearing interest at 8% with
interest and principal due monthly. The remaining unpaid principal and interest,
if any, are due September 12, 2007. The note will be secured by inventory and
receivables. There was $303,550 of outstanding principal and $43,963 of unpaid
interest under this line of credit at May 31, 2003. In addition, during fiscal
2002 the Company was advanced $10,000 from Zackary Irani, another
officer/director. In June 2003, Zackary Irani agreed to accept 40,000 shares of
Biomerica restricted common stock plus 40,000 warrants for restricted common
stock exercisable at a purchase price of $.25 in repayment of the $10,000 loan.
During 2003 and 2002, the Company incurred $29,466 and $19,661, respectively, in
interest expense related to the shareholder line of credit, of which $1,200 was
paid in fiscal 2003. As of May 31, 2003, $45,136 in accrued interest was due on
the line of credit and for the other officer/director loan.

     Pursuant to a decision by the Nasdaq Listing Qualifications Panel, the
Company's common stock was delisted from the Nasdaq Stock Market effective June
20, 2002, for failure to comply with the net tangible assets or shareholders'
equity requirements as set forth in Marketplace Rule 310(c)(2)(B). The Company's
securities were immediately eligible to trade on The OTC Bulletin Board and are
traded under the symbol BMRA.


CRITICAL ACCOUNTING POLICIES

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

                                       19
<PAGE>

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

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

     We recognize product revenues when an arrangement exists, delivery has
occurred, the price is determinable and collection is reasonably assured.

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

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

     In general, we are in a loss position for tax purposes, and have
established a valuation allowance against deferred tax assets, as we do not
believe it is likely that we will generate sufficient taxable income in future
periods to realize the benefit of our deferred tax assets. Predicting future
taxable income is difficult, and requires the use of significant judgment. At
May 31, 2003, all of our deferred tax assets were reserved. Accruals are made
for specific tax exposures and are generally not material to our operating
results or financial position, nor do we anticipate material changes to these
reserves in the near future.

POTENTIAL CONSEQUENCES OF ALLERGY IMMUNO TECHNOLOGY, INC.'S FAILURE TO
CONDUCT A FORMAL STOCKHOLDER VOTE IN CONNECTION WITH OUR PURCHASE OF ASSETS
FROM IT AND ASSUMPTION OF ITS LIABILITIES

     During not less than the preceding three years, AIT, a former
majority-owned subsidiary of ours, had been unprofitable and, for financial
statement reporting purposes, its losses were consolidated into our financial
statements. In March of 2002, AIT ceased its clinical testing services.
Thereafter, in late April of 2002, we entered into a transaction, pursuant to
which, at the end of May of 2002, AIT transferred its remaining assets to us
(valued on its financial statements at approximately $8,000), issued to us
approximately 808,500 shares of its restricted common stock (valued as of the
date of the transaction at approximately $19,000), and we assumed its remaining
liabilities (recorded on its financial statements at approximately $27,000) (the
"Asset/Liability Transaction"). The Asset/Liability Transaction was approved by
our board on April 22, 2002. Approval by our stockholders was not required under
Delaware corporate law. We understand that AIT's board approved the
Asset/Liability Transaction in April of 2002 and that, rather than calling a
formal meeting of AIT's stockholders, our consent to that transaction was deemed
to constitute the approval of the holders of a majority of AIT's capital stock,
as permitted by Delaware corporate law.

     The Company's substantial recurring losses from operations during the
preceding years and its lack of readily available capital, other than a line of
credit from a stockholder and officer, to help fund operations were the major
factors in its decision to stop lending funds to AIT. Both ReadyScript and AIT
contributed to the Company's losses. Accordingly, the Company discontinued
operations of ReadyScript in May of 2001 and ceased funding of AIT one year
later. (See Notes 2 and 13 to the Company's Audited Financial Statements for the
year ended May 31, 2002).

                                       20
<PAGE>

     At the time of the approval of the Asset/Liability Transaction, our seven
directors were Allen Barbieri, David Barrows, Carlos Beharie, M.D., Francis R.
Cano, Ph.D., Zackary S. Irani, Janet Moore, and Robert A. Orlando, M.D., Ph.D.,
three of whom (Mr. Irani, Ms. Moore, and Dr. Orlando) were also directors of
AIT. AIT's fourth director at such time was Susan Irani, whom AIT deemed to be
an affiliate of ours. Further, at such time, Mr. Irani served as the Chief
Executive Officer and Ms. Moore served as the Chief Financial Officer and
Secretary of both AIT and us. The Asset/Liability Transaction was negotiated by
management common to AIT and us and was approved by all of our directors
(including the directors constituting a majority of our board, who did not serve
in common with AIT). We were advised that the Asset/Liability Transaction was
approved by all of the AIT directors (each of whom also served as one of our
directors or was deemed to be an affiliate of ours).

     Notwithstanding the approval of the Asset/Liability Transaction by AIT's
board and its majority stockholder, AIT may not have provided prompt notice of
that approval to all of its stockholders in a manner fully consistent with
Delaware corporate law. That failure could have certain potential consequences.
Although AIT did not solicit proxies from its stockholders, it also did not file
a Schedule 14C with the Securities and Exchange Commission in connection with
the approval of the Asset/Liability Transaction by its majority stockholder.
Further, the potential exists that one of AIT's stockholders could bring a legal
action under Delaware state law against AIT either to rescind the
Asset/Liability Transaction, or to seek damages against AIT. Because of our
status as an affiliate of AIT at the time of the Asset/Liability Transaction,
such failure to file a Schedule 14C or a potential action could also name us,
our directors, and our officers. As of the date of this filing, no action has
been filed, and no proceeding has been commenced, against us or any of our
directors or officers, and no person or agency has contacted us or our directors
or officers announcing an intention to bring any action or to commence any
proceeding.

     We have been advised by counsel to AIT that, as of the date of this filing,
no action has been filed, and no proceeding has been commenced, against AIT or
any of its directors or officers, and no person or agency has contacted AIT or
its directors or officers announcing an intention to bring any action or to
commence any proceeding. AIT has informed us that its present attorney has
advised it that the likelihood of such an action or proceeding is minimal, the
possibility of its success on the merits is remote, and the scope of any
potential damages award is nominal for a variety of reasons. For example,

  No AIT stockholder or other person with potential standing to sue has
  announced dissatisfaction with the Asset/Liability Transaction, although it
  was announced publicly in June of 2002.

  The assets that were the subject of the Asset/Liability Transaction had
  historically yielded only unprofitable operations, which operations had ceased
  prior to the approval of the Asset/Liability Transaction, as well as the
  closing of that transaction.

  The value of the assets that were the subject of the Asset/Liability
  Transaction was small and less than the amount of liabilities that we
  concurrently assumed; thus, any award the compensation due to any potential
  plaintiffs upon a successful claim would be correspondingly small.

  Any potential liability under such a claim would be incapable of precise
  determination because the measure of damages under such a claim would depend
  upon a subjective valuation of the assets and liabilities that were the
  subject of the Asset/Liability Transaction.

We do not believe that such an action is probable, nor that a liability for such
an action, if any, could be estimated. Accordingly, we have not accrued a
liability in the accompanying consolidated financial statements related to the
aforementioned matter.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

                                       21
<PAGE>

     Aside from general macroeconomic downturns, the additional material factors
that could affect future financial results include, but are not limited to:
Terrorist attacks and the impact of such events; diminished access to raw
materials that directly enter into our manufacturing process; shipping labor
disruption or other major degradation of the ability to ship out products to end
users; inability to successfully control our margins which are affected by many
factors including competition and product mix; protracted shutdown of the U.S.
border due to an escalation of terrorist or counter terrorist activity; the
operating and financial covenants contained in our credit line and Lancer's
which could limit our operating flexibility; any changes in our business
relationships with international distributors or the economic climate they
operate in; any event that has a material adverse impact on our foreign
manufacturing operations may adversely affect our operations as a whole; failure
to manage the future expansion of our business could have a material adverse
affect on our revenues and profitability; possible costs in complying with
government regulations and the delays in receiving required regulatory approvals
or the enactment of new adverse regulations or regulatory requirements; numerous
competitors, some of which have substantially greater financial and other
resources than we do; potential claims and litigation brought by patients or
dental or medical professionals alleging harm caused by the use of or exposure
to our products; quarterly variations in operating results caused by a number of
factors, including business and industry conditions and other factors beyond our
control. All these factors make it difficult to predict operating results for
any particular period.


INSURANCE COVERAGE

     Biomerica currently carries various insurance policies including products
liability ($2,000,000), general liability ($2,000,000), property insurance
(premises-$2,490,000, personal property-$1,560,000), business income insurance
($800,000), employee benefit liability insurance ($1,000,000), commercial crime
insurance ($100,000), crime insurance (pension plan) ($300,000), employee theft
($100,000), depositor's forgery ($100,000),umbrella liability insurance
($1,000,000), workman's compensation insurance ($1,000,000), directors and
officers' insurance ($2,000,000), group health, disability and life insurance.
Lancer currently has coverage for personal property ($750,000), business income
(($1,200,000), general liability ($2,000,000), employee benefit liability
($1,000,000), products liability ($7,000,000), auto ($1,000,000, commercial
fidelity ($100,000), excess umbrella ($3,000,000),difference in conditions and
Mexico required coverage ($2,500,000), directors and officers' insurance (shared
with Biomerica) ($2,000,000); group health and dental. Both Lancer's and
Biomerica's workman's compensation policies cover injuries to employees as a
result of accidental contamination of hazardous materials. The companies do not
have a separate policy for contamination of hazardous materials.

RECENT ACCOUNTING PRONOUNCEMENTS:

     In August 2001, the FASB issued FAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long- lived
assets and the associated asset retirement costs. It applies to all entities and
legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or normal operation
of long-lived assets, except for certain obligations of lessees. This statement
is effective for financial statements issued for fiscal years beginning after
June 15, 2002. The Company does not expect SFAS 143 will have a material impact
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
adoption of FAS 144 did not have a material impact on the Company's Consolidated
Financial position or results of operations.

     In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections," to update, clarify and
simplify existing accounting pronouncements. FASB Statement No. 4, which
required all gains and losses from debt extinguishment to be aggregated and, if


                                       22
<PAGE>

material, classified as an extraordinary item, net of related tax effect, was
rescinded. Consequently, FASB Statement No. 64, which amended FASB Statement
No.4, was rescinded because it was no longer necessary. The Company does not
expect the adoption of this statement to have a material effect on our financial
statements.

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

     In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an
Amendment of FASB Statement No. 123." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about. the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company adopted the disclosure requirements effective December 1,
2002, in its consolidated financial statements.

     In November 2002, FIN No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others," was issued. FIN 45 requires that upon issuance of a guarantee, a
guarantor must recognize a liability for the fair value of an obligation assumed
under a guarantee. FIN 45 also requires additional disclosures by a guarantor in
its interim and annual financial statements about the obligations associated
with guarantees issued. The recognition provisions of FIN 45 are effective for
guarantees issued after December 31, 2002, while the disclosure requirements
were effective for financial statements for periods ending after December 15,
2002. The adoption of FIN 45 did not have a material impact on the Company's
consolidated financial position or results of operations.

     In January 2003, FIN No. 46, "CONSOLIDATION OF VARIABLE INTEREST ENTITIES"
was issued. This interpretation clarifies the application of Accounting Research
Bulletin No. 51, " Financial Statements," relating to consolidation of certain
entities. FIN No. 46 will require identification of the Company's participation
in variable interests entities ("VIEs"), which are defined as entities with a
level of invested equity that is not sufficient to fund future activities to
permit them to operate on a stand-alone basis, or whose equity holders lack
certain characteristics of a controlling financial interest. For entities
identified as VIEs, FIN No. 46 sets forth a model to evaluate potential
consolidation based on an assessment of which party to the VIE, if any, bears a
majority of the exposure to its expected losses, or stands to gain from a
majority of its expected returns. FIN No. 46 also sets forth certain disclosures
regarding interests in VIE that are deemed significant, even if consolidation is
not required. The adoption of FIN No. 46 did not have a material impact on the
Company's financial position, results of operations or cash flows.

     In April 2003, SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES" was issued. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for contracts entered into or modified after June 30,
2003. Adoption of this statement is not expected to have a significant effect on
the Company's financial position or results of operations.

     In May 2003, SFAS No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS
WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY" was issued. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003. The adoption of SFAS No. 150 is not expected to have a significant
effect on the Company's financial position, results of operations, or cash
flows.

                                       23
<PAGE>

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

     Exhibit 99.3, "Biomerica, Inc. and Subsidiaries Consolidated Financial
Statements" is incorporated herein by this reference.

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

     Inapplicable.


                                       24
<PAGE>

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.

     The Company's Bylaws give the Board of Directors ("the Board") the power to
set the number of directors at no less than three (3) nor more than nine (9).
The size of the Company's Board is currently set at seven (7). Five (5)
directors are to be elected at the Annual Meeting to be held on September 2,
2003. The directors so elected will serve until replaced by a vote of the
stockholders. In the event that any of them should become unavailable prior to
the Annual Meeting, the Proxy will be voted for a substitute nominee or nominees
designated by the Board or the number of directors may be reduced accordingly.

     The following table sets forth the name and current age of each nominee for
director, the year he or she was first elected a director and his or her
position(s) with the Company.


<TABLE>
<CAPTION>
- ----------------------------- ----------- ----------- -----------------------------------
                                          Director
            Name                 Age        Since               Positions Held
- ----------------------------- ----------- ----------- -----------------------------------
<S>                               <C>        <C>      <C>
Zackary Irani                     37         1997     Chairman of the Board and Chief
                                                      Executive Officer
- ----------------------------- ----------- ----------- -----------------------------------

Janet Moore                       52         1997     Secretary, Chief Financial Officer,
                                                      Treasurer and Director
- ----------------------------- ----------- ----------- -----------------------------------

Allen Barbieri                    44         1999     Director, Vice-President Finance
- ----------------------------- ----------- ----------- -----------------------------------

Robert A. Orlando, M.D.,
Ph.D.                             65         1986     Director
- ----------------------------- ----------- ----------- -----------------------------------

Francis R. Cano, Ph.D.            58         1999     Director
- ----------------------------- ----------- ----------- -----------------------------------
</TABLE>

     Mr. Zackary Irani has been a Director of the Company, and has been serving
as the Company's Chairman of the Board and Chief Executive since April 29, 1997.
Prior to that time, Mr. Irani served as the Company's Vice President of Business
Development since July 1994. He has been an employee of the Company since 1986.
Mr. Irani also serves as a director and Chief Executive Officer of Lancer
Orthodontics, Inc. In addition, Mr. Irani is the President and Chairman of the
Company's discontinued operation, ReadyScript, Inc. Mr. Irani became a salaried
employee of Lancer in June 2001. He has no employment agreement with them and is
paid $30,000 in salary and $30,000 in Lancer common stock per year. He is
usually at the Lancer location two days per week.

     Ms. Janet Moore has been a Director of the Company since April 29, 1997,
and has been serving as the Company's Secretary and Treasurer since 1985. She
has served as the Company's Chief Financial Officer since 1999. She has been an
employee of the Company since 1976. Ms. Moore also serves as a director and
Secretary of Lancer Orthodontics, Inc. and the Company's discontinued operation,
ReadyScript, Inc. Ms. Moore time is spent primarily on Biomerica issues but does
devote some time to Lancer.

     Robert A. Orlando, M.D., Ph.D., has served as a Director of the Company
since 1986. Dr. Orlando is a professor of pathology at Southern California
College of Optometry, as well as a biophysicist and immunologist. Dr. Orlando
has served as the Chief Pathologist at Beverly Hospital in Montebello,
California since 1991. Dr. Orlando also serves as a director of Lancer
Orthodontics, Inc. Dr. Orlando earned his Ph.D. in Pathology from the University
of Chicago and his M.D. from New Jersey University of Medicine.

     Francis R. Cano, Ph.D. has served as a Director of the Company since June
1999. Dr. Cano currently works as a consultant in the biomedical field. From
1996 to 1997, Dr. Cano served as Senior Vice President - Biotechnology of BDM,
an information technology company. From 1992 to 1996, he served as President and
Chief Operating Officer of Aviron, a public biotechnology company focused on
developing viral vaccines for disease prevention. Dr. Cano was also involved in
developing a vaccine business at a division of American Cynamid Corporation. Dr.
Cano also serves on the board of Lancer Orthodontics,Inc.

                                       25
<PAGE>

     Mr. Allen Barbieri has served as a Director of the Company since October
1999 and Vice-President of Finance since May 2002. Mr. Barbieri currently also
works as a private investor. From 1998 to 1999 he served as President and Chief
Financial Officer of Buy.com. From 1994 until 1998 Mr. Barbieri was President
and Chief Executive Officer of Pacific National Bank. Mr. Barbieri also serves
on the board of ReadyScript, Inc. and is Vice-President of Finance of Biomerica.

     The Board recommends a vote for the election of each of the nominated
directors.

EXECUTIVE OFFICERS

     Mr. Francis Capitanio, age 59, has served as the President of the
diagnostics division of Biomerica since July 10, 2000. Mr. Capitanio was
President and Chief Executive Officer of Kalisto Biologicals, Inc. from 1997
until 2000. From 1980 until 1996 he was President and Chief Executive Officer of
Diatech Diagnostics.


SECTION 16(a) - BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive Officers, directors and persons who beneficially own more than 10% of
the Company's Stock, to file initial reports of ownership and reports of changes
in ownership with the Securities and Exchange Commission. Executive officers,
directors and greater than 10% beneficial owners are required by applicable
regulations to furnish the Company with copies of all Section 16(a) forms they
file.

     Based solely upon a review of the copies of such forms furnished to the
Company and information involving securities transactions of which the Company
is aware, the Company believes that during the fiscal year ended May 31, 2003,
all Section 16(a) filing requirements applicable to its executive officers,
directors and greater than 10% beneficial stockholders were complied with.

                                       26
<PAGE>


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

     SUMMARY COMPENSATION TABLE

     The following table sets forth the total compensation earned by the Chief
Executive Officer and all other executive officers who earned in excess of
$100,000 per annum during the fiscal years ended May 31, 2003, 2002 and 2001.


<TABLE>
<CAPTION>
                                       ANNUAL COMPENSATION                LONG TERM COMPENSATION
                                 ------------------------------  --------------------------------------
                                                                         AWARDS             PAYOUTS
                                                                 ----------------------  --------------
                                                                 RESTRICTED  SECURITIES
                                            OTHER     ANNUAL       STOCK     UNDERLYING   LTIP    OTHER
   NAME AND PRINCIPAL             SALARY    BONUS  COMPENSATION   AWARD(S)    OPTIONS/   PAYOUTS  COMP.
        POSITION           YEAR   ($)(1)     ($)       ($)          ($)       SARS (#)     ($)     ($)
- -------------------------- ----  ---------  -----  ------------  ----------  ----------  -------  -----
<S>                        <C>   <C>         <C>       <C>         <C>        <C>          <C>     <C>
Zackary Irani, Chairman    2003  60,000(2)   -0-       -0-           -0-      75,000(4)    -0-     -0-
and Chief Executive
Officer                    2002  45,000(2)   -0-       -0-         20,000     65,000       -0-     -0-

                           2001  91,593      -0-       -0-           -0-        -0-        -0-     -0-


Francis Capitanio,
President, Diagnostics
Division (4)               2003  123,137     -0-       -0-           -0-      25,000       -0-     -0-

                           2002  106,333     -0-       -0-          6,579     21,000       -0-     -0-

                           2001  111,778     -0-       -0-           -0-      72,000       -0-     -0-
</TABLE>


                                       27
<PAGE>

(1)      The amounts described in the Summary Compensation Table above do not
         include other compensation and benefits provided to Mr. Irani or Mr.
         Capitanio during the fiscal year ended May 31, 2003, that in the
         aggregate did not exceed the lesser of $50,000 or 10% of the
         executives' annual salary and bonus.

(2)      During fiscal 2003 Mr. Irani accepted 37,778 shares of restricted
         common stock in payment of $17,000 in accrued wages and 68,182 shares
         of restricted common stock in payment of $15,000 in accrued wages. The
         wages for fiscal years 2003 include $13,333 cash wages and $46,667 in
         accrued wages. In fiscal 2002 Mr. Irani received $3,150 in cash wages
         and $41,250 in accrued wages. In fiscal 2003 Mr. Irani also received
         $31,731 in wages plus an accrual of $32,500 for common stock he will
         receive from the subsidiary, Lancer Orthodontics since he spends time
         at that facility. In fiscal 2002 Mr. Irani also received compensation
         of $40,000 from Lancer Orthodontics. In fiscal 2001 he received $3,000
         from Lancer for director's fees which were taken in Lancer restricted
         common stock. Mr. Irani was an employee of the Company's subsidiary,
         ReadyScript, Inc. from June 2000 through April 2001. The wages shown
         above for fiscal 2001 represent wages paid to him by ReadyScript for
         that period, plus accrued wages of $41,667 still due him by
         ReadyScript, plus wages paid to him by Biomerica, Inc. in May 2001.

(3)      Mr. Capitanio began his employment with the Company in July 2000
         (fiscal 2001). During fiscal 2002 Mr. Capitanio accepted 6,579 of
         Biomerica common stock and 21,000 options for Biomerica common stock in
         lieu of cash salary of $18,667.

(4)      Mr. Irani had an option for 64,000 shares which expired in Dec 2002.


COMPENSATION OF DIRECTORS

     Although not prohibited by the Company's Bylaws, directors receive no
direct payment for their services as directors, but they have been, and may in
the future be, granted options to purchase the Company's securities. The
compensation of directors is subject to review and adjustment from time to time
by the Board of Directors.


STOCK OPTION GRANTS IN LAST FISCAL YEAR

     The following table sets forth information concerning stock options granted
in the fiscal year ended May 31, 2003, to the Company's Chief Executive Officer
and President of diagnostics.

INDIVIDUAL GRANTS(1)

<TABLE>
<CAPTION>
                                           Percent of
                                          Total Number
                         Number of       of Securities
                        Securities         Underlying
                    Underlying Options/   Options/SARs   Exercise or Base
NAME                  SARs Granted (#)     Granted (#)     Price ($/SH)       Expiration Date
- ------------------- -------------------  --------------  -----------------  -------------------
<S>                       <C>                <C>               <C>               <C>
Zackary Irani             75,000             17.3              $.28              5/23/08

Francis Capitanio         25,000              5.8              $.28              5/23/08
</TABLE>

OPTION EXERCISES AND FISCAL YEAR-END VALUES

     The following table presents information for the named executive officers
in the Summary Compensation Table with respect to options exercised during
fiscal 2003 and unexercised options held as of the end of the fiscal year.


                                       28
<PAGE>

<TABLE>
                           AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                                  AND FISCAL YEAR END OPTION VALUES

<CAPTION>
                                                    Number of Securities
                                                         Underlying             Value of Unexercised
                                                    Unexercised Options at      In-the-Money Options
                       Shares                        Fiscal Year End (#)       at Fiscal Year End ($)
                      Acquired         Value      -------------------------  -------------------------
Name               On Exercise (#)  Realized ($)  Exercisable/Unexercisable  Exercisable/Unexercisable
- -----------------  ---------------  ------------  -------------------------  -------------------------
<S>                     <C>             <C>            <C>                         <C>
Zackary Irani (1)       -0-             -0-            1,157,783/50,000            $4,250/$8,500

Francis Capitanio       -0-             -0-              69,500/48,500             $2,125/$2,125
</TABLE>



- ------------
 (1)    Based on the closing price of $.45 as of the last day of the fiscal
        year ended May 31, 2003.


                                       29
<PAGE>

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

     The following table sets forth, as of June 23, 2003 certain information as
to shares of Common Stock owned by (i) each person known to beneficially own
more than 5% of the outstanding Common Stock, (ii) each director, including
nominees for director, and each named executive officer of the Company, and
(iii) all executive officers and directors of the Company as a group. Unless
otherwise indicated, each person listed has sole voting and investment power
over the shares beneficially owned by him or her. Unless otherwise indicated,
the address of each named beneficial owner is the same as that of the Company's
principal executive offices located at 1533 Monrovia Avenue, Newport Beach,
California 92663.

                                              SHARES                PERCENTAGE
NAME OF                                     BENEFICIALLY           BENEFICIALLY
BENEFICIAL OWNER (1)(2)                         OWNED                  OWNED
- -----------------------                   -----------------        ------------

Janet Moore (3)                               829,054                 13.6%

Zackary Irani (4)                           1,529,309                 20.8%

Francis Capitanio(5)                           94,079                  1.6%

Dr. Robert A. Orlando (1)(6)                   96,500                  1.7%

Allen Barbieri (1)(7)                         107,334                  1.8%

Francis R. Cano, Ph.D. (1)(8)                  62,500                  1.1%

Joseph L. Rink                                317,202                  5.5%

All executive officers and directors
as a group (six persons)                    2,718,776                 36.4%

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

(1)      Dr. Orlando's address is 947 West 30th Street, Los Angeles, CA 92034;
         Mr. Barbieri's address is 5 Foxboro, Irvine, CA 92614; and Dr. Cano's
         address is 11 Acorn Lane, Los Altos, CA 94022.

(2)      Beneficial ownership is determined in accordance with Rule 13d-3 of the
         Securities Exchange Act of 1934. Any shares of Common Stock that each
         named person and group has the right to acquire within 60 days pursuant
         to options, warrants, conversion privileges or other rights, are deemed
         outstanding for purposes of computing shares beneficially owned by and
         the percentage ownership of each such person and group. However, such
         shares are not deemed outstanding for purposes of computing the shares
         beneficially owned by or percentage ownership of any other person or
         group. Percentage ownership for each named beneficial owner, and the
         ownership of the directors and executive officers as a group, is based
         on 5,772,431 plus the shares the named person and group has a right to
         acquire within 60 days pursuant to options, warrants, conversion
         privileges or other rights.


                                       30
<PAGE>

(3)      Includes 89,367 shares underlying options exercisable by Ms. Moore at
         or within 60 days after the date of the Proxy, 45,910 shares underlying
         warrants exercisable by The Janet Moore Trust of which Janet Moore is
         the sole trustee, at or within 60 at or within 60 days after the date
         of the Proxy, 607,527 shares owned by The Janet Moore Trust of which
         Janet Moore is the sole trustee and 8,250 shares owned by Ms. Moore's
         minor children.

(4)      Includes 1,257,783 shares underlying options exercisable by Mr. Irani
         at or within 60 days after the date of the Proxy.

(5)      Includes 87,500 shares underlying options exercisable by Mr. Capitanio
         at or within 60 days after the date of the Proxy.
(6)      Includes 72,500 shares underlying options exercisable by Dr. Orlando at
         or within 60 days after the date of the Proxy.

(7)      Includes 79,445 shares underlying options exercisable by Mr. Barbieri
         at or within 60 days after the date of the Proxy.

(8)      Includes 62,500 shares underlying options exercisable by Dr. Cano at or
         within 60 days after the date of the Proxy.


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

     During the fiscal year ended May 31, 2003, the Company leased approximately
22,000 square feet of space in Newport Beach, California. The facilities are
leased from Ilse Sultanian and JSJ Management, of which Ms. Janet Moore is a
partner, as well as two other shareholders, Jennifer Irani and Susan Irani.
Jennifer Irani and Susan Irani are cousins of Zackary Irani. Management believes
that the rent for the facilities in Newport Beach, CA, is consistent with
current market values for comparable property in the area. Management believes
that the lease terms are the same as could be obtained in an arm's length
transaction. Jennifer Irani, Susan Irani and Ilse Sultanian each hold less than
5% of the Company common stock and therefore are not mentioned in the Beneficial
Ownership Table. During fiscal 2003, the Company incurred a total of $182,400,
gross of sublease income, in rent expense. During fiscal 2003 the Company
entered into a four-year lease for these facilities. The facilities are
currently being used for the Company's diagnostic test kit research and
development, manufacturing, marketing and administration.

     During fiscal 2003 Ilse Sultanian and JSJ Management agreed to accept
60,000 shares plus 60,000 warrants exercisable at $.25 per share of Biomerica
restricted common stock in payment for $15,000 in accrued rent. As of May 31,
2003 the Company owed $55,474 in accrued rent and at August 20, 2003 the Company
owed a balance of $86,848 for past rent.

     On July 10, 2001 the Company sold 69,444 shares plus 34,722 warrants to the
Janet Moore Trust of which Ms. Moore is the trustee, at a purchase price of
$1.34 and $.72 per share. The exercise price of the warrants is $1.50. On July
10, 2001 the Company sold 4,166 shares plus 2,083 warrants of Common Stock to
Mr. Irani at a purchase price of $.72 per share. The exercise price of the
warrants is $1.50 per share.

     In August 2002 Zackary Irani accepted 68,182 shares of Biomerica restricted
common stock in lieu of $15,000 in accrued wages and in November 2002 accepted
37,778 shares in lieu of $17,000 in accrued wages. In August 2002 Janet Moore
accepted 30,000 shares of Biomerica restricted common stock in lieu of $13,500
in accrued wages and in November 2002 accepted 30,000 shares in lieu of $6,600
in accrued wages. As of May 31, 2003 the Company owed Zackary Irani
approximately $44,529 in accrued wages and Janet Moore $46,950 in accrued wages.

     On September 12, 2000, Janet Moore, an officer and director of the Company
entered into an agreement to loan to the Company, as needed, up to a $500,000
for working capital needs. The line of credit bore interest at 8%, was secured
by Biomerica accounts receivable and inventory. The line of credit was renewed
August 28, 2002 and expires September 13, 2003. The outstanding principal and
interest on September 12, 2003 was $337,835, including principal of $288,850 and
interest of $48,985, all of which will be converted into a note payable bearing
interest at 8% with interest and principal due monthly. The remaining unpaid
principal and interest, if any, are due September 12, 2007. The note will be
secured by inventory and receivables. There was $303,550 of outstanding


                                       31
<PAGE>

principal and $43,963 of unpaid interest under this line of credit at May 31,
2003. Another shareholder and director, Zackary Irani loaned the Company $10,000
during the fiscal year ended 2002. In June 2003 Mr. Irani agreed to accept
40,000 shares plus 40,000 warrants exercisable at $.25 per share of Biomerica
restricted common stock in repayment of the $10,000 loan advanced during fiscal
2002.

     In May 2002 Biomerica accepted 37,595 shares of Lancer common stock in
payment for expenses of $8,271 advanced by Biomerica on Lancer's behalf.

     In April 2003, Lancer de Mexico entered into a manufacturing subcontractor
agreement with Biomerica, Inc., to provide manufacturing services in Mexicali,
Mexico. The agreement requires reimbursement from Biomerica for discrete
expenses such as payroll, shipping, and customs fees; lease and security
deposits of approximately $2,000 and $1,100 per month, respectively; and service
fees of approximately $2,900 per month.


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

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

 EXHIBIT NO.     DESCRIPTION

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

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

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

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

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

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

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

   3.8           First Amended and Restated Certificate of Incorporation of
                 Biomerica, Inc. filed with the Secretary of State of Delaware
                 on August 1, 2000 (incorporated by reference to Exhibit 3.8
                 filed with the Registrant's Annual Report on Form 10-KSB for
                 the fiscal year ended May 31, 2000).

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

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


                                       32
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       33
<PAGE>

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

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

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

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

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

  10.23          Fifth Revision to Manufacturing Shelter Agreement effective
                 November 1, 1998, whereby Lancer Orthodontics, Inc. and
                 Eagleson Industries, Inc. revised and amended that certain
                 Manufacturing Shelter Agreement entered into on May 11, 1990,
                 revised on June 20, 1991, December 2, 1992, July 1, 1994 and
                 April 1, 1996 (incorporated by reference to Exhibit 10.24 Filed
                 with Registrant's Registration Statement on Form SB-2,
                 Commission No. 333-87231 filed on September 16, 1999).

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

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

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

  10.27          Lease between Biomerica, Inc., JSJ Management and Ilse
                 Sultanian dated September 1, 2001. (Incorporated by reference
                 to the Company's 2002 Form 10KSB/A filed June 6, 2003.)

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


                                       34
<PAGE>

  10.29          General Assignment of Assets Agreement with Allergy Immuno
                 Technologies, Inc.(incorporated by reference to the Company
                 2002 Form 10KSB/A filed June 6, 2003.)

  10.30          Asset Purchase Agreement by and between Biomerica, Inc., and
                 Sangui Bio Tech, Inc. dated September 12, 2002.

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

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

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

  31.1           SCertification of Chief Executive Officer pursuant to 18 U.S.C.
                 Section 1350, as adopted pursuant to Section 302 of the
                 Sarbanes-Oxley Act of 2002.

  31.2           Certification of Chief Financial Officer pursuant to 18 U.S.C.
                 Section 1350, as adopted pursuant to Section 302 of the
                 Sarbanes-Oxley Act of 2002.

  32.1           Certification of Chief Executive Officer pursuant to 18 U.S.C.
                 Section 1350, as adopted pursuant to Section 906 of the
                 Sarbanes-Oxley Act of 2002.

  32.2           Certification of Chief Financial Officer pursuant to 18 U.S.C.
                 Section 1350, as adopted pursuant to Section 906 of the
                 Sarbanes-Oxley Act of 2002.

  99.3           Biomerica, Inc. and Subsidiaries Consolidated Financial
                 Statements For The Years Ended May 31, 2003 and 2002 and
                 Independent Auditors' Report.

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

     Biomerica filed a report on Form 8-K with the Securities and Exchange
Commission on June 6, 2002.


                                       35
<PAGE>

                                   SIGNATURES

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

                                       BIOMERICA, INC.
                                       Registrant

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

                                       Dated:  9/13/03
                                               -------

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

     Signature and Capacity

/s/ Zackary S. Irani                                           Date: 9/13/03
- ------------------------------------
Zackary S. Irani
President, Director, Chief Executive
Officer

/s/ Janet Moore                                                Date: 9/13/03
- ------------------------------------
Janet Moore, Secretary
Director, Chief Financial Officer

/s/ Robert Orlando                                             Date: 9/13/03
- ------------------------------------
Robert Orlando, M.D., Ph.D.
Director

/s/ Francis R. Cano
- -----------------------------------                            Date: 9/13/03
Francis R. Cano
Director

/s/ Allen Barbieri                                             Date: 9/13/03
- ------------------------------------
Allen Barbieri
Director, Vice President Finance


                                       36

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.30
<SEQUENCE>3
<FILENAME>assetpurch-sangui.txt
<TEXT>
<PAGE>
EXHIBIT 10.30

                            ASSET PURCHASE AGREEMENT

                                 BY AND BETWEEN

                                BIOMERICA, INC.

                            AND SANGUI BIO TECH, INC




                         Dated as of September 12, 2002


<PAGE>


                            ASSET PURCHASE AGREEMENT



         This ASSET PURCHASE AGREEMENT, dated as of September 15, 2002 (this
"Agreement"), is made and entered into by Biomerica Inc., a Delaware corporation
("Buyer" or "BMRA"), on the one hand, and Sangui Bio Tech, Inc., a Delaware
company ("Seller" or "Sangui"), on the other hand, with reference to the
following facts:


                                    RECITALS
                                    --------

         A.       Whereas Seller is the owner and titleholder to certain
                  technology which includes the necessary know-how and
                  expertise as listed in Schedule A to manufacture certain
                  immunodiagnostic test kits using antibodies provided by third
                  parties (hereafter "Intellectual Assets"); and

         B.       Whereas, Buyer wishes to purchase these Intellectual Assets
                  along with the ancillary tangible assets listed in Schedules B
                  and C (together, the "Assets"):


         NOW, THEREFORE, in consideration of the above premises, and the
representations, warranties, covenants, conditions and promises hereinafter set
forth, and for other good and valuable consideration, the receipt and adequacy
of which is hereby acknowledged, Buyer and Seller hereby agree as follows:

                                   ARTICLE 1

                                  DEFINITIONS
                                  -----------

         1.1 DEFINED TERMS. As used herein, the terms below shall have the
following meanings. Any of such terms, unless the context otherwise requires,
may be used in the singular or plural, depending upon the reference.

         AFFILIATE shall mean, with respect to any Person: (i) any director,
officer, employee or partner of such Person and any member of the family
(including spouse and siblings) of such Person or of any director, officer or
partner of such Person; and (ii) any other Person which directly or indirectly
controls, is controlled by or is under common control with such Person. As used
in this definition, "control" (and the correlatives, "controlled by" and "under
common control with") shall mean possession, directly or indirectly, of power to
direct or cause the direction of management or policies (whether through
ownership of securities or partnership or other ownership interests, by Contract
or otherwise); provided, however, that in any event, any Person which owns,
directly or indirectly, fifty percent (50%) or more of the securities having
ordinary voting power for the election of directors or other governing body of a
corporation (other than securities having such power only by reason of the
happening of a contingency) or fifty percent (50%) or more of the partnership or
other ownership interests of any non-corporate



<PAGE>

Person (other than as a limited partner of such other Person) shall be deemed to
control such corporation or other Person.

         AGREEMENT shall mean this Asset Purchase Agreement, together with its
exhibits and schedules.

         CLAIM shall mean any claim, legal or equitable cause of action, suit,
litigation, proceeding (including a regulatory or administrative proceeding),
grievance, complaint, demand, charge, investigation, audit, arbitration,
mediation or other process for settling disputes or disagreements, including,
without limitation, any of the foregoing processes or procedures in which
injunctive or equitable relief is sought.

         CLOSING shall have the meaning set forth in Section 8.1.

         CONTRACT shall mean any contract or agreement related to the Assets.

         DISCLOSURE SCHEDULES shall mean the disclosure schedules of Seller,
executed and delivered by Seller concurrently herewith, and as may be amended in
accordance with Section 6.6 below.

         GROSS REVENUE shall mean the sum of all worldwide billings of the Buyer
or its Affiliates to purchasers of the products, less any credits, third-party
royalties, commissions, the cost of returned goods, discounts, or shipping
charges.

         JUDGMENT shall mean any judgment, writ, order, injunction or decree of
or by any court, judge, justice or magistrate, including any bankruptcy court or
judge, and any order of or by any governmental authority.

         KNOWLEDGE shall mean (i) when modifying or qualifying a representation,
warranty or other statement furnished by a party under this Agreement, that the
fact, situation or circumstance described therein is either actually known
and/or, with the exercise of reasonable inquiry or investigation under the
circumstances, should have been known by any manager, member, officer, director
or employee of such party; or (ii) when modifying or qualifying a
representation, warranty or other statement furnished by a party under this
Agreement as to the nonexistence of a fact, situation or circumstance described
therein, that no manager, member, officer, director or employee is either
actually aware of and/or, with the exercise of reasonable inquiry under the
circumstances, should have been aware of such fact, situation or circumstance.

         LAW shall mean the common law and any federal, state or local statute,
ordinance, code or other law, rule, regulation, order, standard, requirement or
procedure enacted, adopted, promulgated, applied or followed by any governmental
authority.

         LIABILITY shall mean any loss, loss of tax benefits or deductions,
assessment, fine, penalty, deficiency, interest, payment, expense, cost, debt,
indebtedness, liability, lien, claim, contract, judgment, damages of every kind
and nature or other obligation (whether due or

                                       2

<PAGE>


payable, absolute or contingent, liquidated or un-liquidated, secured or
unsecured). As to Seller, Liability and/or Liabilities shall be strictly limited
to matters arising prior to the Closing.

         LIENS shall mean any security agreement, financing statement (whether
or not filed), security interest, pledge, conditional sale or other title
retention agreement, license, lease, consignment or bailment given for security
purposes, lien, charge, option, encumbrance, constructive or other trust, Claim,
charge, attachment, exception to or defect in title or other ownership interest,
royalty obligations, restrictions on transferability, reservation of rights or
restrictive covenants of any kind, whether direct, indirect, accrued or
contingent.

         PERSON shall mean any individual, trustee, corporation, general or
limited partnership, limited liability company or partnership, joint venture,
joint stock company, bank, firm, governmental authority, trust, association,
organization or unincorporated entity of any kind.

         PRODUCTS shall mean those assays, test kits and related components
listed in Schedule A.

         PURCHASED ASSETS shall mean those Assets listed in Schedules A, B and
C.

         TANGIBLE PROPERTY shall mean the inventory and assets specified on
Schedules B and C, FOB the place(s) of storage designated by Seller, "as
is/where is" with no representations, warranties, or guarantees of any kind or
nature, except that tangible property shall be in saleable or usable condition.
All costs and risks of shipping and handling shall be the sole responsibility of
Buyer. All risk shall transfer to Buyer upon Closing.

         1.2 CONSTRUCTION OF TERMS. The term "or" shall not be exclusive. The
terms "herein," "hereof," "hereto" "hereunder" and other terms similar to such
terms shall refer to this Agreement as a whole and not merely to the specific
article, section, paragraph or clause where such terms may appear. The term
"including" shall mean "including, but not limited to."

                                   ARTICLE 2

                               PURCHASE AND SALE
                               -----------------

         2.1 SALE OF ASSETS. Upon the terms and subject to the conditions of
this Agreement, at the Closing, Seller shall sell, assign, transfer, convey and
deliver to Buyer, and Buyer shall acquire from Seller, good and marketable title
to the Purchased Assets, free and clear of any Liens, Judgments and Liabilities.

         Without limiting any other provision of this Agreement, at or prior to
the Closing or if subsequently determined, after the Closing, Buyer and Seller
shall prepare, and Seller shall execute, deliver and record, if applicable, such
reasonable assignments, conveyances or documents of transfer as Buyer deems
appropriate to fully transfer, consummate and effectuate the assignment of any
Intellectual Assets associated with the Purchased Assets.


                                       3

<PAGE>


         2.2 CONSIDERATION. Upon the terms and subject to the conditions
contained herein, as full and complete consideration for the sale, transfer,
assignment, conveyance and delivery of the Purchased Assets, Buyer shall pay to
Seller cash payments as described below:

         Twenty Thousand United States Dollars on December 1, 2002

         Twenty Thousand United States Dollars on December 1, 2003.

         Twenty Thousand United States Dollars on December 1, 2004.

         2.3 Buyer shall use commercially reasonable efforts to market and sell
the Products listed in Appendix A. In the unlikely event that sales of the
Products listed in Appendix A for the year October 1, 2002-September 30, 2003
fall below $160,000, then the payment due on December 1, 2003 will be reduced by
the same percentage as the percentage of sales reduction. In the event that
sales of the Products for the year October 1, 2003-September 1, 2004 fall below
$160,000, then the payment due on December 1, 2004 will be reduced by the same
percentage as the percentage of sales reduction.

         2.4 LIABILITIES OF SELLER. Buyer is not assuming any Liabilities of
Seller, including any Liabilities associated with any of the Purchased Assets,
by virtue of this Agreement or otherwise, and Seller shall be totally and
exclusively responsible for and shall timely pay, satisfy or provide for such
Liabilities.

                                   ARTICLE 3

                         REPRESENTATIONS AND WARRANTIES
                         ------------------------------
                                   OF SELLER
                                   ---------

         Seller hereby represents, warrants and covenants to Buyer that, to the
Seller's knowledge, except as otherwise set forth in the Disclosure Schedules
attached hereto, the following representations and warranties are, as of the
date hereof, and will be, as of the Closing Date, true and correct.

         3.1 ORGANIZATION; QUALIFICATION. Seller is a corporation duly
organized, validly existing and validly subsisting under the laws of the State
of Delaware, has the power and authority to own all of its assets, including the
Purchased Assets, and to carry on its business as it is now being conducted and
is duly qualified to do business, is validly subsisting in each jurisdiction in
which the ownership of its property or the conduct of its business requires such
qualification, and possesses all licenses, franchises, rights and privileges
related to the conduct of its business.

         3.2 AUTHORITY OF SELLER. Seller has the full power and authority to
enter into this Agreement and any related documents to which Seller is a party
and to carry out its obligations hereunder and thereunder. The execution,
delivery and performance of this Agreement and any related documents by Seller
and the consummation of the transactions contemplated hereby and thereby have
been duly and validly authorized by Seller's Board of Directors, and no other
proceedings on the part of Seller is necessary to authorize this Agreement or
the related documents or the transactions contemplated hereby and thereby. This
Agreement has, and any

                                       4

<PAGE>


related documents will have been duly and validly executed and delivered by
Seller and constitute the valid and binding agreements of Seller, enforceable
against Seller in accordance with their terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies.

         3.3 NO VIOLATION. The execution, delivery and performance of this
Agreement and any related document and the consummation of the transactions
contemplated hereby and thereby will not constitute, nor with notice or lapse of
time or both would constitute: (i) a violation of Seller's Certificate of
Organization (as amended or restated to date), or corporate resolutions or
actions of Seller's managers; (ii) a breach of or default under any Contract or
Judgment to which Seller is a party or is subject or to which any of the
Purchased Assets is subject or bound; (iii) an event which would permit any
Person to terminate any such Contract or to accelerate the maturity of any
indebtedness or other obligation of Seller; or (iv) the creation or imposition
of any Lien Assets.

         3.4 TITLE TO PURCHASED ASSETS. Except as otherwise set forth herein:

                  (a) LIST OF PURCHASED ASSETS. The items described on Schedules
A, B, and constitute an accurate, correct and complete list and description of
all of the Purchased Assets, correctly and adequately identifies all of the
Purchased Assets and includes written copies or other evidences of licenses,
registrations, filings or applications for registration or filing of
Intellectual Assets associated with the Purchased Assets.

                  (b) GOOD TITLE. Except as set forth on Schedule 3.4(b), (i)
Seller has good, valid, marketable and indefensible title to, and is the
exclusive legal and equitable owner of, or exclusive licensee of, all of the
Purchased Assets, including all Intellectual Assets included therein, free and
clear of any and all Liens, Judgments and other Liabilities, (ii) there are no
Contracts or understandings that are reasonably likely to have an adverse effect
upon Seller's title to or other rights respecting the Purchased Assets, and
(iii) no proprietary rights in any of the Purchased Assets have been
transferred, whether by sale, assignment or license, or have been lost by
Seller.

                  (c) PROTECTION OF OWNERSHIP INTEREST. All of the Intellectual
Assets included within the Purchased Assets have been protected, and have not
been used, divulged, or appropriated for the benefit of any other Person or to
the detriment of Seller. Seller has taken all reasonable security measures to
protect the secrecy, confidentiality and value of the Intellectual Assets that
will he sold and transferred in accordance with this Agreement. Seller has not
taken any action, or, failed to take any action which directly or indirectly
caused the proprietary information associated with the Purchased Assets to enter
the public domain or in any way affect its value or Seller's absolute and
unconditional ownership thereof

                  (d) NO LIMITATIONS ON PURCHASED ASSETS. Except as set forth in
Schedule 3.4(c), all rights to any Tangible Property or Intellectual Assets
which constitute any portion of the Purchased Assets have been validly acquired
or created, and are owned, by Seller, free and

                                       5

<PAGE>

clear of any Liens, Judgments or other adverse claims by any predecessor of
Seller, or creditor of Seller, and no such property rights remain in any such
Person or entity. Seller is under no obligation to pay any other Person, any
royalties or other fixed or contingent amounts based upon the sale, license,
distribution or other use or exploitation of any of the Purchased Assets and,
upon the consummation of the transactions set forth herein, Buyer shall .not be
subject to any limitations, obligations, contingencies, royalties or
restrictions with regard to the sale, license, distribution or other transfer or
exploitation of the Purchased Assets.

         3.5 INTELLECTUAL ASSETS. Except as otherwise set forth herein:

                  (a) Schedule A sets forth an accurate, correct and complete
list of the Seller's Intellectual Assets that are being transferred to Buyer
through this Asset Purchase Agreement.

                  (b) Except as set forth in Schedule 3.5(b) (i) Seller has
good, valid, marketable and indivisible title to and is the exclusive legal and
equitable owner of, all of the Intellectual Assets, free and clear of any Liens,
Judgments or other Liabilities; (ii) Seller is the owner of and has the
exclusive rights to any applications or registrations relating to, or public or
private filings made with respect to, any of the Intellectual Assets; (iii) no
action, suit, proceeding or investigation concerning such Intellectual Assets is
pending or, to Seller's Knowledge, threatened; (iv) neither such Intellectual
Assets nor Seller's use of such Intellectual Assets interferes with, infringes
upon, conflicts with or otherwise violates the rights of any Person or, are
being interfered with or infringed upon by any Person, and none is subject to
any outstanding Judgment, stipulation or charge; (v) Seller has not agreed to
indemnify any Person for or against any infringement of or by such Intellectual
Assets; (vi) to Seller's Knowledge, there have not been any patent, invention or
application therefore or similar property or development which would bar the use
of or infringe upon any such Intellectual Assets or render obsolete or adversely
affect the products or services relating to such Intellectual Assets. Except as
set forth in Schedule 3.5(b), Seller is not subject to any Judgment of any
governmental authority or any arbitrator, nor is Seller a party to any Contract,
which restricts or impairs its use of any of the Intellectual Assets.. Seller
has not received notice of any violation of trade secret rights, copyrights or
other proprietary rights with respect to any of the Intellectual Assets and, to
Seller's knowledge, there is no basis therefore,

                  (c) To the knowledge, information and belief of Seller, the
transactions contemplated by this Agreement will not affect the validity or
enforceability of, or create a Lien or claim upon, any right, title or interest
of Seller in or to the Intellectual Assets. No approval or consent is required
to be obtained, and no notice is required to be given, with respect to the
Intellectual Assets in connection with this Agreement or the consummation of the
transactions contemplated hereunder.

         3.6 MANUFACTURING AND TECHNOLOGY RIGHTS. Seller has not granted rights
to manufacture, publish, produce, assemble, license or sell the Intellectual
Assets or any other rights


                                       6

<PAGE>


related to the Purchased Assets to any other Person and is not bound by any
Contract which affects Seller's exclusive right to engage in such activities.

         3.7 LITIGATION. There are no Claims pending before any governmental
authority, arbitrator or other dispute resolution body nor, to Seller's
Knowledge, is there any threat of or basis for any such Claim: (i) which
questions the validity of this Agreement or the related documents or the right
of Seller to enter into this Agreement or the related documents; (ii) challenges
the ownership or use, in any respect, of any of the Purchased Assets; (iii)
challenges the rights of Seller under, or the validity of, any of the
Intellectual Assets; or (iv) otherwise affects the Purchased Assets in any
manner. There is no Claim being made by Seller which is currently pending or
which is intended to be initiated involving any of the Purchased Assets.

         3.8 TAXES. There are no Tax Liens or Judgments against or affecting any
of the Purchased Assets and there is no basis for any such Lien or Judgment.

         3.9 COMPLIANCE WITH LAWS. To the best of the Seller's knowledge,
information and belief, Seller is in compliance, in all material respects, with
all Laws applicable to its operations, businesses, Purchased Assets and
activities, including, without limitation, Laws relating to the use, storage, or
disposal of any hazardous materials, environmental Laws, Laws relating to the
use or occupancy of any real property, antitrust Laws arid other Laws governing
competitive practices, Tax Laws and the Employee Retirement Income Security Act
of 1974, as amended, except to the extent that non-compliance would have an
inconsequential effect upon any of the Purchased Assets.

         3.10 INVESTMENT BANKERS, FIND OR BROKERS. Neither Seller nor any
Affiliate of Seller will have an obligation to pay any broker, finder,
investment banker, financial advisor or similar fee or expense in connection
with the transactions described in this Agreement and the related documents by
reason of any action taken by or on behalf of Seller.

         3.11 MATERIAL MISSTATEMENTS OR OMISSIONS. No representation or warranty
furnished by Seller or the Members in this Agreement, the Disclosure Schedules,
and in any certificate, agreement or document furnished by Seller pursuant to
this Agreement, contains or will contain any untrue statement of a material fact
or omits or will omit to state any material fact necessary to make the
statements or facts contained herein or therein not misleading in view of the
circumstances under which they are made.

                                   ARTICLE 4

                    REPRESENTATIONS AND WARRANTIES OF BUYER
                    ---------------------------------------

         Buyer represents, warrants and covenants to Seller as follows, which
representations and warranties are, as of the date hereof, and will be, as of
the Closing Date, true and correct:

         4.1 ORGANIZATION: QUALIFICATION. Buyer is a corporation duly organized,
validly existing and in good standing under the Laws of the State of Delaware,
has the corporate power

                                       7


<PAGE>


and authority to own its properties and assets and to carry on its business as
now conducted, and possesses all licenses, franchises, rights and privileges
related to the conduct of its business.

         4.2 CORPORATE AUTHORITY OF BUYER. Buyer has the requisite corporate
power and authority to enter into this Agreement and any related documents to
which Buyer is a party and to carry out its obligations hereunder and there
under. The execution, delivery and performance of this Agreement and the related
documents and the consummation of the transactions contemplated hereby and
thereby have been duly and validly authorized by all necessary corporate action
on the part of Buyer. This Agreement has, and any related documents will have,
been duly and validly executed and delivered by Buyer, and are the valid and
binding agreements of Buyer, enforceable against Buyer in accordance with their
terms, subject to (i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and (ii) rules of law governing specific
performance, injunctive relief and other equitable remedies.

         4.3 INVESTMENT BANKERS, FINDERS OR BROKERS. Buyer will not have an
obligation to pay any broker, finder, investment banker, financial advisor or
similar fee or expense in connection with the transactions described in this
Agreement and the related documents by reason of any action taken by or on
behalf of Buyer.

         4.4 MATERIAL MISSTATEMENTS OR OMISSIONS. No representation or warranty
furnished by Buyer in this Agreement and in any certificate, agreement or
document furnished by Buyer pursuant to this Agreement, contains or will contain
any untrue statement of a material fact or omits or will omit to state any
material fact necessary to make the statements or facts contained herein or
therein not misleading in view of the circumstances under which they are made.



                                   ARTICLE 5

                   SURVIVAL OF REPRESENTATIONS AND WARRANTIES
                   ------------------------------------------

         5.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of Buyer set forth in Article 4 of this Agreement shall survive
for a period of one (1) year after the Closing Date. Regardless of any
investigation which may have been made by or on behalf of Buyer, the
representations and warranties of Seller set forth in Article 3 of this
Agreement, and in any other certificate or document furnished by Seller pursuant
to this Agreement shall survive the Closing for a period of one (1) year after
the Closing Date.

         5.2 BUYER'S RIGHT OF OFFSET. Anything in this Agreement to the contrary
notwithstanding, with respect to any amount Buyer is obligated to pay because of
a breach of Seller of any provision of

                                       8

<PAGE>

the Article 3, Buyer may withhold and set off against any amount not yet paid,
but no greater than the amount scheduled in Article 2. Anything in this
Agreement to the contrary notwithstanding, in no event shall Seller be liable to
Buyer for any amount in excess of the amount Buyer is obligated to pay Seller
pursuant to Article 2, and Buyer's remedy for any claim against Seller pursuant
to this Agreement shall be limited to Buyer's right of offset as provided in
this Section 5.2.


                                   ARTICLE 6

                      ADDITIONAL COVENANTS AND AGREEMENTS
                      -----------------------------------

         Seller and Buyer further covenant and agree as follows:

         6.1 PUBLIC ANNOUNCEMENTS. Neither Seller or Buyer shall issue or
release any public announcement, press release, statement or acknowledgment of
the existence of, or reveal publicly the terms, conditions or status of, the
transactions provided for herein (including any communication to business
partners or governmental authorities) without the prior written consent of the
other party as to the content and timing of release of and the media in which
such statement or announcement is to be made; provided, however, that in the
case of announcements, statements, acknowledgments or revelations which any
party is required by Law to make, issue or release, the making, issuing or
releasing of any such announcement, statement, acknowledgment or revelation by
the party so required to do so by Law shall not constitute a breach of this
Agreement if such party shall have given, to the extent reasonably possible, not
less than two (2) calendar days prior notice to the other party, and shall have
attempted, to the extent reasonably possible, to clear such announcement,
statement, acknowledgment or revelation with the other parties. Each party
hereto agrees that it will not unreasonably withhold any such consent or
clearance,

         6.2 BEST EFFORTS: FURTHER ASSURANCES. Buyer and Seller shall each use
its best efforts in good faith to perform, comply with and otherwise satisfy all
of the conditions and covenants to be satisfied by such party under this
Agreement prior to the Closing of the transactions contemplated hereunder. Each
of the parties hereto shall perform any and all acts and shall execute and
deliver any and all additional documents as are or may become reasonably
necessary to carry out the provisions of this Agreement that are consistent with
the intent of the parties hereto.

         6.3 POST-CLOSING ASSIGNMENTS AND ASSURANCES. If at any time after the
Closing legal counsel for Buyer shall deem it necessary, advisable or
appropriate to take further or additional steps for the purpose of assigning,
assuming, transferring, conveying, perfecting and/or confirming or reducing to
possession any of the Purchased Assets or for the purpose of fully consummating
the transactions contemplated hereunder or any transactions incident thereto,
Seller shall execute, acknowledge and deliver any such reasonable assignments,
assumptions, conveyances, certificates or other documents or instruments of
transfer consistent with the intent and purposes of this Agreement.

                                       9

<PAGE>


         6.4 EXPENSES. Except as otherwise provided in this Agreement, Buyer and
Seller shall pay their own costs and expenses (including all legal and
accounting fees) arising from the negotiation, execution and performance of this
Agreement and any related documents, whether or not the transactions
contemplated hereunder or there under are consummated.

         6.5 NON-DISCLOSURE BY SELLER. Seller acknowledges and agrees that, once
the sale of the Purchased Assets to Buyer has been consummated hereunder, all
Purchased Assets, all Intellectual Assets included therein, and all other
information or data related to the Purchased Assets shall be confidential and
proprietary exclusively to Buyer (the "Confidential Information"). Seller
further acknowledges and agrees that preserving the proprietary character of the
Confidential Information is critical to the successful operations and value of
Buyer. In view of the foregoing, Seller covenants arid agrees that: (i) all
Confidential Information, as of the Closing Date, will be owned exclusively by
Buyer and that Seller shall not reserve, retain or have any right, title or
interest in or to any such Confidential Information; and (ii) Seller shall hold
all such Confidential Information in strictest confidence indefinitely and shall
not disclose, divulge, exploit or use, in any manner whatsoever, any of the
Confidential Information for its own benefit or the benefit of any Person other
than Buyer.

         6.6 AMENDMENT TO DISCLOSURE SCHEDULES. During any period prior to
Closing, Seller will update and amend the Disclosure Schedules delivered
concurrently with the execution and delivery of this Agreement so that the
Disclosure Schedules, as amended, are accurate as of the Closing Date. Seller
will make all updates and amendments to the Disclosure Schedules as soon as
reasonably practicable after discovery of the additional information.
Notwithstanding the foregoing, Buyer, in its sole discretion, may refuse to
accept any updates or amendments to the Disclosure Schedules that impact the
Purchased Assets.

         6.7 ASSISTANCE FROM BUYER TO SELLER ON SELLER'S EXISTING ACCOUNT
RECEIVABLES. Buyer will assist Seller in certain outstanding account receivables
from the current distributors and customers pertaining to the 5 products listed
on SCHEDULE A INTELLECTUAL PROPERTY and by-products or components thereof. In
the event that the distributor(s) and/or customer(s) refuse to pay the invoices
owed to the Buyer, Seller will notify the non-conforming distributor(s) or
customer(s) that the invoice(s) owed to the Buyer must be paid prior to shipment
of a new order received by the Buyer. This assistance is limited only to the
customers who have ordered the products or by-products as listed on Schedule A,
from the Buyer.

                                   ARTICLE 7

                             CONDITIONS TO CLOSING
                             ---------------------

         7.1 CONDITIONS TO BUYER'S OBLIGATIONS. The obligations of Buyer to
consummate the transactions provided for hereby are subject, in the reasonable
discretion of Buyer, to the satisfaction, on or prior to the Closing Date, of
each of the following conditions, any of which may be waived by Buyer:


                                       10


<PAGE>


                  (a) REPRESENTATIONS AND WARRANTIES. All representations and
warranties of the Seller contained in this Agreement shall be true and correct
at and as of the date of this Agreement and at and as of the Closing Date,
except as and to the extent that the facts and conditions upon which such
representations and warranties are based are expressly required or permitted to
be changed by the terms hereof, and the Seller will have performed and satisfied
all agreements and covenants required hereby to be performed by it prior to or
on the Closing Date.

                  (b) CONSENTS. All consents necessary to the consummation of
the transactions contemplated hereby shall have been obtained.

                  (c) CLOSING DOCUMENTS. Seller shall have tendered for delivery
the documents and other items to be delivered by Seller pursuant to Section
8.2(a) of this Agreement in the form and substance reasonably satisfactory to
the Buyer.

                  (d) MATERIAL ADVERSE EFFECT. There shall not have occurred any
event, fact or circumstance that causes, results in or constitutes a material
adverse effect upon all or any portion of the Purchased Assets.

                  (e) ASSIGNMENTS. Seller shall have executed and, if necessary,
recorded any assignments, conveyances, or documents of transfer as Buyer deems
appropriate to fully consummate and effectuate the assignment of any
Intellectual Assets in connection with the Purchased Assets to Buyer.

                  (f) DUE DILIGENCE REVIEW. Buyer had the opportunity to conduct
a due diligence review of the Seller and the Purchased Assets, and in the sole
discretion of the Buyer, Buyer is satisfied that it should proceed with the
transactions contemplated hereby.

                  (g)

         7.2 CONDITIONS TO SELLER'S OBLIGATIONS. The obligations of Seller to
consummate the transactions provided for hereby are subject, in the reasonable
discretion of Seller, to the satisfaction, on or prior to the Closing Date, of
each of the following conditions, any of which may be waived by Seller:

                  (a) REPRESENTATIONS AND WARRANTIES. All representations and
warranties of the Buyer contained in this Agreement shall be true and correct at
and as of the date of this Agreement and at and as of the Closing Date, except
as and to the extent that the facts and conditions upon which such
representations and warranties are based are expressly required or permitted to
be changed by the terms hereof, and the Buyer shall have performed and satisfied
all agreements and covenants required hereby to be performed by it prior to or
on the Closing Date.

                  (c) CLOSING DOCUMENTS. Buyer shall have tendered for delivery
the documents and other items to be delivered by Buyer pursuant to Section
8.2(b) of this Agreement in the form and substance reasonably satisfactory to
the Seller.



                                       11
<PAGE>


                                    ARTICLE 8

                                     CLOSING
                                     -------

         8.1 CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place on September 30, 2002 (the "Closing
Date") via facsimile, unless the parties hereto otherwise agree.

         8.2 DELIVERIES AT CLOSING. On the Closing Date:


                  (a) DELIVERIES BY SELLER TO BUYER. The Seller shall execute,
where applicable, and deliver to Buyer:

                           (i) A Bill of Sale, in the form attached hereto as
Exhibit A, conveying the Purchased Assets;


                           (ii) CERTIFIED RESOLUTIONS. Resolutions adopted by
the managers of the Seller, duly certified by a manager of the Seller,
authorizing the sale of the Purchased Assets to Buyer as contemplated hereunder
and approving the execution, delivery and performance of this Agreement arid any
related documents to which Seller is a party and the consummation of the
transactions contemplated hereby and thereby, have been delivered to Buyer.

                           (iii) CERTIFICATE OF INCUMBENCY. Seller shall have
delivered to Buyer a certificate of incumbency certifying to the authority of
individuals who have executed this Agreement arid any documents related thereto
on behalf of Seller.

INTELLECTUAL ASSETS. All Intellectual Assets including but not limited to design
control records, manufacturing documents, quality control documents, technical
support records, historical files, standard operating procedures, customer
lists, vendor lists, copies of FDA submissions, computer files, notebooks,
processes reduced to writing, spread sheets, formulas, and the like and any and
all other documentation that will assist the Buyer in producing, selling and
marketing Products. The conveyance of the intellectual assets will be made by
the employees of Sangui Biotech, Inc. at 1508 Brookhollow Drive, Suite 354,
Santa Ana, California.

                           (iv) OTHER DOCUMENTS. All other documents reasonably
necessary to vest in Buyer the Purchased Assets pursuant to the terms hereof as
Buyer may reasonably request.

                           (v) TANGIBLE ASSETS. Seller shall deliver to Buyer as
soon as practicable after the Closing, but in no event after more than three (3)
business days, all the Tangible Assets listed on Schedule B and such
Intellectual Assets that were too bulky or cumbersome to deliver at the Closing,
to the offices of the Buyer or the Buyer's Agents, 1533 Monrovia Avenue, Newport
Beach, California or such other location, within reasonable proximity,
designated at the Closing


                                       12

<PAGE>


by the Buyer. Risk of loss or damage to the Purchased Assets shall pass to the
Buyer at the Closing but Seller shall use reasonable care in transporting the
Assets, acting with such case as though the Assets were still the property of
the Seller, to effect delivery of the Purchased Assets to the Buyer. Buyer will
either provide pick up services at the expense of the buyer to move the Tangible
Assets listed on Schedule B or will furnish the pickup with both the employees
of the Seller and the Buyer.

                  (b) DELIVERIES BY BUYER TO SELLER. The Buyer shall execute,
where applicable, and deliver to Seller:

                           (i) This Agreement,; and

                           (ii) Such other documents and items as the Seller may
reasonably request.

                                    ARTICLE 9

                            MISCELLANEOUS PROVISIONS
                            ------------------------

         9.1 NOTICES. Any and all notices, requests, consents, demands or other
communications required or permitted to be given under this Agreement (the
"Notice") shall be in writing and shall be deemed to have been duly given (i)
when delivered, if sent by United States registered or certified mail (return
receipt requested), (ii) when delivered, if delivered personally by commercial
courier, (iii) on the second following business day, if sent by United States
Express Mail or overnight courier or (iv) upon the date reflected on a facsimile
confirmation from the transmitting facsimile machine, if sent by facsimile
transmission and delivery of the facsimile transmission is confirmed
telephonically within one (1) business day, whether or not such Notice was
received or rejected, and in each case to the parties at the following addresses
or facsimile numbers (or at such other addresses or facsimile numbers as shall
be specified by like notice) with applicable postage or delivery charges
prepaid:

               If to Buyer:

               Biomerica, Inc.
               1533 Monrovia Avenue
               Newport Beach, CA 92663
               Facsimile: (949) 722-6674
               Attn.: Francis Capitanio


               If to Seller:

               Sangui Bio Tech, Inc.
               c/o Sangui BioTech AG
               Alfred Herrhausen Strasse 44
               D-58455 Witten
               Germany

                                       13


<PAGE>



               Attn.: Professor Wolfgang Barnikol

         9.2 HEADINGS. The headings of the sections of this Agreement are
inserted for convenience of reference only and are not intended to affect the
meaning or interpretation of this Agreement.

         9.3 ENTIRE AGREEMENT. This Agreement, together with the exhibits,
constitutes the final written integrated expression of all of the agreements
between Buyer and Seller respecting the matters addressed herein. This Agreement
and the exhibits attached hereto supersede all prior or contemporaneous, written
or oral, memoranda, arrangements, Contracts or understandings between or among
the parties hereto relating to the subject matter hereof. Any representations,
promises, warranties or statements made by any party which differ in any way
from the terms of this Agreement, the Disclosure Schedules and the exhibits
attached hereto shall be given no force or effect. The parties specifically
represent, each to the other, that there are no additional or supplemental
agreements or Contracts between them related in any way to the matters herein
contained unless specifically included or referred to herein.

         9.4 WAIVER. Either Buyer or Seller may, by written notice to the other,
(i) waive any of the conditions to its obligations hereunder or extend the time
for the performance of any of the obligations or actions of the other; (ii)
waive any inaccuracies in the representations of the other contained in this
Agreement, the Disclosure Schedules (as may be amended), or in any documents
delivered pursuant to this Agreement; (iii) waive compliance with any of the
covenants of the other contained in this Agreement; and (iv) waive or modify
performance of any of the obligations or the other. Neither consummation of the
transactions contemplated hereunder nor any action taken pursuant to this
Agreement, including without limitation any investigation by or on behalf of any
party, shall be deemed to constitute a waiver by the party taking such action or
waiver of compliance with any representation, warranty, condition or agreement
contained herein. Waiver of the breach of any one or more provisions of this
Agreement shall not be deemed or construed to be a waiver of other breaches or
subsequent breaches of the same provisions.

         9.5 SEVERABILITY. In the event that any provision in this Agreement
shall be found by a court or arbitrator of competent jurisdiction to be invalid,
illegal or unenforceable, such provision shall be construed and enforced as if
it had been narrowly drawn so as not to be invalid, illegal or unenforceable,
and the validity, legality, and enforceability of the remaining provisions of
this Agreement shall not in any way be affected or impaired thereby.

         9.6 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of the Seller and its successors and assigns. Without limiting the generality of
the foregoing, the Seller may assign or otherwise transfer its rights to receive
the payments from Buyer under Article 2 to any other party, including without
limitation, its sole owner, Sangui Biotech International, Inc. and its
affiliates, Sangui Biotech AG and GlukoMeditech AG.; provided, however, that
Buyer's obligations to make the payments to Seller as provided in Article 2 may
not be assigned without the consent of the Seller.

                                       14

<PAGE>


         9.7 GOVERNING LAW. This Agreement and the rights and obligations of the
parties hereunder shall be construed, interpreted and enforced in accordance
with, and governed by, the laws of the State of California, without regard to
principles relating to conflicts of law, Any and all service of process shall be
effective against any party if given personally or by registered or certified
mail, return receipt requested, or by any other means of mail that requires a
signed receipt, postage prepaid, mailed to such party as herein provided.

         9.8 CONSTRUCTION. This Agreement has been drafted with the joint
participation of each of the parties hereto and shall be construed to be neither
against nor in favor of any party hereto, but rather in accordance with the fair
meaning hereof.

         9.9 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered the same agreement.

         9.10 AMENDMENTS. No amendment, modification or addition to this
Agreement, in any minor or material respect, shall be valid unless expressly set
forth in a dated, written instrument which has been signed by Seller and Buyer.

         9.11 ATTORNEYS' FEES. In the event of any dispute with respect to the
subject matter of or construction of this Agreement (including an arbitration or
mediation), the prevailing party shall be entitled to recover its reasonable
attorneys' fees and court, arbitration or mediation costs incurred in resolving
or settling the dispute, in addition to any and all other damages or relief
which a court, arbitrator or mediator may deem proper.

         9.12 NO THIRD PARTY BENEFICIARIES. This Agreement is not intended to
confer upon any Person other than the parties hereto any rights or remedies
hereunder.











                                       15


<PAGE>



         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date first above written.

BUYER:                                       BIOMERICA INC.
                                             a Delaware corporation


                                             By: /s/ Francis Capitano
                                                 -----------------------------
                                             Title: President


SELLER:                                      SANGUI BIO TECH, INC.

                                             By: /s/ signature
                                                 -----------------------------
                                             Title:




                       SCHEDULE A - INTELLECTUAL PROPERTY
                       ----------------------------------


All and any know-how involved in the development, manufacture, quality control,
sale and support of the products listed below, including, but not limited to
design control records, manufacturing documents, quality control documents,
technical support records, historical files, customer lists, vendor lists, and
any and all other documentation that will assist Buyer in producing selling and
marketing such products:

Parathyroid Hormone (PTH) IRMA Assay

Parathyroid Hormone (PTH) ELISA Assay

Adrenocortocotropic Hormone (ACTH) ELISA Assay

Calcitonin ELISA Assay

Erythropoictin (EPO) ELISA Assay



                                       16


<PAGE>

                          SCHEDULE B - TANGIBLE ASSETS
                          ----------------------------

Conference table and chairs (Bales)
AST Computer (Best Buy)
Compaq Computer (Staples)
HP LaserJet 3100S (Staples)
HP eVetra (PC Connection)
Microplate Reader & Software (Bio-Tek)
Pump & Accessories (Cole-Parmer)
Microplate MultiWash (Labsystems)
Commercial Refrigerator, 2-door, Beverage-Air (Ace Fixture)
IsoData Gamma Counter, 20/10 (CaDxServ)
Mettier Analytical Balance (Genie Corp)
Centrifuge (VWR)
Microplate Washer (Bio-Tek)
Column for Bead Processing (Millipore)
Walk-in Refrigerator (Norm's Refrigeration)
Pump Dispenser & Pumphead (Cole-Parmer)
Scale, High Capacity (McMaster-Carr)
Vacuum Pressure Pump (Cole Parmer)
PH Meter (VWR)
Vacuum Pump (GAST)
Water Bath (Blue M)
Miscellaneous refrigerators, freezers, shelving, etc. at the principal location
     of the Seller.






                                       17


<PAGE>


                             SCHEDULE C - INVENTORY
                             ----------------------


         The inventory was counted as of June 30, 2002, the fiscal year end of
Sangui BioTech Inc. Corbin & Wertz Certified Accountants, LLP, Irvine, CA,
auditors to Sangui BioTech Inc. conducted their testing on the inventory counts
submitted to them using the generally accepted accounting principles as one of
their audit exercises and process. The attached Sub-Schedule C is a bona fide
copy of the inventory submitted the CPA firm, with the deletion of all items NOT
listed to Schedule A of this agreement.

         Subsequent to June 30, 2002, Sangui BioTech Inc. used some of the
inventory for shipments to meet orders, take some of the raw material to make
intermediate components, purchased some raw material to continue to make the
intermediate components such as the calibrators. The significant changes in
inventory mostly pertain to the manufacturing of calibrators for Parathyroid
Hormone (PTH) ELISA Assay, Adrenocortocotropic Hormone (ACTH) ELISA Assay,
Calcitonin ELISA Assay and Parathyroid Hormone (PTH) IRMA listed in Schedule A
of this agreement, because there were insufficient quantities to meet expected
orders from the customers and distributors. Biomerica agrees to accept the
inventory as submitted by the employees of Sangui BioTech Inc. provided the
inventory received agrees reasonably well with the quantities shown in
Sub-Schedule C, with due considerations to the usages and new purchases as
described above.





<PAGE>


                                   EXHIBIT A

                                  BILL OF SALE

         Sangui Bio Tech Inc., a Delaware corporation (the "Assignor"), for good
and valuable consideration, the receipt and adequacy of which is hereby
acknowledged, does hereby sell, assign, transfer, and convey unto BIOMERICA,
INC., a Delaware corporation (the "Assignee"), its successors and assigns, all
rights (whether at common law or otherwise), title and interest in and to the
Purchased Assets, all as described in that certain Asset Purchase Agreement
dated September 15, 2002 by and between the Assignor and the Assignee (the
"Purchased Assets"), to have and to hold the Purchased Assets forever.

         The Assignor, subject to the terms of the Asset Purchase Agreement
relating to the sale of the Assets, does hereby warrant, covenant, and agree
that it

         (a)      Has good and marketable tide to the Assets hereby sold,
                  assigned, transferred, conveyed, and delivered;

         (b)      Will warrant and defend the sale of the Assets against all and
                  every person or persons whomsoever claiming to or making
                  claim against arty or all of the same; and

         (c)      Will take all reasonable steps necessary to put Assignee, its
                  successor or assigns, in actual possession and operating
                  control of the Assets.

         IN WITNESS WHEREOF, the Assignor has caused the same to be signed this
30th day of September, 2002.

                                            Sangui Bio Tech, Inc.
                                            A Delaware Corporation company



                                            By: /s/ Wolfgang Barnikol
                                                --------------------------------
                                            Name:
                                            Its:

<PAGE>


                            CERTIFICATE OF INCUMBENCY

         Each of the undersigned, Wolfgang Barnikol and Patrick Onishi, hereby
certifies that he is the incumbent President and Secretary, respectively, of
Sangui Bio Tech, Inc., a Delaware corporation (the "Corporation") and that, as
such, he is authorized to execute on behalf of the Corporation the Asset
Purchase Agreement by and between the Corporation and Biomerica Inc., a Delaware
corporation, dated as of September 15, 2002, as well as any other documents
required to be executed as contemplated by the Asset Purchase Agreement.

         IN WITNESS WHEREOF, the undersigned has executed this Certificate on
behalf of Corporation as of September 12, 2002.

                                         SANGUI BIO TECH, INC.

                                         By: /s/ Wolfgang Barnikol
                                             -----------------------------------
                                             Wolfgang Barnikol, President


                                         By: /s/ Patrick Onishi
                                             -----------------------------------
                                             Patrick Onishi



                                     *****
<PAGE>


                              OFFICER'S CERTIFICATE




         The undersigned, Wolfgang Barnikol, does hereby certify that he is the
President of Sangui Bio Tech, Inc., a Delaware corporation (the "Corporation"),
and that the following resolutions were duly adopted by the Board of Directors
of the Corporation (the "Board") by unanimous written consent of the Board
executed to be effective as of September 11, 2002:

         WHEREAS, Sangui BioTech International, Inc., a Colorado corporation
("Patent"), owns all the outstanding equity interests in the Corporation;

         WHEREAS, Messrs. Wolfgang Barnikol and Patrick Onishi are the President
and Secretary, respectively, of the Corporation;

         WHEREAS, the Corporation and Parent have been in negotiations with
Biomerica Inc., a Delaware corporation ("Buyer"), to enter into an Asset
Purchase Agreement (the "Agreement") pursuant to which the Corporation will sell
all its assets (collectively, the "Assets") to Buyer in exchange for $60,000
cash to the Corporation (the "Purchase Price");

         WHEREAS, pursuant to the Agreement, Buyer shall pay the Purchase Price
by paying $20,000 to the Corporation on each of December 1, 2002, December 1,
2003 and December 1, 2004;

         WHEREAS, the Board has reviewed a draft of the Agreement as well as a
Bill Of Sale and additional documents (collectively, the "Ancillary Documents")
to be executed upon consummation of the transactions contemplated by the
Agreement (the "Closing");

         WHEREAS, the Board believes that it is in the Corporation's best
interests for the Corporation to effect the transactions contemplated by the
Agreement and the Ancillary Documents;

         RESOLVED, that the Board approves the Corporation's sale of the Assets
to Buyer;

         FURTHER RESOLVED, that the Corporation enter into the Agreement and the
Ancillary Documents pursuant to which the Corporation will agree to sell the
Assets to Buyer; and

         FURTHER RESOLVED, that each of Messrs. Barnikol and/or Onishi be, and
each of them hereby is, authorized and directed to do and perform, or cause, to
be done and performed, all such acts, deeds and things, and to make, amend,
execute and deliver, or cause to be made, amended, executed and delivered, the
Agreement and the Ancillary Documents and all such other agreements,
undertakings, documents, instruments or certificates in the name and on behalf
of the Corporation or otherwise as each such officer may deem necessary or
appropriate to effectuate or carry out fully the purpose and intent of the
foregoing resolutions arid any of the transactions contemplated thereby.



                                       1
<PAGE>




         IN WITNESS WHEREOF, I have hereunto signed my name as of September ___,
2002.


                                             SANGUI BIO TECH, INC.


                                             By: /s/ Wolfgang Barnikol
                                                 -------------------------------
                                                 Wolfgang Barnikol, President




                                      *****


<PAGE>


                              CONSENT OF DIRECTORS
                                       OF
                              SANGUI BIO TECH, INC.

         Pursuant to Section 141 of Title 8 of the General Corporation Law of
Delaware, the undersigned, being all the members of the Board Of Directors (the
"Board") of Sangui Bio Tech, Inc., a Delaware corporation (the "Corporation'),
hereby consent to, vote in favor of; and adopt the following resolutions by
unanimous written consent without a meeting:

         WHEREAS, Sangui BioTech International, Inc., a Colorado corporation
("Parent"), owns all the outstanding equity interests lathe Corporation;

         WHEREAS, Messrs. Wolfgang Barnikol and Patrick Onishi are the President
and Secretary, respectively, of the Corporation;

         WHEREAS, the Corporation and Parent have been in negotiations with
Biomerica Inc., a Delaware corporation ("Buyer"), to enter into an Asset
Purchase Agreement (the "Agreement") pursuant to which the Corporation will sell
all its assets (collectively, the "Assets") to Buyer in exchange for $60,000
cash to the Corporation (the "Purchase Price");

         WHEREAS, pursuant to the Agreement, Buyer shall pay the Purchase Price
by paying $20,000 to the Corporation on each of December 1, 2002, December 1,
2003 and December 1, 2004;

         WHEREAS, the Board has reviewed a draft of the Agreement as well as a
Bill Of Sale and additional documents (collectively, the "Ancillary Documents")
to be executed upon consummation of the transactions contemplated by the
Agreement (the "Closing");

         WHEREAS, the Board believes that it is in the Corporation's best
interests for the Corporation to effect the transactions contemplated by the
Agreement and the Ancillary Documents;

         RESOLVED, that the Board approves the Corporation's sale of the Assets
to Buyer

         FURTHER RESOLVED, that the Corporation enter into the Agreement and the
Ancillary Documents pursuant to which the Corporation will agree to sell the
Assets to Buyer; and

         FURTHER RESOLVED, that each of Messrs. Barnikol and/or Onishi be, and
each of them hereby is, authorized and directed to do and perform, or cause to
be done and performed, all such acts, deeds and things, and to make, amend,
execute and deliver, or cause to be made, amended, executed and delivered, the
Agreement and the Ancillary Documents and all such other agreements,
undertakings, documents, instruments or certificates in the name and on behalf
of the Corporation or otherwise as each such



                                       1
<PAGE>


officer may deem necessary or appropriate to effectuate or carry out fully the
purpose and intent of the foregoing resolutions and any of the transactions
contemplated thereby

         This Consent Of Directors may be executed in one or more counterparts,
all of which taken together shall constitute a single instrument. This Consent
Of Directors is executed to be effective as of September 11, 2002.



                                             /s/ Wolfgang Barnikol
                                             -----------------------------------
                                             Wolfgang Barnikol


                                             /s/ Oswald Burkhard
                                             -----------------------------------
                                             Oswald Burkhard


                                             /s/ Dora Malek
                                             -----------------------------------
                                             Dora Malek


                                             /s/ Joachim Lutz
                                             -----------------------------------
                                             Joachim Lutz


                                     *****


                                       2


<PAGE>

                              CONSENT OF DIRECTORS
                                       OF
                       SANGUI BIOTECH INTERNATIONAL, INC.

         Pursuant to Section 7-108-202 of the Colorado Business Corporation Act,
the undersigned, being all the members of the Board Of Directors (the "Board")
of Sangui BioTech International, Inc., a Colorado corporation (the
"Corporation"), hereby consent to, vote in favor of, and adopt the following
resolutions by unanimous written consent without a meeting:

         WHEREAS, the Corporation owns all the outstanding equity interests in
Sangui BioTech, Inc., a Delaware corporation ("Seller");

         WHEREAS, (1) Messrs. Wolfgang Barnikol and Patrick Onishi are the
President and Secretary, respectively, of Seller, and (2) the undersigned
members of the Board also are the only directors of Seller;

         WHEREAS, the Corporation and Seller have been in negotiations with
Biomerica a Delaware corporation ("Buyer"), to enter into an Asset Purchase
Agreement (the "Agreement") pursuant to which Seller will sell all its assets
(collectively, the "Assets") to Buyer in exchange for $60,000 cash to Seller
(the "Purchase Price");

         WHEREAS, pursuant to the Agreement, Buyer shall pay the Purchase Price
by paying $20,000 to Seller on each of December 1, 2002, December 1, 2003 and
December 1, 2004;

         WHEREAS, the Board has reviewed a draft of the Agreement as well as a
Bill Of Sale and additional documents (collectively, the "Ancillary Documents")
to be executed upon consummation of the transactions contemplated by the
Agreement (the "Closing");

         WHEREAS, the Board believes that it is in the Corporation's and
Seller's best interests for Seller to effect the transactions contemplated by
the Agreement and the Ancillary Documents;

         RESOLVED, that the Board approves Seller's sale of the Assets to Buyer;

         FURTHER RESOLVED, that Seller enter into the Agreement and the
Ancillary Documents pursuant to which Seller will agree to sell the Assets to
Buyer;

         FURTHER RESOLVED, that, as the sole shareholder of Seller, the
Corporation confirms the election of each of the undersigned members of the
Board as the members of the Board Of Directors of Seller, and

         FURTHER RESOLVED, that each of Messrs. Barnikol and/or Onishi be, and
each of them hereby is, authorized and directed to do and perform, or cause to
be done and performed, all such acts, deeds and things, and to make, amend,
execute and deliver, or cause to be made, amended, executed and delivered, the
Agreement and the Ancillary



                                       1
<PAGE>


Documents and all such other agreements, undertakings, documents, instruments or
certificates in the name and on behalf of Seller or otherwise as each such
officer may deem necessary or appropriate to effectuate or carry out fully the
purpose and intent of the foregoing resolutions and any of the transactions
contemplated thereby.

         This Consent Of Directors may be executed in one or more counterparts,
all of which taken together shall constitute a single instrument. This Consent
Of Directors is executed to be effective as of September 11, 2002.



                                             /s/ Wolfgang Barnikol
                                             -----------------------------------
                                             Wolfgang Barnikol


                                             /s/ Oswald Burkhard
                                             -----------------------------------
                                             Oswald Burkhard


                                             /s/ Dora Malek
                                             -----------------------------------
                                             Dora Malek


                                             /s/ Joachim Lutz
                                             -----------------------------------
                                             Joachim Lutz


                                     *****

                                       2

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>4
<FILENAME>biomerica_10kex23-1.txt
<TEXT>
<PAGE>
EXHIBIT 23.1

                             CONSENT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS



Biomerica, Inc. and Subsidiaries
Newport Beach, California

We hereby consent to the incorporation by reference in the Registration
StatementS on Form S-8 (Nos. 333-33494, 333-00159 and 033-47054) of Biomerica,
Inc. and Subsidiaries Inc. of our report dated August 11, 2003, relating to the
consolidated financial statements, which appears in this Form 10-KSB. Our report
contains an explanatory paragraph regarding the Company's ability to continue as
a going concern.


/s/ BDO Seidman, LLP


Costa Mesa, CA
August 11, 2003


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>5
<FILENAME>biomerica_10kex31-1.txt
<TEXT>
<PAGE>

EXHIBIT 31.1


                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER
                                   PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Zachary S. Irani, certify that:

1.   I have reviewed this Annual Report on Form 10-KSB of Biomerica, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material fact or omit to state a material fact necessary to make the
     statements made, in light of the circumstances under which such statements
     were made, not misleading with respect to the period covered by this
     report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this report, fairly present in all material
     respects, the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this report;

4.   The registrant's other certifying officer and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     a)   designed such disclosure controls and procedures, or caused such
          disclosure controls and procedures to be designed under our
          supervision, to ensure that material information relating to the
          registrant, including its consolidated subsidiaries, is made known to
          us by others within those entities, particularly during the period in
          which this report is being prepared;

     b)   evaluated the effectiveness of the registrant's disclosure controls
          and procedures and presented in this report our conclusions about the
          effectiveness of the disclosure controls and procedures, as of the end
          of the period covered by this report based on such evaluation; and

     c)   disclosed in this report any change in the registrant's internal
          control over financial reporting that occurred during the registrant's
          most recent fiscal quarter that has materially affected, or is
          reasonably likely to materially affect, the registrant's internal
          control over financial reporting; and

5.   The registrant's other certifying officer and I have disclosed, based on
     our most recent evaluation of our internal control over financial
     reporting, to the registrant's auditors and the audit committee of the
     registrant's board of directors (or other persons performing the equivalent
     functions):

     a)   all significant deficiencies and material weaknesses in the design or
          operation of internal control over financial reporting which are
          reasonably likely to adversely affect the registrant's ability to
          record, process, summarize and report financial information; and

     b)   any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          control over financial reporting.

Date: September 12, 2003

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

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>6
<FILENAME>biomerica_10kex31-2.txt
<TEXT>
<PAGE>

EXHIBIT 31.2


                    CERTIFICATION OF CHIEF FINANCIAL OFFICER
                                   PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Janet Moore, certify that:

1.   I have reviewed this Annual Report on Form 10-KSB of Biomerica, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material fact or omit to state a material fact necessary to make the
     statements made, in light of the circumstances under which such statements
     were made, not misleading with respect to the period covered by this
     report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this report, fairly present in all material
     respects, the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this report;

4.   The registrant's other certifying officer and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     a)   designed such disclosure controls and procedures, or caused such
          disclosure controls and procedures to be designed under our
          supervision, to ensure that material information relating to the
          registrant, including its consolidated subsidiaries, is made known to
          us by others within those entities, particularly during the period in
          which this report is being prepared;

     b)   evaluated the effectiveness of the registrant's disclosure controls
          and procedures and presented in this report our conclusions about the
          effectiveness of the disclosure controls and procedures, as of the end
          of the period covered by this report based on such evaluation; and

     c)   disclosed in this report any change in the registrant's internal
          control over financial reporting that occurred during the registrant's
          most recent fiscal quarter that has materially affected, or is
          reasonably likely to materially affect, the registrant's internal
          control over financial reporting; and

5.   The registrant's other certifying officer and I have disclosed, based on
     our most recent evaluation of our internal control over financial
     reporting, to the registrant's auditors and the audit committee of the
     registrant's board of directors (or other persons performing the equivalent
     functions):

     a)   all significant deficiencies and material weaknesses in the design or
          operation of internal control over financial reporting which are
          reasonably likely to adversely affect the registrant's ability to
          record, process, summarize and report financial information; and

     b)   any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          control over financial reporting.

Date: September 12, 2003

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

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>7
<FILENAME>biomerica_10kex32-1.txt
<TEXT>
<PAGE>

EXHIBIT 32.1

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

I, Zackary Irani, certify that the Annual Report on Form 10-KSB for the fiscal
year ended May 31, 2003 fully complies with the requirements in Sections 13(a)
or 15(d) of the Securities Exchange Act of 1934, and that the information
contained in such Annual Report fairly presents, in all material respects, the
financial condition and results of operations of Biomerica, Inc. for the periods
being presented.
                                                 /s/ Zackary S. Irani
                                                 ---------------------------
                                                 Zackary S. Irani
                                                 Chief Executive Officer

Date: September 12, 2003


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.2
<SEQUENCE>8
<FILENAME>biomerica_10kex32-2.txt
<TEXT>
<PAGE>


EXHIBIT 32.2

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

I, Janet Moore, certify that the Annual Report on Form 10-KSB for the fiscal
year ended May 31, 2003 fully complies with the requirements in Sections 13(a)
or 15(d) of the Securities Exchange Act of 1934, and that the information
contained in such Annual Report fairly presents, in all material respects, the
financial condition and results of operations of Biomerica, Inc. for the periods
being presented.


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

Date: September 12, 2003



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.3
<SEQUENCE>9
<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, 2003                   FS-3

           Consolidated Statements of Operations and
             Comprehensive Loss for the Years Ended
             May 31, 2003 and 2002, respectively                    FS-4 - FS-5

           Consolidated Statements of Shareholders' Equity
             for  the Years Ended May 31, 2003 and 2002             FS-6 - FS-7

           Consolidated Statements of Cash Flows for the
             Years Ended May 31, 2003 and 2002                      FS-8 - FS-9


           Notes to Consolidated Financial Statements             FS-10 - FS-56

<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, 2003, and the related
consolidated statements of operations and comprehensive loss, shareholders'
equity and cash flows for the years ended May 31, 2003 and 2002. 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, 2003, and the results of their operations and their
cash flows for the years ended May 31, 2003 and 2002, in conformity with
accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has historically
reported net losses and negative cash flows from operations, which raise serious
liquidity concerns. Management estimates that its available cash resources as of
May 31, 2003 along with cost reductions will be sufficient to fund planned
operations through May 31, 2004. These operating and liquidity issues, amongst
other concerns, raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are described
in Note 1 to the accompanying consolidated financial statements. The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.



                                                                BDO SEIDMAN, LLP

Costa Mesa, California
August 11, 2003

                                      FS-2
<PAGE>


                                                BIOMERICA, INC. AND SUBSIDIARIES

                                                      CONSOLIDATED BALANCE SHEET

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

MAY 31,                                                                 2003
- --------------------------------------------------------------------------------

ASSETS

CURRENT ASSETS
   Cash and cash equivalents                                        $   525,167
   Available-for-sale securities                                         13,112
   Accounts receivable, less allowance for doubtful
     accounts and sales returns of $120,045                           1,663,236
   Inventories, net                                                   2,649,932
   Prepaid expenses and other                                           171,423
- --------------------------------------------------------------------------------

Total current assets                                                  5,022,870
- --------------------------------------------------------------------------------

INVENTORIES, non-current                                                 25,000
- --------------------------------------------------------------------------------


PROPERTY AND EQUIPMENT, at cost
   Equipment                                                          2,928,126
   Construction in progress                                             186,433
   Furniture, fixtures and leasehold improvements                       427,377
- --------------------------------------------------------------------------------
                                                                      3,541,936

ACCUMULATED DEPRECIATION AND AMORTIZATION                            (3,154,952)
- --------------------------------------------------------------------------------

Net property and equipment                                              386,984

INTANGIBLE ASSETS, net                                                   69,775

OTHER ASSETS                                                             43,400
- --------------------------------------------------------------------------------
                                                                    $ 5,548,029
================================================================================


LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
   Line of credit                                                  $        426
   Accounts payable and accrued expenses                              1,280,134
   Accrued compensation                                                 342,900
   Current portion of shareholder debt                                   59,048
   Net liabilities from discontinued operations                         365,119
- --------------------------------------------------------------------------------

Total current liabilities                                             2,047,627
- --------------------------------------------------------------------------------


SHAREHOLDER DEBT                                                        254,502


MINORITY INTEREST                                                     2,146,061
- --------------------------------------------------------------------------------


SHAREHOLDERS' EQUITY
   Common stock, $.08 par value; 25,000,000 shares
     authorized; 5,522,431 shares issued and
     outstanding and 18,000 shares subscribed                           446,293
   Additional paid in capital                                        17,117,393
   Accumulated other comprehensive loss                                  (9,657)
   Accumulated deficit                                              (16,454,190)
- --------------------------------------------------------------------------------

Total shareholders' equity                                            1,099,839
- --------------------------------------------------------------------------------

                                                                   $  5,548,029
================================================================================

                      SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS AND
                        ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      FS-3
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

YEARS ENDED MAY 31,                                      2003           2002
- --------------------------------------------------------------------------------

NET SALES                                            $ 9,059,938    $ 8,598,054

Cost of sales                                          6,161,485      6,062,462
- --------------------------------------------------------------------------------

GROSS PROFIT                                           2,898,453      2,535,592
- --------------------------------------------------------------------------------

OPERATING EXPENSES
   Selling, general and administrative                 2,845,495      2,841,255
   Research and development                              262,841        159,758
- --------------------------------------------------------------------------------

Total operating expenses                               3,108,336      3,001,013
- --------------------------------------------------------------------------------

OPERATING LOSS FROM CONTINUING OPERATIONS               (209,883)      (465,421)

OTHER INCOME (EXPENSE)
   Interest expense, net of interest income              (32,267)       (40,370)
   Other income (expense), net                            69,526        (32,667)
- --------------------------------------------------------------------------------

LOSS FROM CONTINUING OPERATIONS, before minority
   interest in net loss of consolidated
   subsidiaries and income taxes                        (172,624)      (538,458)

MINORITY INTEREST IN NET INCOME OF
   CONSOLIDATED SUBSIDIARIES                             (49,024)       (26,154)
- --------------------------------------------------------------------------------

LOSS FROM CONTINUING OPERATIONS, before income taxes    (221,648)      (564,612)

INCOME TAX EXPENSE                                         2,219          2,060
- --------------------------------------------------------------------------------

NET LOSS FROM CONTINUING OPERATIONS                     (223,867)      (566,672)

DISCONTINUED OPERATIONS
   Loss from discontinued operations, net                (41,746)       (78,544)
   Gain on sale, net of tax of $0                             --        224,481
- --------------------------------------------------------------------------------

NET LOSS                                                (265,613)      (420,735)

                                      FS-4
<PAGE>


                                                BIOMERICA, INC. AND SUBSIDIARIES


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


YEARS ENDED MAY 31,                                      2003           2002
- --------------------------------------------------------------------------------

OTHER COMPREHENSIVE LOSS, net of tax
   Unrealized gain (loss) on
     available-for-sale securities                        10,580         (9,948)
- --------------------------------------------------------------------------------

COMPREHENSIVE LOSS                                   $  (255,033)   $  (430,683)
================================================================================

BASIC NET LOSS PER COMMON SHARE:
   Net loss from continuing operations               $     (0.04)   $     (0.11)
   Net income (loss) from discontinued operations          (0.01)          0.03
- --------------------------------------------------------------------------------

Basic net loss per common share                      $     (0.05)   $     (0.08)
================================================================================

DILUTED NET LOSS PER COMMON SHARE:
   Net loss from continuing operations               $     (0.04)   $     (0.11)
   Net income (loss) from discontinued operations          (0.01)          0.03
- --------------------------------------------------------------------------------

Diluted net loss per common share                    $     (0.05)   $     (0.08)
================================================================================

WEIGHTED AVERAGE NUMBER OF COMMON AND
   COMMON EQUIVALENT SHARES
   Basic                                               5,304,432      5,100,719
================================================================================

   Diluted                                             5,304,432      5,100,719
================================================================================

                      SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS AND
                        ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      FS-5
<PAGE>
<TABLE>
                                                                                   BIOMERICA, INC. AND SUBSIDIARIES

                                                                    CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

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

<CAPTION>
                                                 COMMON STOCK           ADDITIONAL       COMMON STOCK SUBSCRIBED
                                         ---------------------------     PAID-IN      -----------------------------
                                            SHARES         AMOUNT        CAPITAL         SHARES          AMOUNT
- -------------------------------------------------------------------------------------------------------------------
<S>                                         <C>         <C>            <C>                <C>         <C>
Balances, May 31, 2001                      4,890,679   $    391,254   $ 16,748,968        146,075    $    110,774

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

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

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

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

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

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

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

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

Net loss                                           --             --             --             --              --
- -------------------------------------------------------------------------------------------------------------------
Balances, May 31, 2002                      5,172,364   $    413,788   $ 16,981,982         28,333    $     23,750
</TABLE>

<TABLE>
<CAPTION>
                                      ACCUMULATED OTHER
                                        COMPREHENSIVE    ACCUMULATED
                                         INCOME (LOSS)     DEFICIT           TOTAL
- --------------------------------------------------------------------------------------
<S>                                      <C>             <C>             <C>
Balances, May 31, 2001                   $    (10,289)   $(15,767,842)   $  1,472,865

Issuance of subscribed shares                      --              --              --

Private placement                                  --              --          10,200

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

Common stock issued for compensation               --              --          17,739

Exercise of stock options                          --              --           1,128

Common stock issued for consulting
   services rendered                               --              --          64,200

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

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

Net loss                                           --        (420,735)       (420,735)
- --------------------------------------------------------------------------------------
Balances, May 31, 2002                   $    (20,237)   $(16,188,577)   $  1,210,706
</TABLE>

                                                 (Continued)

                                                    FS-6
<PAGE>

<TABLE>
                                                                                   BIOMERICA, INC. AND SUBSIDIARIES

                                                        CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED

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

<CAPTION>
                                                 COMMON STOCK           ADDITIONAL      COMMON STOCK SUBSCRIBED
                                         ---------------------------     PAID-IN      -----------------------------
                                            SHARES         AMOUNT        CAPITAL         SHARES          AMOUNT
- -------------------------------------------------------------------------------------------------------------------
<S>                                         <C>         <C>            <C>                 <C>        <C>
Issuance of subscribed shares                  28,333          2,267         21,483        (28,333)        (23,750)

Common stock subscribed for private
   placement                                       --             --             --         18,000           4,500

Private placement                             142,000         11,360         24,140             --              --

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

Common stock issued for compensation          177,627         14,209         55,058             --              --

Common stock issued for legal services
   rendered                                     2,107            169            442             --              --

Compensation expense in connection
   with options and warrants granted               --             --         34,288             --              --

Net loss                                           --             --             --             --              --
- -------------------------------------------------------------------------------------------------------------------
Balances, May 31, 2003                      5,522,431   $    441,793   $ 17,117,393         18,000    $      4,500
===================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                         ACCUMULATED OTHER
                                           COMPREHENSIVE    ACCUMULATED
                                            INCOME (LOSS)     DEFICIT           TOTAL
- -----------------------------------------------------------------------------------------

<S>                                         <C>             <C>             <C>
Issuance of subscribed shares                         --              --              --

Common stock subscribed for private
   placement                                          --              --           4,500

Private placement                                     --              --          35,500

Change in unrealized gain (loss) on
   available-for-sale securities                  10,580              --          10,580

Common stock issued for compensation                  --              --          69,267

Common stock issued for legal services
   rendered                                           --              --             611

Compensation expense in connection
   with options and warrants granted                  --              --          34,288

Net loss                                              --        (265,613)       (265,613)
- -----------------------------------------------------------------------------------------
Balances, May 31, 2003                      $     (9,657)   $(16,454,190)   $  1,099,839
=========================================================================================

                               SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS AND
                                 ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>

                                      FS-7
<PAGE>

<TABLE>
                                                           BIOMERICA, INC. AND SUBSIDIARIES

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

FOR THE YEARS ENDED MAY 31,                                            2003        2002
- -------------------------------------------------------------------------------------------

<S>                                                                 <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss from continuing operations                              $(223,867)   $(566,672)
   Adjustments to reconcile net loss to net cash
     (used in) provided by continuing operating
     activities:
     Depreciation and amortization                                    116,547      192,418
     Provision for losses on accounts receivable                       78,772        3,893
     Provision for losses on inventory                                     --       32,683
     Realized gain on sale of available-for-sale securities                --      (10,026)
     Write-off of intangibles                                          10,000      100,320
     Write-off of notes receivable                                         --        7,800
     Warrants and options issued for services rendered                 34,288       71,507
     Common stock issued or subscribed for services rendered           69,878       85,689
     Minority interest in net income of consolidated subsidiaries      49,024       26,154
     Changes in current liabilities and assets
       Accounts receivable                                           (237,664)       9,544
       Inventories                                                    261,080      (91,508)
       Prepaid expenses and other                                     (54,384)     (36,705)
       Other assets                                                        --        3,992
       Accounts payable and other accrued liabilities                 373,944      (13,042)
       Accrued compensation                                            34,918       52,880
- -------------------------------------------------------------------------------------------

Net cash provided by (used in) operating activities                   512,536     (131,073)
- -------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Sales of available-for-sale securities                                  --       39,116
   Purchases of property and equipment                               (231,685)     (11,728)
   Increase in intangible assets                                       (7,600)     (20,436)
   Proceeds from sale of subsidiary                                        --      212,500
- -------------------------------------------------------------------------------------------

Net cash (used in) provided by investing activities                  (239,285)     219,452
- -------------------------------------------------------------------------------------------

                                  (Continued)
</TABLE>

                                      FS-8
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

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

 FOR THE YEARS ENDED MAY 31,                                 2003        2002
- --------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net decrease under line of credit borrowings            (65,243)     (74,331)
   (Decrease) increase of shareholder debt                 (61,450)     280,000
   Change in of minority interests                          12,145       11,782
   Exercise of stock options                                    --        1,128
   Sale of common stock, net of offering expenses           40,000       10,200
- --------------------------------------------------------------------------------

Net cash (used in) provided by financing activities        (74,548)     228,779
- --------------------------------------------------------------------------------

Net cash (used in) discontinued operations                  (2,813)    (114,725)
- --------------------------------------------------------------------------------

Net change in cash and cash equivalents                    195,890      202,433

CASH AND CASH EQUIVALENTS, beginning of year               329,277      126,844
- --------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS, end of year                   $ 525,167    $ 329,277
================================================================================

SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION
   CASH PAID DURING THE YEAR FOR:
     Interest                                            $   3,635    $  17,539
================================================================================

     Income taxes                                        $   2,219    $   2,060
================================================================================

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
   AND FINANCING ACTIVITIES
   Change in unrealized holding gain (loss) on
     available-for-sale securities                       $  10,580    $  (9,948)
================================================================================

                      SEE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS AND
                        ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      FS-9
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


1. ORGANIZATION AND LIQUIDITY

         ORGANIZATION

         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 AND GOING CONCERN

         These consolidated financial statements have been prepared assuming
         that the Company will continue as a going concern. The Company has
         operating and liquidity concerns due to historically reporting net
         losses and negative cash flows from operations. Biomerica's
         shareholder's line of credit (Note 6) expires on September 13, 2003 and
         will not be renewed. The unpaid principal and interest will be
         converted into a note payable bearing interest at 8% and payable in
         monthly installments over four years.

         Biomerica has suffered substantial recurring losses from operations
         over the last couple of years. Biomerica 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 3 and
         13). ReadyScript and Allergy Immuno Technologies, Inc. were
         contributors to the Company's losses in the fiscal year 2003. The
         Company reduced operating costs through certain cost reduction efforts
         and plans to concentrate on its core business in Lancer and Biomerica
         to increase sales. Additional cost reductions were made in the first
         quarter of fiscal 2004. 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.

                                      FS-10
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


1. ORGANIZATION AND LIQUIDITY (CONTINUED)

         The Company will continue to have limited cash resources. Although the
         Company's management recognizes the imminent need to secure additional
         financing there can be no assurance that the Company will be successful
         in consummating any such transaction or, if the Company does consummate
         such a transaction, that the terms and conditions of such financing
         will not be unfavorable to us. The failure by the Company to obtain
         additional financing will have a material adverse effect on the Company
         and likely result in their inability to continue as a going concern.

         Our independent certified public accountants have concluded that there
         is substantial doubt as to the Company's ability to continue as a going
         concern for a reasonable period of time, and have, therefore modified
         their report in the form of an explanatory paragraph describing the
         events that have given rise to this uncertainty. The consolidated
         financial statements do not include any adjustments relating to the
         recoverability and classification of asset carrying amounts or the
         amount and classification of liabilities that might result should the
         Company be unable to continue as a going concern.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements for the years ended May 31, 2003
         and 2002 (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.

         ACCOUNTING ESTIMATES

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

                                      FS-11
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         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, line of credit,
         shareholder debt and accounts payable. The carrying amounts of the
         Company's financial instruments approximate their fair values at May
         31, 2003.

         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. he Company performs ongoing credit
         evaluations of its customers. The Company does not obtain collateral
         with which to secure its accounts receivable. The Company maintains
         reserves for potential credit losses based upon the Company's
         historical experience related to credit losses. At May 31, 2003, two
         customers accounted for 13% and 11% of gross accounts receivable. At
         May 31, 2002, one customer accounted for 13% of gross accounts
         receivable. No one customer accounted for 10% or more of revenues for
         the years ended May 31, 2003 and 2002.

         At May 31, 2003, one company accounted for 27% of accounts payable. At
         May 31, 2002, one company accounted for 35% of accounts payable. No
         company accounted for more than 10% of purchases for the years ended
         May 31, 2003 and 2002.

                                     FS-12
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         GEOGRAPHIC CONCENTRATION

         Approximately $1,135,975 of gross inventory and $59,000 of property and
         equipment, net of accumulated depreciation and amortization, is located
         at the Company's wholly-owned subsidiary in Mexico (Note 7).


         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 totaled $39,116 (see Note 9). The change
         in the net unrealized holding gain (loss) on available-for-sale
         securities that has been included as a separate component of
         shareholders' equity totaled $10,580 and $(9,948) for the years ended
         May 31, 2003 and 2002, respectively.

                                     FS-13
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         INVENTORIES

         Inventories are stated at the lower of cost (first-in, first-out
         method) or market and consist primarily of orthodontic products and
         biological chemicals. Cost includes raw materials, labor, manufacturing
         overhead and purchased products. Market is determined by comparison
         with recent purchases or net realizable value. Such net realizable
         value is based on forecasts for sales of the Company's products in the
         ensuing years. The industries in which the Company operates are
         characterized by technological 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,                                                        2003
         -----------------------------------------------------------------------
         Raw materials                                              $   834,977
         Work in progress                                               374,261
         Finished products                                            1,672,477
         Inventory reserve                                             (231,783)
         -----------------------------------------------------------------------
                                                                      2,649,932

         Long-term                                                       25,000
         -----------------------------------------------------------------------
                                                                    $ 2,674,932
         =======================================================================

         Approximately $1,045,525 of Lancer's gross inventory and $90,450 of
         Biomerica's gross inventory is located at its manufacturing facility in
         Mexico as of May 31, 2003.

         Allowances for inventory obsolescence are recorded as necessary to
         reduce obsolete inventory to estimated net realizable value or to
         specifically reserve for obsolete inventory that the Company intends to
         dispose. The inventory items identified for disposal at each year-end
         are generally discarded during the following year.

                                     FS-14
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         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 or amortization are removed from the accounts, and gains
         or losses from retirements and dispositions are credited or charged to
         income.

         Depreciation and amortization are provided over the estimated useful
         lives of the related assets, ranging from 3 to 12 years, using
         straight-line and declining-balance methods. Leasehold improvements are
         amortized over the lesser of the estimated useful life of the asset or
         the term of the lease. Depreciation and amortization expense amounted
         to $62,540 and $101,968 for the years ended May 31, 2003 and 2002,
         respectively. At May 31, 2003, approximately $78,000 of Biomerica and
         Lancer's 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, 2003.

         INTANGIBLE ASSETS

         On June 1, 2002, the Company adopted Statement of Financial Accounting
         Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
         Assets." SFAS No. 142 requires that the Company's license agreements be
         tested annually (or more frequently if impairment indicators arise) for
         impairment. Upon initial application of SFAS No. 142, the Company
         determined there was no impairment. The Company has established the
         date of May 31 on which to conduct its annual impairment test.

                                     FS-15
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         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 $54,007
         and $90,450 for the years ended May 31, 2003 and 2002, 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 years ended May 31, 2003 and
         2002, management determined that certain licenses have been impaired as
         Biomerica no longer manufactured the products covered by the license.
         The Company recorded an impairment expense for the unamortized balance
         of the licenses in the amount of $10,000 and $100,320 which is
         reflected in cost of sales in the accompanying statement of operations
         for the years ended May 31, 2003 and 2002, respectively.

         RISKS AND UNCERTAINTIES

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

                                     FS-16
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         DISTRIBUTION - Lancer has entered into various exclusive and
         non-exclusive distribution agreements (the "Agreements") which
         generally specify territories of distribution, none of which are
         material. 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.

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

                                     FS-17
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

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

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

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

         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.

                                     FS-18
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         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. The Company has elected to account for its stock-based
         compensation to employees under APB 25.

         In December 2002, the Financial Accounting Standards Board issued
         Statement of Financial Accounting Standards No. 148 ("SFAS 148"),
         "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE -
         AN AMENDMENT TO SFAS NO. 123." SFAS No. 148 provides alternative
         methods of transition for a voluntary change to the fair value based
         method on accounting for stock-based employee compensation. The Company
         currently does not intend to adopt SFAS No. 123 and the implementation
         of SFAS No. 148 did not have a material effect on the Company's
         consolidated financial position or results of operations.

         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, 2003 and 2002; risk free interest rates
         ranging from 2.33% to 4.37%; dividend yield of 0%; expected life of the
         options ranging from three to ten years; and volatility factors of the
         expected market price of the Company's common stock ranging from
         104.94% to 216.78%.

                                     FS-19
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         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.

         For purposes of pro forma disclosures, the estimated fair value of the
         options is amortized to expense over the option vesting period.
         Adjustments are made for options forfeited prior to vesting. The effect
         on compensation expense, net loss, 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,                                       2003              2002
         -----------------------------------------------------------------------

         Net loss from continuing
            operations, as reported                $  (223,867)     $  (566,672)
         Plus:  Stock-based employee
            compensation expense included
            in reported net loss                        11,916            1,612
         Less:  Stock-based employee
            compensation expense
            determined using fair
            value based method                        (182,909)        (629,098)
         -----------------------------------------------------------------------

         Net loss from continuing
            operations, pro forma                  $  (394,860)     $(1,194,158)
         =======================================================================

         Pro forma net loss from
            continuing operations
            per share - basic                      $     (0.07)     $     (0.23)
         =======================================================================

         Pro forma net loss from
            continuing operations
            per share - diluted                    $     (0.07)     $     (0.23)
         =======================================================================

                                     FS-20
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         MAY 31,                                       2003              2002
         -----------------------------------------------------------------------

         Net income (loss) from
            discontinued operations,
            as reported                            $   (41,746)     $   145,937
         Plus:  Stock-based employee
            compensation expense
            included in reported net
            loss                                            --               --
         Less:  Stock-based employee
            compensation expense
            determined using fair
            value based method                              --               --
         -----------------------------------------------------------------------

         Net loss from discontinued
            operations, pro forma                  $   (41,746)     $   145,937
         =======================================================================

         Pro forma net loss from
            discontinued operations
            per share - basic                      $     (0.01)     $      0.03
         =======================================================================

         Pro forma net loss from
            discontinued operations
            per share - diluted                    $     (0.01)     $      0.03
         =======================================================================

         MINORITY INTEREST

         Minority interest represents the minority shareholders' proportionate
         share of the equity of Lancer. At May 31, 2003, Biomerica owned 31.12%
         of Lancer and 88.9% of ReadyScript. Biomerica sold its interest in AIT
         on May 30, 2002 (see Notes 3 and 13).

         REVENUE RECOGNITION

         Revenues from product sales are recognized at the time the product is
         shipped, customarily FOB shipping point, at which point title passes.
         An allowance is established for estimated returns as revenue is
         recognized.

                                     FS-21
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         RESEARCH AND DEVELOPMENT

         Research and development expenses are expensed as incurred. The Company
         expensed approximately $263,000 and $160,000 of research and
         development expenses during the years ended May 31, 2003 and 2002,
         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.

         ADVERTISING COSTS

         The Company reports the cost of all advertising as expense in the
         period in which those costs are incurred. Advertising costs were
         approximately $16,931 and $27,000 for the years ended May 31, 2003 and
         2002, respectively.

                                     FS-22
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         CURRENCY

         The functional currency for the Lancer De Mexico subsidiary is dollars.
         Accordingly, all transactions are recorded using dollars and no
         adjustments gains and losses on intercompany currency transactions is
         recorded.

         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,
                                                 -------------------------------
                                                      2003             2002
         -----------------------------------------------------------------------

         Numerator:
             Loss from continuing operations     $    (223,867)   $    (566,672)
             Gain (loss) from discontinued
                  operations                           (41,746)         145,937
         -----------------------------------------------------------------------

         Numerator for basic and diluted net
             loss per common share               $    (265,613)   $    (420,735)
         =======================================================================

         Denominator for basic net loss per
             common share                            5,304,432        5,100,719
         Effect of dilutive securities:
             Options and warrants                           --               --
         -----------------------------------------------------------------------

         Denominator for diluted net loss per
             common share                            5,304,432        5,100,719
         =======================================================================

                                     FS-23
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                                                   For the Years Ended May 31,
                                                 -------------------------------
                                                      2003             2002
         -----------------------------------------------------------------------

         Basic net loss per common share:
             Loss from continuing operations     $       (0.04)   $       (0.11)
             Gain (loss) from discontinued
                  operations                             (0.01)            0.03
         -----------------------------------------------------------------------

         Basic net loss per common share         $       (0.05)   $       (0.08)
         =======================================================================

         Diluted net loss per common share:
             Loss from continuing operations     $       (0.04)   $       (0.11)
             Gain (loss) from discontinued
                  operations                             (0.01)            0.03
         -----------------------------------------------------------------------

         Diluted net loss per common share       $       (0.05)   $       (0.08)
         =======================================================================


         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, 2003, there was a total of 3,425,386 potential dilutive
         shares of common stock.

         SEGMENT REPORTING

         The Financial Accounting Standards Board has issued Statement of
         Financial Accounting Standards No. 131 "DISCLOSURES ABOUT SEGMENTS OF
         AN ENTERPRISE AND RELATED INFORMATION" ("SFAS 131"). SFAS 131 requires
         public companies to report information about segments of their business
         in their annual financial statements and requires them to report
         selected segment information in their quarterly reports issued to
         shareholders. It also requires entity-wide disclosures about the
         product, services an entity provides, the material countries in which
         it holds assets and reports revenues, and its major customers. The
         Company's business segments are disclosed in Note 10.

                                     FS-24
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         REPORTING COMPREHENSIVE INCOME

         In June 1997, the Financial Accounting Standards Board issued Statement
         of Financial Accounting Standards 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 August 2001, the Financial Accounting Standards Board issued
         Statement of Financial Accounting Standards FAS No. 143 ("SFAS No.
         143"), "Accounting for Asset Retirement Obligations." This statement
         addresses financial accounting and reporting for obligations associated
         with the retirement of tangible long-lived assets and the associated
         asset retirement costs. It applies to all entities and legal
         obligations associated with the retirement of long-lived assets that
         result from the acquisition, construction, development and/or normal
         operation of long-lived assets, except for certain obligations of
         lessees. This statement is effective for financial statements issued
         for fiscal years beginning after June 15, 2002. The Company does not
         expect SFAS 143 will have a material impact on the Company's
         consolidated financial position or results of operation.

                                     FS-25
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         In October 2001, the Financial Accounting Standards Board issued
         Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"),
         "Accounting for the Impairment or Disposal of Long-Lived Assets." 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. This standard was effective for the Company's
         consolidated financial statements beginning June 1, 2002. The
         implementation of SFAS No. 144 did not have a material impact on the
         Company's consolidated financial position or results of operations.

         In April 2002, the Financial Accounting Standards Board issued
         Statement of Financial Accounting Standards No. 145 ("SFAS No. 145"),
         "Rescission of SFAS No. 44 and 64, Amendment of SFAS No. 13, and
         Technical Corrections," to update, clarify and simplify existing
         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. The adoption of this
         statement did not have a material effect on the Company's consolidated
         financial position or results of operations.

                                     FS-26
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         In June 2002, the Financial Accounting Standards Board issued Statement
         of Financial Accounting Standards No. 146 ("SFAS No. 146"), "Accounting
         for Costs Associated with Exit or Disposal Activities." SFAS No. 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. The Company does
         not expect the adoption of this statement to have a material effect on
         the Company's consolidated financial position or results of operations.

         In December 2002, the Financial Accounting Standards Board issued SFAS
         No. 148, "Accounting for Stock-Based Compensation - Transition and
         Disclosure - an Amendment of FASB Statement No. 123." This statement
         amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
         provide alternative methods of transition for a voluntary change to the
         fair value based method of accounting for stock-based employee
         compensation. In addition, this statement amends the disclosure
         requirements of SFAS No. 123 to require prominent disclosures in both
         annual and interim financial statements about. the method of accounting
         for stock-based employee compensation and the effect of the method used
         on reported results. The Company adopted the disclosure requirements
         effective December 1, 2002, in its consolidated financial statements.

                                     FS-27
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         In April 2003, the Financial Accounting Standards Board issued
         Statement of Financial Accounting Standards No. 149 ("SFAS No. 149"),
         "Amendment of Statement 133 on Derivative Instruments and Hedging
         Activities." This statement amends and clarifies financial accounting
         and reporting for derivative instruments, including certain derivative
         instruments embedded in other contracts (collectively referred to as
         derivatives) and for hedging activities under Statement of Financial
         Accounting Standards No. 133, "Accounting for Derivative Instruments
         and Hedging Activities." This statement is effective for contracts
         entered into or modified after June 30, 2003. Adoption of this
         statement is not expected to have a significant effect on the Company's
         consolidated financial position or results of operations.

         In November 2002, FIN No. 45, "Guarantor's Accounting and Disclosure
         Requirements for Guarantees, Including Indirect Guarantees of
         Indebtedness of Others," was issued. FIN 45 requires that upon issuance
         of a guarantee, a guarantor must recognize a liability for the fair
         value of an obligation assumed under a guarantee. FIN 45 also requires
         additional disclosures by a guarantor in its interim and annual
         financial statements about the obligations associated with guarantees
         issued. The recognition provisions of FIN 45 are effective for
         guarantees issued after December 31, 2002, while the disclosure
         requirements were effective for financial statements for periods ending
         after December 15, 2002. The adoption of FIN 45 did not have a material
         impact on the Company's consolidated financial position or results of
         operations.

                                     FS-28
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         In January 2003, the Financial Accounting Standards Board ("FASB")
         issued FASB Interpretation No. 46 ("FIN No. 46"), "Consolidation of
         Variable Interest Entities". This interpretation clarifies the
         application of Accounting Research Bulletin No. 51, "Consolidated
         Financial Statements," relating to consolidation of certain entities.
         FIN No. 46 will require identification of the Company's participation
         in variable interests entities ("VIEs"), which are defined as entities
         with a level of invested equity that is not sufficient to fund future
         activities to permit them to operate on a stand-alone basis, or whose
         equity holders lack certain characteristics of a controlling financial
         interest. For entities identified as VIEs, FIN No. 46 sets forth a
         model to evaluate potential consolidation based on an assessment of
         which party to the VIE, if any, bears a majority of the exposure to its
         expected losses, or stands to gain from a majority of its expected
         returns. FIN No. 46 also sets forth certain disclosures regarding
         interests in VIE that are deemed significant, even if consolidation is
         not required. The Company does not expect FIN No. 46 will have a
         material impact on the Company's financial position or results of
         operations.

         In April 2003, SFAS No. 149, "Amendment Of Statement 133 On Derivative
         Instruments And Hedging Activities" was issued. This statement amends
         and clarifies financial accounting and reporting for derivative
         instruments, including certain derivative instruments embedded in other
         contracts (collectively referred to as derivatives) and for hedging
         activities under SFAS No. 133, "Accounting for Derivative Instruments
         and Hedging Activities." This statement is effective for contracts
         entered into or modified after June 30, 2003. Adoption of this
         statement is not expected to have a significant effect on the Company's
         financial position or results of operations.

                                     FS-29
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         In May 2003, the Financial Accounting Standards Board issued Statement
         of Financial Accounting Standards No. 150 ("SFAS No. 150"), "Accounting
         for Certain Financial Instruments with Characteristics of Both
         Liabilities and Equity." SFAS No. 150 provides guidance on how an
         entity classifies and measures certain financial instruments with
         characteristics of both liabilities and equity. Many of these
         instruments were previously classified as equity. This statement is
         effective for financial instruments entered into or modified after May
         31, 2003, and otherwise is effective at the beginning of the first
         interim period beginning after June 15, 2003. The statement requires
         cumulative effect transition for financial instruments existing at the
         adoption date. The Company does not expect the adoption of this
         statement to have a material effect on its consolidated financial
         position or results of operations.

         RECLASSIFICATIONS

         Certain reclassifications have been made to the 2002 consolidated
         balances to conform to the 2003 presentation.

3. CONSOLIDATED SUBSIDIARIES

         Lancer is engaged in the design, manufacture and 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 31.12% and its direct and indirect (via
         agreements with certain shareholders) voting control over Lancer is
         greater than 50% as of May 31, 2003.

                                     FS-30
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


3. CONSOLIDATED SUBSIDIARIES (CONTINUED)

         AIT provided immune allergy testing and products to physicians and
         medical institutions. On May 30, 2002, 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 holds 1.4% of the
         outstanding shares of AIT, which are included in available-for-sale
         securities. The Asset/Liability Transaction was approved by our board
         on April 22, 2002. Approval by our stockholders was not required under
         Delaware corporate law. We understand that AIT's board approved the
         Asset/Liability Transaction in April of 2002 and that, rather than
         calling a formal meeting of AIT's stockholders, our consent to that
         transaction was deemed to constitute the approval of the holders of a
         majority of AIT's capital stock, as permitted by Delaware corporate
         law. The gain and loss from operations are included in discontinued
         operations in the accompanying consolidated statement of operations for
         the year ended May 31, 2003 (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-31
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


3. CONSOLIDATED SUBSIDIARIES (CONTINUED)

         Operating results for Lancer, AIT (as discussed) and ReadyScript (as
         discussed) in the aggregate for the years ended May 31, 2003 and 2002,
         which are included in the consolidated operating results of the
         Company, are as follows:

                                                        2003            2002
         -----------------------------------------------------------------------

         Net sales                                   $ 5,887,898    $ 6,022,331
         Cost of sales                                 4,143,999      4,159,048
         -----------------------------------------------------------------------

              Gross profit                             1,743,899      1,863,283
         -----------------------------------------------------------------------

         Operating expenses:
            Selling, general and administrative        1,620,004      1,759,920
            Research and development                     107,370          3,842
         -----------------------------------------------------------------------

              Total operating expenses                 1,727,374      1,763,762
         -----------------------------------------------------------------------

         Other income (expense):
            Interest expense, net                         (3,459)       (17,182)
            Other income, net                             59,526        (43,295)
         -----------------------------------------------------------------------

                                                          56,067        (60,477)
         -----------------------------------------------------------------------

         Income (loss) from continuing
            operations before income taxes                72,592         39,044

         Income tax expense                                1,419          1,260
         -----------------------------------------------------------------------

         Net income (loss) from continuing
            operations                                    71,173         37,784

         Discontinued operations of AIT and
            ReadyScript:
            Income (loss) from discontinued
              operations, net                            (41,746)       (78,544)
         -----------------------------------------------------------------------

         Net income (loss)                           $   (29,427)   $    40,760
         =======================================================================

                                     FS-32
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


4. INTANGIBLE ASSETS

         Intangible assets, net of accumulated amortization, consist of the
         following:

         MAY 31,                                                        2003
         -----------------------------------------------------------------------

         Marketing and distribution rights                          $   442,750
         Technology use rights                                          858,328
         Patents and other intangibles                                   77,975
         -----------------------------------------------------------------------

                                                                      1,379,053

         Less accumulated amortization                               (1,309,278)
         -----------------------------------------------------------------------

                                                                    $    69,775
         =======================================================================

         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
         2003 and 2002, 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, 2003 and 2002 related to these assets. Sales of products
         manufactured under these agreements comprised approximately 10% and 12%
         of consolidated revenue for fiscal years ended May 31, 2003 and 2002,
         respectively.

         The Company 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 the
         Company. Royalty income in 2003 and 2002 of approximately $53,000 is
         netted from Cost of Sales for these agreements. Income from these
         agreements is less than 1% of the total revenue recognized for the
         fiscal year ended May 31, 2003 and 2002.

                                     FS-33
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


4. INTANGIBLE ASSETS (CONTINUED)

         During the year ended May 31, 2003 and 2002, management determined that
         certain licenses had been impaired as Biomerica no longer manufactured
         the product covered by the licenses. The Company recorded an impairment
         expense for the unamortized balances of the licenses in the amount of
         $10,000 and $100,320, respectively, which is reflected in cost of sales
         in the accompanying statement of operations for the year ended May 31,
         2002. Amortization expense related to these licenses which is included
         in the accompanying consolidated statements of operations amounted to
         $2,442 and $16,854 for the years ended May 31, 2003 and 2002,
         respectively.

5. LINE OF CREDIT

         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, 2003 was $426. 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, 2003, was
         approximately $365,000. The new line of credit bears interest at prime
         plus 2% per annum, but in no event shall it be lower than 8% (6.25% at
         May 31, 2003). 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, 2003.

                                     FS-34
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


5. LINE OF CREDIT (CONTINUED)

         The following summarizes information on short-term borrowings for the
         year ended May 31, 2003:

          MAY 31,                                                         2003
         -----------------------------------------------------------------------

         Average month end balance                                      $ 13,295
         Maximum balance outstanding at any month end                   $130,660
         Weighted average interest rate (computed by dividing
            interest expense by average monthly balance)                    27 %
         Interest rate at year end                                           8 %
         =======================================================================


6. RELATED PARTY TRANSACTIONS

         SHAREHOLDER LINE OF CREDIT

         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 bore interest at 8%, was
         secured by accounts receivable and inventory, and expires September 13,
         2003. The outstanding principal and interest on September 12, 2003 was
         $337,835, including principal of $288,850 and interest of $48,985, all
         of which will be converted into a note payable bearing interest at 8%
         with interest and principal due monthly. The remaining unpaid principal
         and interest, if any, are due September 12, 2007. The note will be
         secured by inventory and receivables. There was $303,550 of outstanding
         principal and $43,963 of unpaid interest under this line of credit at
         May 31, 2003.

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

             2004                                                    $   49,048
             2005                                                        78,638
             2006                                                        85,165
             2007                                                        92,233
             2008                                                        32,416
         -----------------------------------------------------------------------
                                                                        337,500

         Current portion                                                (49,048)
         -----------------------------------------------------------------------
                                                                     $  288,452
         =======================================================================

                                     FS-35
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


6. RELATED PARTY TRANSACTIONS (CONTINUED)

         SHAREHOLDER LOAN

         During 2002 a shareholder advanced the Company $10,000. The loan bears
         interest at 8% and is due on demand.

         During 2003 and 2002, the Company incurred $29,466 and $19,661,
         respectively, in interest expense related to the shareholder line of
         credit and loan, all of which is accrued as of May 31, 2003.

         Biomerica, Inc. leases facilities from a company owned, in part, by a
         shareholder of the Company. Rent expense of $165,000 was incurred
         during 2003 for this lease.

         ACCRUED COMPENSATION

         Two officers, who are also shareholders of the Company agreed to defer
         a portion of their salaries. At May 31, 2003 approximately $91,479 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.

         See additional related party transactions in Note 11.

7. SHAREHOLDERS' EQUITY

         1991, 1995 AND 1999 STOCK OPTION AND RESTRICTED STOCK PLANS

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

                                     FS-36
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


7. SHAREHOLDERS' EQUITY (CONTINUED)

         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.

         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 1999, the Company granted options to purchase 2,000, 179,850 and
         27,900 shares of its common stock at an exercise prices of $0.90, $0.86
         and $0.85, respectively, to employees and 2,000 and 7,000 shares to
         non-employees, at exercise prices of $0.90 and $0.86, respectively. The
         intrinsic value of the options issued to employees was $0, and the fair
         value of options issued to non-employees was $4,826 and will be
         amortized over the service period of four years.

         During 2000, the Company agreed to grant warrants to three medical
         groups in exchange for services. During 2001, the Company issued 5,000
         of these warrants at an exercise price of $3.25. The Company recorded
         $17,372 of expense related to the fair value of these warrants in 2000.
         These warrants were canceled during the year ended May 31, 2002.

                                     FS-37
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


7. SHAREHOLDERS' EQUITY (CONTINUED)

         As of May 31, 2003, the Company recognized the remaining compensation
         expense 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 2002, the Company granted 229,254 options to purchase shares of
         the Company's stock to employees for services rendered. The purchase
         price of the options ranges from $0.42 to $0.90 per share. Management
         recorded $0 and $1,612 during the years ended May 31, 2003 and 2002 of
         expense related to the granting of options to employees.

         During 2003, the Company granted approximately 319,500 and 124,000
         options and warrants to employees and non-employees, respectively to
         purchase shares of the Company's stock, for services rendered. The
         purchase price of the options ranges from $0.20 to $0.30 per share.
         Management recorded $11,916 and $22,372, respectively, during the year
         ended May 31, 2003 of expense related to the granting of options to
         employees and non-employees.


                                     FS-38
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


7. SHAREHOLDERS' EQUITY (CONTINUED)

         Activity as to stock options and warrants under the 1991, 1995 and 1999
         plans are as follows:


                                                                        WEIGHTED
                                              NUMBER                    AVERAGE
                                             OF STOCK     PRICE RANGE   EXERCISE
                                             OPTIONS       PER SHARE     PRICE
         -----------------------------------------------------------------------

         Options outstanding at
            May 31, 2001                    3,144,234    $ .50 - $3.25   $ 2.58
         Options granted                      229,254    $  .42 - $.90   $  .59
         Options exercised                     (1,625)   $  .50 - $.86   $  .69
         Options canceled or expired         (286,977)   $ .50 - $3.25   $ 1.49
         -----------------------------------------------------------------------

         Options outstanding at
            May 31, 2002                    3,084,886    $ .42 - $3.00   $ 2.53
         Options granted                      443,500    $  .20 - $.30   $  .25
         Options canceled or expired         (103,000)   $ .50 - $1.91   $ 1.83
         -----------------------------------------------------------------------

         Options and warrants outstanding
            at May 31, 2003                 3,425,386    $ .25 - $2.53   $ 2.26
         =======================================================================

         Options and warrants exercisable
            at May 31, 2003                 3,416,132    $ .20 - $3.00   $ 2.26
         =======================================================================

         The weighted average fair value of options and warrants granted during
         2003 and 2002 was $0.45 and $0.40, respectively.

         The following summarizes information about the Company's stock options
         and warrants outstanding at May 31, 2003:

                                       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, 2003    YEARS     PRICE       2000     PRICE
         -----------------------------------------------------------------------

         $   .42 - $.90      911,511      3.79    $  .46       881,041   $  .45
         $ 1.09 - $1.90      165,875      2.19    $ 1.50        91,125   $ 1.55
         $ 2.62 - $3.00    2,348,000      1.06    $ 2.99     1,584,776   $ 2.99
         =======================================================================

                                     FS-39
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


7. SHAREHOLDERS' EQUITY (CONTINUED)

         STOCK ACTIVITY

         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 issued 8,333 shares of common stock to an
         employee as compensation. The Company valued these shares at $3,750.

         During 2003, the Company agreed to sell 18,000 shares of its common
         stock at a selling price of $0.25 per share. Proceeds to the Company
         were $4,500. As of May 31, 2003, the shares have not been issued and
         accordingly have been classified as common stock subscribed.

         During 2003, the Company sold 142,000 shares of its common stock at a
         selling price of $0.25 per share. Proceeds to the Company were $35,500.

         During 2003, the Company, issued 177,627 shares of common stock to
         employees as compensation. The Company valued these shares at $69,267.

         During 2002, the Company, issued 20,000 shares of common stock to a
         consultant for legal services provided. As of May 31, 2002, these
         shares were classified as common stock subscribed and valued by the
         Company at $20,000. These shares have been issued as of May 31, 2003.
         During 2003, the Company issued this consultant an additional 2,107
         shares of common stock for legal services provided. The Company valued
         these shares at $611.

                                     FS-40
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


7. SHAREHOLDERS' EQUITY (CONTINUED)

         SUBSIDIARY OPTIONS AND WARRANTS

         During the year ended May 31, 2002, the Company granted 20,000 options
         to purchase shares of the Company's common stock at an exercise price
         of $0.40 to an employee of the Company for services rendered. The
         options have a term of one year. Management assigned a value of $0 to
         the options.

         During the year ended May 31, 2003, Lancer granted 70,000 options to
         purchase shares of the Company's common stock at an exercise price of
         $0.26 to certain employees of the Company for services rendered. The
         options vest over four years and have a term of five years. Management
         assigned a value of $0 to the options.

         During the year ended May 31, 2003, Lancer granted 40,000 options to
         purchase shares of the Company's common stock at an exercise price of
         $0.28 to an employee of the Company for services rendered. The options
         vest over four years and have a term of five years. Management assigned
         a value of $0 to the options.

         During the year ended May 31, 2003, Lancer granted 30,000 options to
         purchase shares of the Company's common stock at an exercise price of
         $0.28 to certain employees of the Company for services rendered. The
         options vest over four years and have a term of five years. Management
         assigned a value of $0 to the options.

         There were 430,500 and 293,166 options outstanding and exercisable,
         respectively, (at a weighted average exercise price of $.53) to acquire
         Lancer common stock at May 31, 2003.

                                     FS-41
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


8. INCOME TAXES

         Income tax expense from continuing operations for the years ended May
         31, 2003 and 2002 consists of the following current provisions:

         MAY 31,                                           2003          2002
         -----------------------------------------------------------------------
         U.S. Federal                                   $      --     $      --

         State and local                                    2,219         2,060
         -----------------------------------------------------------------------

                                                        $   2,219     $   2,060
         =======================================================================

         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,                                           2003          2002
         -----------------------------------------------------------------------

         Computed "expected" tax benefit                $ (77,577)    $(197,614)
         Increase (reduction) in income taxes
            resulting from:
            Meals and entertainment                         3,958         5,363
            Change in valuation allowance                 (20,127)      168,831
            Equity in earnings of affiliates
              not subject to taxation because
              of dividends- received deduction
              for tax purposes                             93,746        23,420
            State income taxes                              2,219         2,060
         -----------------------------------------------------------------------

                                                        $   2,219     $   2,060
         =======================================================================

                                     FS-42
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


8. INCOME TAXES (CONTINUED)

         The tax effect of temporary differences that give rise to significant
         portions of liabilities are presented below.

         MAY 31,                                                       2003
         -----------------------------------------------------------------------

         Deferred tax assets (liabilities):
           Accounts receivable, principally
             due to allowance for doubtful
             accounts and sales returns                             $    48,175
           Inventories, principally due to
             additional costs inventoried for
           tax purposes pursuant to the Tax
             Reform Act of 1986 and
             allowance for inventory
             obsolescence                                               142,324
           Compensated absences and
             deferred payroll, principally due
             to accrual for financial reporting
             purposes                                                   114,129
           Net operating loss
             carryforwards                                            2,305,703
           Tax credit carryforwards                                     136,010
           Accumulated Depreciation of Property
             and Equipment                                              (23,107)
           Marketing rights, principally due to
             amortization                                               (14,000)
         -----------------------------------------------------------------------

                                                                      2,709,234

         Less valuation allowance                                    (2,709,234)
         -----------------------------------------------------------------------

         Net deferred tax asset (liability)                         $        --
         =======================================================================


         The Company has provided a valuation allowance for all of its deferred
         tax assets as of May 31, 2003. Management provided such allowance as it
         is currently more likely than not that the Company will not generate
         taxable income sufficient to realize such assets in foreseeable future
         reporting periods.

                                     FS-43
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


8. INCOME TAXES (CONTINUED)

         As of May 31, 2003, Biomerica had net tax operating loss carryforwards
         of approximately $4,384,000 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 2004 to 2022. As of May 31, 2003, Biomerica has net
         operating tax loss carryforwards of approximately $1,177,000 available
         to offset future state income tax liabilities, which expire through
         2012.

         As of May 31, 2003, Lancer had net tax operating loss carryforwards of
         approximately $2,059,000 and business tax credits of approximately
         $64,000 available to offset future Federal tax liabilities. The
         carryforwards expire through 2021. As of May 31, 2003, Lancer has net
         tax operating loss carryforwards of approximately $70,000 and business
         tax credits of approximately $10,000 available to offset future state
         income tax liabilities. The state carryforwards expire at varying dates
         through 2011.

         On September 11, 2002, California passed one of the budget trailer
         bills that implemented the state's 2002-2003 Budget Bill (A425). The
         new law suspends the net operating loss ("NOL") carryover deduction for
         tax years 2002 and 2003. To compensate for the deduction suspension,
         the period of availability for these NOL deductions has been extended
         for two years.

         Pursuant to Internal Revenue Code Sections 382 and 383, annual use of
         the Company's net operating loss ("NOL") and credit carryforwards will
         be limited by statute because of a cumulative change in ownership of
         more than 50%. We have had numerous equity transactions that have more
         likely than not resulted in several changes in ownership of us as
         defined by Section 382 of the Internal Revenue Code of 1986, as
         amended, or the Code. Pursuant to Sections 382 and 383 of the Code, the
         annual use of our NOLs would be limited if there is a cumulative change
         of ownership (as that term is defined in Section 382(g) of the Code) of
         greater than 50% in the past three years. Should Section 382 ownership
         change have occurred, there would be a substantial limitation on our
         ability to utilize our NOLs to offset future taxable income.

                                     FS-44
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


9. INSURANCE CLAIM RECEIVABLE

         Management of Lancer completed an assessment of two occurrences of
         theft of inventory located at its 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 SEGMENTS

         Reportable business segments are identified by product line and for the
         years ended May 31, 2003 and 2002 are as follows:

                                                         2003           2002
         -----------------------------------------------------------------------

         Domestic sales:
            Orthodontic products                     $ 3,144,000    $ 3,031,000
         =======================================================================

            Medical diagnostic products              $ 1,466,000    $ 1,223,000
         =======================================================================

         Foreign sales:
            Orthodontic products                     $ 2,744,000    $ 2,991,000
         =======================================================================

            Medical diagnostic products              $ 1,706,000    $ 1,353,000
         =======================================================================

         Net sales:
            Orthodontic products                     $ 5,888,000    $ 6,022,000
            Medical diagnostic products                3,172,000      2,576,000
         -----------------------------------------------------------------------

         Total                                       $ 9,060,000    $ 8,598,000
         =======================================================================

         Operating profit (loss):
            Orthodontic products                     $    17,000    $    99,000
            Medical diagnostic products                 (227,000)      (565,000)
         -----------------------------------------------------------------------

         Total                                       $  (210,000)   $  (466,000)
         =======================================================================

         Operating loss from discontinued segment:
            AIT                                      $        --    $   (75,790)
            ReadyScript                                  (41,746)        (2,754)
         -----------------------------------------------------------------------

         Total                                       $   (41,746)   $   (78,544)
         =======================================================================

                                     FS-45
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


10. BUSINESS SEGMENTS (CONTINUED)

                                                         2003           2002
         -----------------------------------------------------------------------

         Domestic long-lived assets:
            Orthodontic products                     $   241,000    $   110,000
            Medical diagnostic products                  179,000        208,000
         -----------------------------------------------------------------------

         Total                                       $   420,000    $   318,000
         =======================================================================

         Foreign long-lived assets:
            Orthodontic products                     $    18,000    $    27,000
            Medical diagnostic products                   19,000             --
         -----------------------------------------------------------------------

         Total                                       $    37,000    $    27,000
         =======================================================================

         Total assets:
            Orthodontic products                     $ 3,751,000    $ 3,646,000
            Medical diagnostic products                1,797,000      1,631,000
         -----------------------------------------------------------------------

         Total                                       $ 5,548,000    $ 5,277,000
         =======================================================================

         Depreciation and amortization expense:
            Orthodontic products                     $    79,000    $   107,000
            Medical diagnostic products                   38,000         85,000
         -----------------------------------------------------------------------

         Total                                       $   117,000    $   192,000
         =======================================================================

         Capital expenditures:
            Orthodontic products                     $   198,000    $     4,000
            Medical diagnostic products                   34,000          8,000
         -----------------------------------------------------------------------

         Total                                       $   232,000    $    12,000
         =======================================================================


         The net sales as reflected above consist of sales to unaffiliated
         customers only as there were no significant intersegment sales during
         fiscal years 2003 and 2002. No customer accounted for more than 10% of
         net sales during fiscal years 2003 and 2002.

                                     FS-46
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


10. BUSINESS SEGMENTS (CONTINUED)

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


                                                         2003          2002
         -----------------------------------------------------------------------

         Net sales:
            United States                            $ 4,610,000   $ 4,254,000
            Europe                                     2,393,000     2,313,000
            South America                                460,000       498,000
            Asia                                         228,000       199,000
            Other foreign                              1,369,000     1,334,000
         -----------------------------------------------------------------------

         Total net sales                             $ 9,060,000   $ 8,598,000
         =======================================================================

         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 AND CONTINGENCIES

         OPERATING LEASES

         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. The facilities are owned and
         operated by four of the Company's shareholders. Management believes
         there would be no significant difference in the terms of the leases if
         they were with a third party. Total rent expense for this facility was
         approximately $164,963 and $179,000 during the years ended May 31, 2003
         and 2002, respectively.

         Biomerica has subleased a portion of its facility under a
         non-cancelable operating lease expiring May 16, 2003, the Company
         recorded base rental income of $18,062 and $1,642 during the years
         ended May 31, 2003 and 2002, respectively.

         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 $3,300
         during the year ended May 31, 2003.

                                     FS-47
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


11. COMMITMENTS AND CONTINGENCIES (CONTINUED)

         Lancer leases its main facility under a non-cancelable operating lease
         expiring December 31, 2003, as extended, which requires monthly rentals
         that increase annually, from $2,900 per month in 1994 to $6,317 per
         month in 2004. The lease expense is being recognized on a straight-line
         basis over the term of the lease. The excess of the expense recognized
         over the cash paid aggregates $3,903 at May 31, 2003, 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, 2003 and 2002 was approximately $74,000 and $69,000, respectively..

         Lancer entered into a non-cancelable operating lease for its Mexico
         subsidiary which expires March 2009, which requires average monthly
         rentals of approximately $6,000. Total expense for this facility was
         approximately $76,000 and $69,000 during the years ended May 31, 2003
         and 2002, 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 $2,300
         during the year ended May 31, 2003.

         Rental expense for all operating leases amounted to approximately
         $317,000 and $321,000 for the years ended May 31, 2003 and 2002,
         respectively. The future annual minimum payments, net of sublease
         income, are as follows:

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

         2004                                                      $    349,277
         2005                                                           306,408
         2006                                                           197,691
         2007                                                           117,066
         Thereafter                                                     211,552
         -----------------------------------------------------------------------

         Minimum lease payments, net                               $  1,181,994
         =======================================================================

                                     FS-48
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


11. COMMITMENTS AND CONTINGENCIES (CONTINUED)

         MANUFACTURING AGREEMENT

         In May 1990, the Company entered into a manufacturing 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. 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 Lancer. 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, 2003, this
         obligation was approximately $401,138. 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-49
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


11. COMMITMENTS AND CONTINGENCIES (CONTINUED)

         RETIREMENT SAVINGS PLAN

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

         LITIGATION

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

         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-50
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


12. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

         Lancer's line-of-credit prohibits the transfer or dividend of funds to
         Biomerica, Inc. As a result, the following condensed unconsolidated
         balance sheet for Biomerica, Inc. as of May 31, 2003, and the condensed
         unconsolidated statements of operations and cash flows for the years
         ended May 31, 2003 and 2002 have been provided. No cash dividends were
         paid by the consolidated subsidiaries (see Note 3) during the years
         ended May 31, 2003 and 2002.

                         CONDENSED UNCONSOLIDATED BALANCE SHEET

          MAY 31,                                                       2003
         -----------------------------------------------------------------------

                                         ASSETS

         CURRENT ASSETS:
              CASH                                                  $    13,760
              AVAILABLE-FOR-SALE SECURITIES                              13,112
              ACCOUNTS RECEIVABLE, NET                                  563,795
              INVENTORIES                                               900,916
              NOTES RECEIVABLE                                            2,419
              PREPAID EXPENSES AND OTHER                                100,413
         -----------------------------------------------------------------------

         TOTAL CURRENT ASSETS                                         1,594,415

         INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED
              SUBSIDIARY, RESTRICTED                                    969,592
         INVENTORY, NON-CURRENT                                          25,000
         PROPERTY AND EQUIPMENT, NET 163,678
         INTANGIBLE ASSETS                                               34,500
         -----------------------------------------------------------------------

                                                                    $ 2,787,185
         =======================================================================


                                     FS-51
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


12. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)

                   CONDENSED UNCONSOLIDATED BALANCE SHEET (CONTINUED)

          MAY 31,                                                       2003
         -----------------------------------------------------------------------

                          LIABILITIES AND SHAREHOLDERS' EQUITY

         CURRENT LIABILITIES:
              ACCOUNTS PAYABLE AND ACCRUED LIABILITIES             $    764,727
              ACCRUED COMPENSATION                                      243,950
              CURRENT PORTION OF SHAREHOLDER LOANS                       58,800
         -----------------------------------------------------------------------

         TOTAL CURRENT LIABILITIES                                    1,067,477
         -----------------------------------------------------------------------

         SHAREHOLDER LOANS                                              254,750

         EQUITY IN LOSSES OF UNCONSOLIDATED SUBSIDIARIES, NET OF
              ADVANCES, UNRESTRICTED                                    365,119
         -----------------------------------------------------------------------

         SHAREHOLDERS' EQUITY:
              COMMON STOCK                                              446,293
              ADDITIONAL PAID-IN CAPITAL                             17,117,393
              ACCUMULATED OTHER COMPREHENSIVE LOSS                       (9,657)
              ACCUMULATED DEFICIT                                   (16,454,190)
         -----------------------------------------------------------------------

         TOTAL SHAREHOLDERS' EQUITY                                   1,099,839
         -----------------------------------------------------------------------

                                                                   $  2,787,185
         =======================================================================


                                     FS-52
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


12. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)


                CONDENSED UNCONSOLIDATED STATEMENT OF OPERATIONS

          MAY 31,                                        2003           2002
         -----------------------------------------------------------------------

         NET REVENUES                                $ 3,172,040    $ 2,575,723
         COST OF SALES                                 2,017,486      1,903,414
         -----------------------------------------------------------------------

             GROSS PROFIT                              1,154,554        672,309
         -----------------------------------------------------------------------

         OPERATING EXPENSES:
         SELLING, GENERAL AND ADMINISTRATIVE           1,225,491      1,081,335
         RESEARCH AND DEVELOPMENT                        155,471        155,916
         -----------------------------------------------------------------------

         TOTAL OPERATING EXPENSES                      1,380,962      1,237,251
         -----------------------------------------------------------------------

             OPERATING LOSS                             (226,408)      (564,942)

         OTHER EXPENSE                                   (18,808)       (12,560)
         -----------------------------------------------------------------------

         LOSS FROM OPERATIONS BEFORE INTEREST
             IN NET INCOME OF CONSOLIDATED
             SUBSIDIARIES AND INCOME TAXES              (245,216)      (577,502)

         INTEREST IN NET INCOME OF
             CONSOLIDATED SUBSIDIARIES                    22,149         11,630

         INTEREST IN NET LOSS OF CONSOLIDATED
             SUBSIDIARIES - DISCONTINUED
             OPERATIONS                                  (41,746)       (78,544)
         GAIN ON SALE OF SUBSIDIARY                           --        224,481
         -----------------------------------------------------------------------

         LOSS FROM OPERATIONS BEFORE INCOME
             TAXES                                      (264,813)      (419,935)

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

         NET LOSS                                    $  (265,613)   $  (420,735)
         =======================================================================

                                     FS-53
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


12. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)


                CONDENSED UNCONSOLIDATED STATEMENT OF CASH FLOWS

          FOR THE YEARS ENDED MAY 31,                    2003           2002
         -----------------------------------------------------------------------

         CASH FLOWS FROM OPERATING ACTIVITIES:
             NET LOSS                                $  (265,613)   $  (420,735)
             ADJUSTMENTS TO RECONCILE NET
                  INCOME TO NET CASH USED IN
                  OPERATING ACTIVITIES:
                  DEPRECIATION AND AMORTIZATION           38,230         84,648
                  PROVISION FOR LOSSES ON
                      ACCOUNTS RECEIVABLE                 21,861             --
                  REALIZED GAIN ON SALE OF
                      AVAILABLE-FOR-SALE
                      SECURITIES                              --        (10,026)
                  LOSS OF SUBSIDIARIES                    38,932         66,914
                  OPTIONS AND WARRANTS ISSUED
                      FOR SERVICES RENDERED               34,899         71,507
                  COMMON STOCK ISSUED OR
                      SUBSCRIBED FOR SERVICES
                      RENDERED                            69,267         85,689
                  GAIN ON SALE OF SUBSIDIARY                  --       (224,481)
                  INCREASE IN INVESTMENT IN
                      AND ADVANCES TO
                      CONSOLIDATED SUBSIDIARIES           (8,829)      (153,637)
                  WRITE-OFF OF INTANGIBLES                10,000        100,320
                  WRITE-OFF OF NOTES RECEIVABLE               --          7,800
                  NET CHANGE IN OTHER CURRENT
                      ASSETS AND CURRENT
                      LIABILITIES                        (65,701)        78,526
         -----------------------------------------------------------------------

         NET CASH USED IN OPERATING ACTIVITIES          (126,954)      (313,475)
         -----------------------------------------------------------------------

         CASH FLOWS FROM INVESTING ACTIVITIES:
             SALES OF AVAILABLE-FOR-SALE
                 SECURITIES                                   --         39,116
             INCREASE IN INTANGIBLE ASSETS                (7,602)       (20,436)
             PROCEEDS FROM SALE OF SUBSIDIARY                 --        212,500
             PURCHASE OF PROPERTY AND EQUIPMENT          (30,926)        (8,341)
         -----------------------------------------------------------------------

         NET CASH (USED IN) PROVIDED BY
             INVESTING ACTIVITIES                        (38,528)       222,839
         -----------------------------------------------------------------------

                                     FS-54
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


12. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (CONTINUED)


                CONDENSED UNCONSOLIDATED STATEMENT OF CASH FLOWS,
                                   CONTINUED

          FOR THE YEARS ENDED MAY 31,                    2003           2002
         -----------------------------------------------------------------------


         CASH FLOWS FROM FINANCING ACTIVITIES:
             NET DECREASE IN SHAREHOLDER LOANS           (61,450)         1,128
             SALE OF COMMON STOCK, NET OF
             OFFERING EXPENSES                            40,000         10,200
             INCREASE IN SHAREHOLDER LOANS                    --        280,000
         -----------------------------------------------------------------------
         NET CASH (USED IN) PROVIDED BY                  (21,450)       291,328
             FINANCING ACTIVITIES
         -----------------------------------------------------------------------

         NET CHANGE IN CASH AND CASH
             EQUIVALENTS                                (186,932)       200,692

         CASH AND CASH EQUIVALENTS AT
             BEGINNING OF YEAR                           200,692             --
         -----------------------------------------------------------------------

         CASH AND CASH EQUIVALENTS AT END OF
             YEAR                                    $    13,760    $   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                          $    10,580    $    (9,948)
         =======================================================================

                                     FS-55
<PAGE>

                                                BIOMERICA, INC. AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                               YEARS ENDED MAY 31, 2003 AND 2002

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


13. DISCONTINUED OPERATIONS

         The following summarizes the net liabilities of the discontinued
         operations ReadyScript and AIT as of May 31, 2003 and the results of
         its operations for each of the years in the two-year period ended May
         31, 2003.

          Balance sheet items:

          MAY 31,                                         2003           2002
         -----------------------------------------------------------------------

         Assets:
             Prepaid expenses and other                $   2,491      $   2,436
             Equipment                                     3,323         43,508
         -----------------------------------------------------------------------

                                                           5,814         45,944

         Less liabilities:
             Accrued liabilities                        (370,933)      (372,131)
         -----------------------------------------------------------------------

         Net liabilities                               $ 365,119      $ 326,187
         =======================================================================

          Results of its operations items:

          YEARS ENDED MAY 31,                             2003           2002
         -----------------------------------------------------------------------

         Revenues                                      $      --      $  46,417

         Cost and expenses:
             Cost of Sales                                    --        (63,434)
             General and administrative                  (41,746)       (61,527)
             Research and development                         --             --
         -----------------------------------------------------------------------

         Total costs                                     (41,746)      (124,961)
         -----------------------------------------------------------------------

         Loss from operations                          $ (41,746)     $ (78,544)
         =======================================================================

                                     FS-56

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