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<SEC-DOCUMENT>0001019687-04-002008.txt : 20040910
<SEC-HEADER>0001019687-04-002008.hdr.sgml : 20040910
<ACCEPTANCE-DATETIME>20040910162350
ACCESSION NUMBER:		0001019687-04-002008
CONFORMED SUBMISSION TYPE:	10KSB
PUBLIC DOCUMENT COUNT:		8
CONFORMED PERIOD OF REPORT:	20040531
FILED AS OF DATE:		20040910
DATE AS OF CHANGE:		20040910

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:		041025805

	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-053104.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, 2004            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:  $9,168,833.

State the aggregate market value of the voting and non-voting stock held by
non-affiliates of the issuer (based upon 4,400,504 shares held by non-affiliates
and the closing price of $0.45 per share for Common Stock in the
over-the-counter market as of July 31, 2004): $1,980,227.

Number of shares of the issuer's common stock, par value $0.08, outstanding as
of August 27, 2004: 5,752,431.

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 2004 we had one operational
subsidiary, Lancer Orthodontics, Inc. ("Lancer"), an international manufacturer
of orthodontics products.

     Lancer is engaged in the design, manufacture and distribution of
orthodontic products. Biomerica's direct ownership percentage of Lancer is 25.0%
and its direct and indirect (via agreements with certain shareholders) voting
control over Lancer is greater than 50% as of May 31, 2004.

     The Company adopted a formal plan in April 2001 to discontinue operations
of its ReadyScript subsidiary. 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.


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 worldwide 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 and they
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, food allergies, H. pylori, diabetes 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.


                                       2
<PAGE>

     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.

     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 conducts its operations at two facilities, one of which is
located at 253 Pawnee Street, San Marcos, California 92069-2347 and the other in
Mexicali, Mexico.

     Lancer's product line includes preformed bands, direct bonding brackets,
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 and preformed arches.

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

     Lancer has undergone no material change in the mode of conducting its
business other than as described above and it did not dispose of any material
amount of its assets during the fiscal year ended May 31, 2004.

DISCONTINUED OPERATIONS

     Biomerica's 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.

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 (Notes 1 and 6)
expired on September 13, 2003. The unpaid principal and interest were converted
into a note payable bearing interest at 8% and due September 1, 2004. No
payments are currently due on the note through September 1, 2004.

     The Company has suffered substantial recurring losses from operations over
the last several 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. ReadyScript and Allergy Immuno Technologies, Inc. were major
contributors to the Company's losses. In fiscal years 2004 and 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.

                                       3
<PAGE>

     Management believes that cash flows from operations coupled with reduced
costs and anticipated increased sales should enable the Company to fund
operations for at least the next twelve months. Should the Company be unable to
reduce costs adequately, increase sales or 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. Biomerica, as a
parent entity, has no open or existing, operating line of credit or loans on
which it can draw any debt financing and we are not currently in negotiations to
obtain such financing. Although the Company's management recognizes the imminent
need to secure additional financing or increase sales, there can be no assurance
that the Company will be successful in doing so or, if the Company does
consummate a financing, that the terms and conditions of such financing will not
be unfavorable to shareholders.

     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 and in Mexicali, Mexico. During fiscal
2003 we established a manufacturing facility in Mexicali, Mexico, in a building
that we share with Lancer Orthodontics. We have moved some of our diagnostic
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.

     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 in the name of
Lancer de Mexico, 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.

     Should Lancer discontinue operations in Mexico, it is responsible for
accumulated employee seniority obligations as prescribed by Mexican law. At May
31, 2004, this obligation was approximately $397,000. 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.


                                       4
<PAGE>

     Consolidated research and development expenses incurred by Biomerica for
the years ended May 31, 2004 and 2003 aggregated approximately $274,000 and
$263,000, 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 $116,000 and $107,000
for fiscal 2004 and 2003, 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 100 are distributors and the balance are
hospital and clinical laboratories, medical research institutions, medical
schools, pharmaceutical companies, chain drugstores, wholesalers and physicians'
offices.

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

     Lancer sells its products directly to orthodontists through company-paid
sales representatives in the United States. At the end of its fiscal year,
Lancer had five (three telesales) sales representatives in the United States and
Mexico, 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 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.

     On a consolidated basis no customer accounted for 10% or more of the
consolidated sales in the fiscal years ended May 31, 2004 and 2003. No customer
accounted for 10% or more of Lancer Orthodontics' sales for the fiscal year
ended May 31, 2004 and 2003. On an unconsolidated basis Biomerica has one
customer which accounts for greater than 10% of its sales for the years ended
May 31, 2004 and 2003.

BACKLOG

     At May 31, 2004 and 2003 Biomerica had a backlog of approximately $92,000
and $110,000 respectively. As of May 31, 2004 and 2003, Lancer had a backlog of
approximately $124,000 and $35,000, respectively. The change in Lancer's backlog
is primarily attributable to problems related to software upgrades to their
computer system. Neither Biomerica nor Lancer's businesses are subject to
significant seasonal fluctuations.

RAW MATERIALS

     The principal raw materials utilized by Biomerica consist of various
chemicals, serums, reagents 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, 2004 and 2003.

     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
2004 fiscal year, and does not anticipate that there will be any interruption or
cessation of supply in the future.


                                       5
<PAGE>

COMPETITION

     Immunodiagnostic products are currently produced by more than 100
companies, a majority of which are located within the United States. Biomerica
is 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 the uniqueness of our
products, our reputation for the quality of our products, the speed of our test
results, 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.

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:

                                       6
<PAGE>

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, T3 EIA kit, T4 EIA kit, TSH ELISA
kit, Anti-thyroglobulin ELISA kit, anti-TPO ELISA 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), (professional), Aware(tm) Breast Self-Examination, drugs of abuse rapid
tests, EZ-HP Professional, PTH (intact) IRMA kit, GAP(tm) IgA H. Pylori ELISA
kit

Class III - GAP(tm) IgM H. Pylori ELISA kit, Professional 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, but approval is required before the
product can be sold for general use in the U.S. 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
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, 2005. 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, 2005. 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 went into effect
beginning December 7, 2003. The Company has completed 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. 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.

                                       7
<PAGE>

     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
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
EZ-H. Pylori Rapid Test

Biomerica is licensed to design, develop, manufacture and distribute IN VITRO
diagnostic devices and is subject to the Code of Federal Regulations, Section
21, parts 800 - 1299. The FDA is the governing body that assesses and issues
Biomerica's license to assure that it complies with these regulations. Biomerica
is currently licensed, and its last assessment was in April 2002. Biomerica is
also registered and licensed with the State of California's Department of Health
Services. The Company believes that all Biomerica products sold in the U.S.
comply with the FDA regulations.

     Biomerica's Quality Management System is in compliance with the
International Standards Organization (ISO) EN ISO 13485:2000. EN ISO 13485:2000
is an internationally recognized standard in which companies establish their
methods of operation and commitment to quality.

    Effective June 18, 1998, fifteen major European countries are requiring a CE
(European Community) certification to sell products within their countries. The
European Community Directive 98/79/EC is the IN VITRO Device Directive (IVDD),
which regulates the import and sale of IN VITRO devices in the countries that
comprise the European Community. In order for Biomerica's products to be sold
within the European Community with the CE Mark, a Notified Body assessed
Biomerica's compliance to the IVDD in October of 2003, and the Company was
issued approval according to Annex IV, Article 3 of the IVDD in December 2003.
Biomerica completed the translation of all direction inserts into the native
languages of each of the countries in Europe where products are distributed.

   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.

                                       8
<PAGE>

   In order to obtain the 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. Compliance with and certification to both ISO 9000:2000 and ISO 13485
was implemented in December 2003.

SEASONALITY OF BUSINESS

     The businesses of the Company and its subsidiaries have 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 Biomerica and its consolidated
subsidiaries:

                                                   Year Ended May 31,
                                                   ------------------
                                              2004                  2003
                                              ----                  ----
                  U.S. Customers        $4,279,000/46.7%      $4,609,000/50.9%
                  Asia                     207,000/2.3%          228,000/2.5%
                  Europe                 2,711,000/29.6%       2,393,000/26.4%
                  Middle East              311,000/3.4%          321,000/3.6%
                  Oceania                  518,000/5.6%          452,000/5.0%
                  S. America               428,000/4.7%          460,000/5.1%
                  Other foreign            715,000/7.7%          596,000/6.5%
                                            -----------          ------------
                  Total Revenues        $9,169,000/100%       $9,059,000/100%

     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, terrorism
and import restrictions all could impact sales within certain foreign countries.
Foreign countries have licensing requirements applicable to the sale of
diagnostic products which vary substantially from domestic requirements;
depending upon the product and the foreign country, these may be more or less
restrictive than requirements within the United States. We cannot predict the
impact that conversion to the Euro in the European countries may have on
Biomerica or Lancer, if any.

     Foreign diagnostic sales are made primarily through a network of over 100
independent distributors in approximately 50 countries.

                                       9
<PAGE>

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.

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, "Candiquant," "Candigen," "EZ-H.P." and "EZ-PSA." A
trademark for "Aware" was issued and assigned in January, 2002.

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

     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, 2004, the Company and its subsidiaries employed 57
full-time employees of whom 3 are part-time employees in the United States. Of
the 57 employees, 33 are employees of Lancer and 24 are Biomerica employees. The
number of employees between the two companies decreased over the previous year
according to the following breakdown between departments:

                              2004             2003
                              ----             ----

Administrative                 9                11
Marketing & sales             16                17
Research & development         3                 2
Production and operations     29                32
                              --                --
Total                         57                62

                                       10
<PAGE>

     In addition, Lancer, through its Mexican subsidiary, employs approximately
102 people. Biomerica contracts with 11 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

     Biomerica leases its primary facility under a non-cancelable operating
lease expiring October 31, 2004, with monthly lease 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 one of whom is an officer and director.
During fiscal 2004 the Company consolidated some of its operations and the
landlords agreed to take back the space no longer needed by the Company and to
reduce the rent accordingly. The landlords also agreed not to institute the 3%
increase as required in the lease. The current monthly rent is $12,940. 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 $0.25 for payment of $15,000 in
accrued rent. 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 $150,000 and $165,000 during the years ended May
31, 2004 and 2003, respectively.

     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, 2004, future aggregate minimum lease payments for the facilities
for Biomerica areas follows:

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

                                  2005     $169,000
                                  2006       68,000
                                  2007        2,000
                                          -----------
                                           $239,000

     Biomerica has subleased a portion of its facility under a non-cancelable
operating lease which expired May 16, 2003 and is currently month-to-month. the
Company recorded base rental income of $18,020 and $18,062 during the years
ended May 31, 2004 and 2003, respectively.

     Lancer leases its main facility under a non-cancelable operating lease
expiring April 30, 2009, as extended, which requires monthly rentals that
increase annually, from $6,688 per month in 2004 to $7,527 per month in 2009.
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
$20,264 at May 31, 2004, and is included in accounts payable in the accompanying
consolidated balance sheet. Total rental expense for this facility for each of
the years ended May 31, 2004 and 2003 was approximately $75,000 and $69,000,
respectively.

     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 is providing
subcontracted manufacturing services to Biomerica, Inc., using a portion of the
additional square footage. The lease requires 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, 2004 and 2003, was approximately $103,000 and $76,000, respectively.

     The Lancer Orthodontics de Mexico lease also required an additional
refundable security deposit of $26,550. Lancer Orthodontics, Inc., paid half and
Biomerica, Inc. the other half. This is in addition to the $31,146 refundable
security deposit paid in fiscal year 2002. At May 31, 2004 other assets on the
balance sheet include approximately $44,000 of security deposit paid by Lancer
on the Mexico location.

                                       11
<PAGE>

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

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

                      2005         223,000
                      2006         225,000
                      2007         228,000
                      2008         228,000
                      2009         191,000
                                ----------
                      Total     $1,095,000

     A sub-lease agreement for approximately 459 square feet of Lancer's main
facility as entered into in April 2003, effective through November 2003, and
extended in December 2003 through November 2004. The leased space is to be used
for a machine shop and requires monthly payments of $344. Rental income for the
sub-leased space for the years ended May 31, 2004 and 2003 were $4,128 and $344,
respectively.

     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, 2004:

                             Payments Due by Period

Contractual Cash                       Less than
Obligations               Total          1 year        1-3 years       5 years
- ----------------          -----          ------        ---------       -------

Shareholder debt       $  317,318      $   317,318             --             --
Operating Leases       $1,355,156          397,336    $   537,988    $   419,832

Total                  $1,672,474      $   714,654    $   537,988    $   419,832

     Pursuant to the terms of an employment agreement between Lancer and Dan
Castner, the Vice President of Sales and Marketing for Lancer, dated May 20,
2003, Lancer agreed to pay Mr. Castner an annual base salary of $135,000. After
June 1, 2004, the contract is automatically extended on a month-to-month basis
requiring fourteen days notice of intention to terminate by either party.

     In addition, Lancer granted Mr. Castner stock options to purchase an
aggregate of 120,000 shares of Lancer common stock at an exercise price of $0.43
per share. The stock options have a term of five years and will vest over four
years as follows: (i) 25% vesting on the first anniversary of the date of grant;
(ii) 25% vesting on the second anniversary of the date of the grant; (iii) the
remaining 50% vesting as to one-twenty fourth (1/24th) per month each month
thereafter for the next two years. Should Lancer be purchased by an unaffiliated
third party, the options shall vest 100%.

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

    In January 2001, ReadyScript, Inc., entered into negotiations with
PacifiCare Health Systems, Inc. and its wholly owned subsidiary RxConnect
Acquisition Corporation, for a transaction that would have resulted in the sale
of substantially all of ReadyScript's assets or stock to PacifiCare or
PacifiCare controlled entities. The transaction was seen as desirable for
ReadyScript due to financing and cash flow concerns that threatened
ReadyScript's ability to operate as a going concern. As part of the
negotiations, the parties developed a term sheet and entered into a
confidentiality and consulting agreement in connection with the proposed
transaction. In March 2001, PacifiCare and RxConnect terminated negotiations and
refused to close the proposed transaction. In April 2001, ReadyScript ceased
doing business and filed suit against PacifiCare and Rx Connect in Orange County


                                       12
<PAGE>

California Superior Court alleging breach of the confidentiality and consulting
agreements, misappropriation of trade secrets, unfair competition, fraud and
other related claims. The court ordered the case to arbitration and in March
2004, the parties reached a confidential settlement agreement. After paying
attorney's fees, all remaining proceeds will be distributed to former
ReadyScript employees who were owed unpaid wages.

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

     Inapplicable.

                                     PART II

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

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

          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 be quoted on the OTC Bulletin
Board and are quoted under the symbol BMRA.OB.

     Shares quoted 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 for the periods indicated, based upon data reported by Yahoo
Finance. Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions, and may not necessarily represent actual transactions.

                                                   Bid Prices
                                                   ----------
                                                  High     Low
                                                  ----     ---
Quarter ended:
 May 31, 2004..............................     $0.70     $0.42
 February 28, 2004.........................     $0.65     $0.38
 November 30, 2003.........................     $0.55     $0.40
 August 31, 2003...........................     $0.52     $0.35
 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

     As of August 19, 2004, the number of holders of record of Biomerica's
common stock was approximately 984, 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.

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

                                       13
<PAGE>
<TABLE>

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

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

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

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

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

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

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

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

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

6/03     common        202,000    insider & qualified  investors     $0.25      $ 50,500
</TABLE>


     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, 2004:
<TABLE>

                                                                                Number of
                                                                                Securities
                                                                                Remaining Available
                                                                                for Future
                                                                                Issuance Under
                         Number of Securities          Compensations Plans      (Excluding
Securities               To be issued upon             Weighted-Average         Reflected in First
Plan                     Exercise of outstanding       Exercise Price of        Column)
Category                 Options                       Outstanding Options


Equity compensations
Plans approved by
Securities holders
<S>                      <C>                           <C>                      <C>
Total                    928,828                       $1.02                    783,123*

</TABLE>

* Of these shares, 628,394 have not yet been registered by a Form S-8.

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.

                                       14
<PAGE>

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 expired on
September 13, 2003 and was not renewed. The unpaid principal and interest was
converted into a note payable bearing interest at 8% and payable in September
2004.

     The Company has suffered substantial recurring losses from operations over
the last several 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. ReadyScript and Allergy Immuno Technologies, Inc. were contributors to
the Company's losses. In fiscal years 2004 and 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. Management
believes that cash flows from operations coupled with reduced costs and
anticipated increased sales should enable the Company to fund operations for at
least the next twelve months. Should the Company be unable to reduce costs or
increase sales 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. Biomerica, as a
parent entity, has no open or existing, operating line of credit or loans on
which it can draw any debt financing and we are not currently in negotiations to
obtain such financing. Although the Company's management recognizes the imminent
need to secure additional financing or increase sales, 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 shareholders.

     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.

RESULTS OF OPERATIONS

     Biomerica currently has one active subsidiary, Lancer Orthodontics, Inc.
("Lancer"), which is engaged in manufacturing, sales and development of
orthodontic products. We own approximately 25.0% of the outstanding stock of
Lancer. Biomerica exercises effective control of over 50% over Lancer via voting
agreements with some Biomerica directors and 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,".

     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 has been 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 2004 Compared to Fiscal 2003

     Our consolidated net sales were $9,168,833 for fiscal 2004 compared to
$9,059,938 for fiscal 2003. This represents an increase of $108,895, or 1.2% for
fiscal 2004. Of the total consolidated net sales for fiscal 2004, $6,024,009 is
attributable to Lancer, and $3,144,824 to Biomerica. Lancer's sales increased by
$136,111 or 2.3% over the prior fiscal year, while Biomerica showed a sales
decrease of $27,216, or 0.8%. The increase at Lancer was attributable to an
increase in international sales of $161,017, primarily in South and Central
America. Domestic sales at Lancer decreased $24,906. Lancer instituted an
increase in sales prices for domestic customers in November 2003. The decrease
in sales at Biomerica was due to decreased OTC sales due to fewer EZ Detect
screening programs.

                                       15
<PAGE>

     Cost of sales in fiscal 2004 as compared to fiscal 2003 increased by
$90,932 or 1.5%. Lancer's cost of sales as a percentage of sales decreased from
70.3% to 68.5% in fiscal 2004 as compared to fiscal 2003. The decrease was
primarily attributable to the selling price increase. Biomerica had an increase
in cost of sales as a percentage of sales from 63.6% to 68.7% in fiscal 2004 as
compared to fiscal 2003. The increase was due to increased costs related to
obtaining the CE Mark and establishing the Mexicali facility.

     Selling, general and administrative costs increased in fiscal 2004 as
compared to fiscal 2003 by $113,078 or 3.9%. Lancer had an increase of $195,381
in these costs due to selling labor and advertising expenses and increased
insurance and professional fees in the administrative area. Biomerica had a
decrease in fiscal 2004 as compared to fiscal 2003 of $82,303, primarily due to
lower administrative wages and sales commissions.

     Research and development expense increased in fiscal 2004 as compared to
fiscal 2003 by $11,140 or 4.2%. Of this, Lancer had an increase of $8,734, as a
result of increased labor costs associated with development of new products and
manufacturing technologies. Biomerica had an increase in research and
development expenses of $2,406.

     Interest expense net of interest income, increased in fiscal 2004 as
compared to fiscal 2003 by $1,847 or 5.7%, due to an decrease of such expense at
Lancer of $1,729 which was offset by an increase at Biomerica of $3,576 due to
interest due on the note payable shareholder and rent payable.

     Other income increased by $9,513 or 1.4% in fiscal 2004 as compared to
fiscal 2003. Of this, Lancer had an increase in other income of $7,401 due to an
increase in income from providing shelter services in Mexico and rental income,
offset by the decrease in income due to insurance proceeds received in 2003.
Lancer had rental income of $4,128 in fiscal year 2004 resulting from the
sub-lease of approximately 459 square feet of San Marcos warehouse space.
Biomerica had increases in other income of $2,112.

     As of May 31, 2004 Biomerica had net tax operating loss carryforwards of
approximately $4,607,000 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 2023. As
of May 31, 2004, Biomerica had net operating tax loss carryforwards of
approximately $1,289,000 available to offset future state income tax
liabilities, which expire through 2012. As of May 31, 2004, Lancer had net
operating loss carryforwards of approximately $1,997,000 and business tax
credits of approximately $63,000 available to offset future Federal tax
liabilities. The Lancer federal carryforwards expire through 2021. As of May 31,
2004, 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
2013.

Liquidity, Capital Resources and Going Concern

     As of May 31, 2004, we had cash and available for sale securities of
$378,494 (see Note 2 of Notes to Consolidated Financial Statements) and current
working capital of $2,696,065. Of the current working capital, $2,822,792 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 2004, cash used in operations was
$75,032 as compared to cash provided by operations in fiscal 2003 of $512,536.
During fiscal 2004, cash used in investing activities was $390,122, primarily
due to the purchase of property and equipment at Lancer of $394,612 which was
offset by sales of available for sale securities at Biomerica of $45,967. During
fiscal 2003 cash used in investing activities was $239,285 primarily due to the
purchase of property and equipment at Lancer. During 2004, cash provided by
financing activities of $293,335 was primarily a result of sale of common stock
of $270,000 at Lancer and $50,500 at Biomerica. During 2003, cash used in
financing activities was $74,548 due to decreases in borrowings.

     On an unconsolidated basis, Biomerica used cash in operating activities of
$24,336 in fiscal 2004 as compared to $126,954 in fiscal 2003. Net cash provided
by (used in) investing activities for the years ended May 31, 2004 and 2003 were
$3,937 and ($38,528), respectively. Net cash provided by and (used in) financing
activities was $54,868 for fiscal 2004 and ($21,450) for fiscal 2003. See Note
11 to the Notes to Consolidated Financial Statements.

                                       16
<PAGE>

     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 expired on
September 13, 2003 and was not renewed. The unpaid principal and interest was
converted into a note payable bearing interest at 8% and payable September 1,
2004.

     The Company has suffered substantial recurring losses from operations over
the last several 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. ReadyScript and Allergy Immuno Technologies, Inc. were major
contributors to the Company's losses. In the fiscal years 2003 and 2004, the
Company reduced operating costs through certain cost reduction efforts and
concentrated on its core business in Lancer and Biomerica to increase sales.

     Management believes that cash flows from operations coupled with reduced
costs and anticipated increased sales should enable the Company to fund
operations for at least the next twelve months. Should the Company be unable to
reduce costs or increase sales 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. Biomerica, as a
parent entity, has no open or existing, operating line of credit or loans on
which it can draw any debt financing and we are not currently in negotiations to
obtain such financing. Although the Company's management recognizes the imminent
need to secure additional financing or increase sales, there can be no assurance
that the Company will be successful in doing so or, if the Company does
consummate such a financing, that the terms and conditions of such financing
will not be unfavorable to shareholders.

     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.

     During fiscal 2004 Lancer management negotiated a new line of credit with
Cuyamaca Bank through January 8, 2005. The line of credit allows for borrowings
up to $400,000 and are limited to 80% of accounts receivable less than 90 days
old. The outstanding balance at May 31, 2004 was $0 and the unused portion
available under the line of credit at May 31, 2004, was approximately $340,000.
Borrowings bear interest at prime plus 2.00% per annum, but not lower than 8%
(6.% at May 31, 2004). Lancer requested that Cuyamaca Bank reserve $60,000 of
Lancer's available credit as a guarantee of credit with a European supplier.

     The Lancer 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 $2,700,000, and that a zero outstanding
balance be maintained for 30 consecutive days during the term. The line of
credit expires on January 8, 2005.

     Lancer also had a term loan for $100,000 with Cuyamaca Bank that was paid
off in May 2004. This loan required monthly payments of approximately $2,300
(principal and interest) at an interest rate of prime plus 2% (6% at May 31,
2004).

     Lancer is restricted from distribution of any assets to Biomerica except
for reimbursement of expenses on behalf of Lancer or for services rendered.

     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.

                                       17
<PAGE>

     Biomerica, Inc. entered into an agreement for a line of credit agreement on
September 12, 2000 with a shareholder whereby the shareholder would 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
expired September 13, 2003. In March 2004 the Company signed a note payable for
the principal and interest due at that time of $313,318 and agreed to a
forbearance of any payments for the length of the agreement. A warrant for
40,000 shares of restricted common stock exercisable at a price of $.51 per
share was awarded as compensation for the forbearance. The note payable is
secured by all of the Company's assets except for the Lancer common stock owned
by Biomerica. The note is due September 1, 2004. There was $313,318 of
outstanding principal and $5,356 of interest payable under this note payable at
May 31, 2004 (also see Note 7).

     During 2004 and 2003, a shareholder advanced the Company $4,000 and
$10,000, respectively. During June 2003 the $10,000 advance was repaid in the
form of Company common stock at the price of $.25 per share. Interest for the
fiscal year ended May 31, 2004 was $283. At May 31, 2004, $1,555 was owed in
interest payable on the two loans.

     During 2004 and 2003, the Company incurred $32,060 and $29,466,
respectively, in interest expense related to the shareholder line of credit,
note payable and rental liabilities, of which $19,200 was paid in fiscal 2004.
As of May 31, 2004, $12,860 in accrued interest was due on the promissory note
and rental liabilities.

     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.

     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.

     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.

     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


                                       18
<PAGE>

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, 2004, 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.

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.

     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-$2,589,350 and personal property-$1,622,400), 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),
commercial auto ($1,000,000) 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 ($472,500), business income ($1,200,000), general
liability ($2,000,000), employee benefit liability ($1,000,000), products
liability ($2,000,000), auto ($1,000,000), commercial fidelity ($100,000),
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.

                                       19
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS:

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.

     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 adoption of this
statement did not 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. The adoption of SFAS No. 123 did
not have a material 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.

     In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable Interest
Entities". In December 2003, FIN 46 was replaced by FASB Interpretation No. 46R,
"Consolidation of Variable Interest Entities." FIN 46R clarifies some of the
provisions of FIN 46 and exempts certain entities from its requirements. FIN 46R
was effective at the end of the first interim period ending March 15, 2004.


                                       20
<PAGE>

Entities that have adopted FIN 46 prior to this date can continue to apply
provisions of FIN 46 until the effective date of FIN 46R or early election of
FIN 46R. This interpretation clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," relating to consolidation
of certain entities. FIN No. 46 requires 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 or results of operations.

     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. The adoption of this statement did
not have a significant effect on the Company's consolidated financial position
or results of operations.

     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 adoption
of this statement did not have a material effect on the Company's consolidated
financial position or results of operations.

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.
- --------------------------------------------------------------------------------

     The Company's independent auditors for the fiscal years ended May 31, 2003
and 2002 were BDO Seidman, LLP ("BDO"). Effective May 29, 2004, the Company,
upon approval of the audit committee of the Board of Directors of the Company,
dismissed BDO. Effective May 29, 2004 the Company, upon approval of the audit
committee of the Board of Directors, approved the appointment of PKF, Certified
Public Accountants, A Professional Corporation, San Diego, as the Company's
independent auditors for the fiscal year ended May 31, 2004.

     BDO last reported on the Company's financial statements on August 11, 2003.
The report, which covered the two fiscal years ended May 31, 2003, was modified
for going concern. BDO expressed substantial doubt as to the Company's ability
to remain a going concern.

     The auditors' report of BDO Seidman on the consolidated financial
Statements of Biomerica, Inc. and subsidiaries as of and for the years ended May
31, 2003 and 2002 contained the following paragraph:

                                       21
<PAGE>

     "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."

     The change of independent accountants was ratified by the Board of
Directors of the Company on May 29, 2004.

     During the two fiscal years ended May 31, 2003 and the subsequent interim
period through May 29, 2004, there were no disagreements between the Company and
BDO on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which, if not resolved, to BDO's
satisfaction, would have caused it to make reference to the subject matter of
the disagreement in connection with its report.

     During and the two fiscal years ended May 31, 2003 and subsequent interim
period through May 29, 2004, there have been no reportable events (as defined in
Regulation S-K Item 304(a)(1)(v)).

     During the two fiscal years ended May 31, 2003 and the subsequent interim
period through May 29, 2004 BDO did not advise the Company that the internal
controls necessary for the Company to develop reliable financial statements do
not exist.

     During the two fiscal years ended May 31, 2003 and the subsequent interim
period through May 29, 2004, BDO did not advise the Company that any information
had come to their attention which had led them to no longer be able to rely on
management's representation, or that had made BDO unwilling to be associated
with the financial statements prepared by management.

     During the two fiscal years ended May 31, 2003 and the subsequent interim
period through May 29, 2004, BDO did not advise the Company that the scope of
any audit needed to be expanded significantly or that more investigation was
necessary.

     During the two fiscal years ended May 31, 2003 and the subsequent Interim
period through May 29, 2004, BDO did not advise the Company that There was any
information which the accountants concluded would materially Impact the fairness
and reliability of either (i) a previously issued Audit report or the underlying
statements, or (ii) the financial statements Issued or to be issued covering the
fiscal period(s) subsequent to the Date of the most recent financial statements
covered by an audit report (including information that, unless resolved to the
accountant's satisfaction, would prevent it from rendering an unqualified audit
report on those financial statements).

     The Company engaged PKF, Certified Public Accountants, A Professional
Corporation (San Diego) ("PKF") as its new independent accountant on May 29,
2004. Prior to May 29, 2004, the Company had not consulted with PKF regarding
(i) the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's financial statements, and no written report or oral advice was
provided to the Company by PKF concluding there was an important factor to be
considered by the Company in reaching a decision as to an accounting, auditing
or financials reporting issue; or (ii) any matter that was either the subject of
a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K
and the related instructions to Item 304 of Regulation S-K, or a reportable
event, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K.

                                       22
<PAGE>

ITEM 8A.  Controls and Procedures
- ---------------------------------

     The Company maintains a system of disclosure controls and procedures which
are designed to ensure that information required to be disclosed by the Company
in the reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported with the time period specified under the
Securities and Exchange Commission's rules and forms. Based on an evaluation
performed, the Company's certifying officers have concluded that the disclosure
controls and procedures were effective as of the end of the period covered by
this report to provide reasonable assurance of the achievement of these
objectives.

     Notwithstanding the foregoing, there can be no assurance that the Company's
disclosure controls and procedures will detect or uncover all failures of
persons within the Company to disclose material information otherwise required
to be set forth in the Company's reports.

     We do not believe that there has been any change in the Company's internal
control over financial reporting during the period covered by this report that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.


                                    PART III

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

     This information is incorporated by reference to the Company's proxy
statement for its 2004 Annual Meeting of Stockholders which will be filed not
later than 120 days after the end of the Company's fiscal year ended May 31,
2004.


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

    This information is incorporated by reference to the Company's proxy
statement for its 2004 Annual Meeting of Stockholders, which will be filed not
later than 120 days after the end of the Company's fiscal year ended May 31,
2004.

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

    This information is incorporated by reference to the Company's proxy
statement for its 2004 Annual Meeting of Stockholders, which will be filed not
later than 120 days after the end of the Company's fiscal year ended May 31,
2004.

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

     In fiscal 2003, Biomerica entered into an agreement with Lancer whereby
Biomerica agreed to pay an initial shelter fee of $5,000 with additional monthly
payments of $2,875 for use of the Lancer de Mexico facilities to produce and
manufacture Biomerica products. The monthly payments are due as long as
Biomerica produces its products at the Lancer de Mexico facility. At May 31,
2004, Biomerica has paid all applicable shelter fees.

   Other information regarding related transactions is incorporated by reference
to the Company's proxy statement for its 2004 Annual Meeting of Stockholders,
which will be filed not later than 120 days after the end of the Company's
fiscal year ended May 31, 2004.



                                       23
<PAGE>

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

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

EXHIBIT NO.     DESCRIPTION
- -----------     -----------

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

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

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

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

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

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

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

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

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

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

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

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

                                       24
<PAGE>

   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
                hare (incorporated by reference to Exhibit 10.18 filed with
                Registrant's Registration Statement on Form SB-2, Commission o.
                333-87231 filed on September 16, 1999).

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

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

                                       25
<PAGE>

   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).

   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.

                                       26
<PAGE>

   10.31        Loan Modification, Forbearance and Security Agreement
                (incorporated by reference to the Company's February 29, 2004
                Form 10-QSB filed April 14, 2004).

   10.32        Promissory Note (incorporated by reference to the Company's
                February 29, 2004 Form 10-QSB filed April 14, 2004).

   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).

   16.3         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).

   16.4         Letter on change of certifying accountant (incorporated by
                reference to Exhibit A to Form 8-K/A filed with the Securities
                and Exchange Commission on June 7, 2004.)

   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).

   23.1         Consent of Independent Registered Public Accounting Firm (BDO
                Seidman, LLP)

   23.2         Consent of Independent Registered Public Accounting Firm (PKF
                San Diego)

   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.

   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, 2004 and 2003 and
                Independent Registered Public Accounting Firm' Report.

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

      No reports on Form 8-K were filed in the year ended May 31, 2004.
Biomerica filed a report on Form 8-K/A with the Securities and Exchange
Commission on June 7, 2004. Lancer filed a report on Form 8-K June 8, 2004. Both
reports were filed to report a change in independent accountants.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- -----------------------------------------------

     For the year end May 31, 2003, BDO Seidman, LLP audited the Company's
consolidated financial statements and provided tax related services. For the
interim periods for the year ended May 31, 2004, BDO Seidman, LLP performed
reviews of the Form-10QSB's. PKF (San Diego), Certified Public Accountants, was
engaged to audit the consolidated financial statements for the year ended May
31, 2004.

     The aggregate fees billed for professional services by BDO Seidman, LLP and
PKF (San Diego) in 2004 and 2003 were as follows:

                                       27
<PAGE>

                                                2004                2003
                                                ----                ----

PKF audit fees                                 $57,000(1)               --
 BDO audit fees                                 66,421(2)          $94,500(3)
     audit related fees                            260              10,700
     tax fees                                       --               5,274(4)
                                            ------------        ------------
     total                                    $123,681            $110,474

(1) Billed or to be billed in fiscal 2005.
(2) Includes $19,000 billed in fiscal 2005 and $47,421 billed in fiscal 2004
(3) Includes $59,900 billed in fiscal 2004 and $34,600 billed in fiscal 2004
(4) Billed in fiscal 2004

AUDIT FEES consist of the aggregate fees billed for professional services
rendered for the audit of our annual financial statements, the audit of our
subsidiaries financial statements, the reviews of the financial statements
included in our Forms 10-QSB, the reviews of the financial statement included in
our subsidiaries Form 10-QSB and for any other services that are normally
provided by PKF or BDO in connection with our statutory and regulatory filings
or engagements.

AUDIT RELATED FEES consist of the aggregate fees billed for professional
services rendered for assurance and related services that were reasonably
related to the performance of the audit or review of our financial statements
and the financial statements of our subsidiaries that were not otherwise
included in Audit Fees.

TAX FEES consist of the aggregate fees billed for professional services rendered
for tax compliance, tax advice and tax planning. Included in such Tax Fees were
fees for preparation of our tax returns and consultancy and advice on other tax
planning matters.

ALL OTHER FEES consist of the aggregate fees billed for products and services
provided by PKF or BDO and not otherwise included in Audit Fees, Audit Related
fees or Tax Fees. Included in such Other Fees were fees for services rendered by
PKF or BDO in connection with our private and public offerings conducted during
such periods.


                                       28
<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:  9/9/04
                                               ------

     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: 9/9/04
- ------------------------------------
Zackary S. Irani
President, Director, Chief Executive
Officer

/s/ Janet Moore                                                Date: 9/9/04
- ------------------------------------
Janet Moore, Secretary
Director, Chief Financial Officer

/s/ Robert Orlando                                             Date: 9/9/04
- ------------------------------------
Robert Orlando, M.D., Ph.D.
Director

/s/ Francis R. Cano
- -----------------------------------                            Date: 9/9/04
Francis R. Cano
Director

/s/ Allen Barbieri                                             Date: 9/9/04
- ------------------------------------
Allen Barbieri
Director


                                       29

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>2
<FILENAME>biomerica_10kex23-1.txt
<TEXT>
<PAGE>



EXHIBIT 23.1

                             CONSENT OF INDEPENDENT
                       REGISTERED PUBLIC ACCOUNTING FIRM

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
September 10, 2004



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.2
<SEQUENCE>3
<FILENAME>biomerica_10kex23-2.txt
<TEXT>
<PAGE>
EXHIBIT 23.2

                             CONSENT OF INDEPENDENT
                        REGISTERED PUBLIC ACCOUNTING FIRM



Biomerica, Inc. and Subsidiaries
Newport Beach, California

We hereby consent to the incorporation by reference, in the previously filed
Registration Statements on Form S-8 (Nos. 333-33494, 333-00159 and 033-47054) of
Biomerica, Inc. and Subsidiaries Inc., of our report dated July 30, 2004,
relating to the consolidated financial statements as of and for the year ended
May 31, 2004 , 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/ PKF
Certified Public Accountants
A Professional Corporation


San Diego, CA
September 8, 2004



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>4
<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, Zackary 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 9, 2004

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


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>5
<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 am 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 9, 2004

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


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>6
<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, 2004 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 9, 2004



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.2
<SEQUENCE>7
<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, 2004 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 9, 2004



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.3
<SEQUENCE>8
<FILENAME>biomerica_10kex99-3.txt
<TEXT>
<PAGE>


                        BIOMERICA, INC. AND SUBSIDIARIES
                                TABLE OF CONTENTS
================================================================================

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM                                                    FS-2-3

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheet as of May 31, 2004                               FS-4

Consolidated Statements of Operations and
  Comprehensive Loss for the Years Ended
  May 31, 2004 and 2003                                              FS-5 - FS-6

Consolidated Statements of Shareholders' Equity
  for the Years Ended May 31, 2004 and 2003                         FS-7 - FS-10

Consolidated Statements of Cash Flows for the
  Years Ended May 31, 2004 and 2003                                FS-11 - FS-12




                                      FS-1
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors and Stockholders
Biomerica, Inc.
Newport Beach, California


We have audited the accompanying consolidated balance sheet of Biomerica, Inc.
(a California Corporation) and its subsidiaries as of May 31, 2004 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. 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 audit.

We have conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Biomerica, Inc. as of May 31, 2004, and the results of its consolidated
operations and cash flows for the year ended May 31, 2004 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 raises
liquidity concerns. Management estimates that its available cash resources as of
May 31, 2004 along with cost reductions and anticipated increased sales should
be sufficient to fund planned operations through May 31, 2005. These conditions
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 from the outcome of this
uncertainty.



July 30, 2004                                       PKF
San Diego California                                Certified Public Accountants
                                                    A Professional Corporation




                                      FS-2

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
Biomerica, Inc. and Subsidiaries

We have audited the accompanying consolidated statement of operations and
comprehensive loss, shareholders' equity and cash flows of Biomerica, Inc. and
Subsidiaries (the "Company") for the year ended May 31, 2003. 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 audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Biomerica, Inc., and Subsidiaries for the year ended May 31, 2003, 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 financials 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.

/s/ BDO Seidman, LLP

Costa Mesa, California
August 11, 2003



                                      FS-3
<PAGE>


BIOMERICA, INC. AND SUBSIDIARIES

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

MAY 31,                                                               2004
- --------------------------------------------------------------------------------
ASSETS

CURRENT ASSETS
   Cash and cash equivalents                                       $    352,374
   Available-for-sale securities                                         26,120
   Accounts receivable, less allowance for doubtful
      accounts and sales returns of $172,402                          1,517,283
   Inventories, net                                                   2,672,843
   Prepaid expenses and other                                           181,761

Total current assets                                                  4,750,381
- --------------------------------------------------------------------------------
INVENTORIES, non-current                                                 20,000
- --------------------------------------------------------------------------------

PROPERTY AND EQUIPMENT, at cost
   Equipment                                                          3,421,173
   Construction in progress                                              23,117
   Furniture, fixtures and leasehold improvements                       530,175
- --------------------------------------------------------------------------------
                                                                      3,974,465

ACCUMULATED DEPRECIATION AND AMORTIZATION                            (3,257,664)
- --------------------------------------------------------------------------------
Net property and equipment                                              716,801

INTANGIBLE ASSETS, net                                                   48,821

OTHER ASSETS                                                             31,887
- --------------------------------------------------------------------------------

                                                                   $  5,567,890
================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
   Accounts payable and accrued expenses                           $    982,779
   Accrued compensation                                                 465,923
   Notes payable-shareholder                                            317,318
   Net liabilities from discontinued operations                         288,296
- --------------------------------------------------------------------------------
Total current liabilities                                             2,054,316
- --------------------------------------------------------------------------------

MINORITY INTEREST                                                     2,587,301
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
   Common stock, $.08 par value; 25,000,000 shares
      authorized; 5,752,431 shares issued and
      outstanding                                                       460,193
   Additional paid in capital                                        17,125,005
   Accumulated other comprehensive gain                                  18,466
   Accumulated deficit                                              (16,677,391)
- --------------------------------------------------------------------------------
Total shareholders' equity                                              926,273
- --------------------------------------------------------------------------------
                                                                   $  5,567,890
================================================================================

         SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND
            ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      FS-4
<PAGE>
<TABLE>

                         BIOMERICA, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<CAPTION>

YEARS ENDED MAY 31,                                        2004           2003
- ----------------------------------------------------------------------------------

<S>                                                    <C>            <C>
NET SALES                                              $ 9,168,833    $ 9,059,938
Cost of sales                                            6,252,417      6,161,485
- ----------------------------------------------------------------------------------

GROSS PROFIT                                             2,916,416      2,898,453
- ----------------------------------------------------------------------------------

OPERATING EXPENSES
    Selling, general and administrative                  2,958,573      2,845,495
    Research and development                               273,981        262,841
- ----------------------------------------------------------------------------------

Total operating expenses                                 3,232,554      3,108,336
- ----------------------------------------------------------------------------------

OPERATING LOSS FROM CONTINUING OPERATIONS                 (316,138)      (209,883)

OTHER INCOME (EXPENSE)
    Interest expense, net of interest income               (34,114)       (32,267)
    Other income (expense), net                             79,039         69,526
- ----------------------------------------------------------------------------------

LOSS FROM CONTINUING OPERATIONS, before minority
    interest in net loss of consolidated
    subsidiaries and income taxes                         (271,213)      (172,624)

MINORITY INTEREST IN NET INCOME OF
    CONSOLIDATED SUBSIDIARIES                              (26,014)       (49,024)
- ----------------------------------------------------------------------------------

LOSS FROM CONTINUING OPERATIONS, before income taxes      (297,227)      (221,648)
INCOME TAX EXPENSE                                           1,823          2,219
- ----------------------------------------------------------------------------------

NET LOSS FROM CONTINUING OPERATIONS                       (299,050)      (223,867)

DISCONTINUED OPERATIONS
    Gain (loss) from discontinued operations, net           75,849        (41,746)
- ----------------------------------------------------------------------------------

NET LOSS                                                  (223,201)      (265,613)


                                       FS-5
</TABLE>

<PAGE>
<TABLE>


                          BIOMERICA, INC. AND SUBSIDIARIES

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

YEARS ENDED MAY 31,                                       2004          2003
- -----------------------------------------------------------------------------------
<S>                                                        <C>              <C>

OTHER COMPREHENSIVE LOSS, net of tax
   Unrealized gain (loss) on
      available-for-sale securities                        28,123           10,580
- -----------------------------------------------------------------------------------

COMPREHENSIVE LOSS                                  $    (195,078)   $    (255,033)
===================================================================================

BASIC NET LOSS PER COMMON SHARE:
   Net loss from continuing operations              $       (0.05)   $       (0.04)
   Net income (loss) from discontinued operations            0.01            (0.01)
- -----------------------------------------------------------------------------------

Basic net loss per common share                     $       (0.04)   $       (0.05)
===================================================================================

DILUTED NET LOSS PER COMMON SHARE:
   Net loss from continuing operations              $       (0.05)   $       (0.04)
   Net income (loss) from discontinued operations            0.01            (0.01)
- -----------------------------------------------------------------------------------

Diluted net loss per common share                   $       (0.04)   $       (0.05)
===================================================================================

WEIGHTED AVERAGE NUMBER OF COMMON AND
    COMMON EQUIVALENT SHARES
   Basic                                                5,739,993        5,304,432
===================================================================================

   Diluted                                              5,739,993        5,304,432
===================================================================================

          SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND
              ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                       FS-6
</TABLE>

<PAGE>
<TABLE>


                                             BIOMERICA, INC. AND SUBSIDIARIES

                                      CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


                                                    COMMON STOCK            ADDITIONAL           COMMON STOCK
                                                                              PAID-IN             SUBSCRIBED
                                               SHARES          AMOUNT         CAPITAL        SHARES          AMOUNT
- -------------------------------------------------------------------------------------------------------------------
<S>                                            <C>          <C>            <C>                 <C>        <C>
Balances, May 31, 2002                         5,172,364    $   413,788    $ 16,981,982        28,333     $    23,750

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            --              --

Common stock subscribed for services
    rendered                                          --             --              --            --              --

Net loss                                              --             --              --            --              --
- ----------------------------------------------------------------------------------------------------------------------

Balances, May 31, 2003                         5,522,431    $   441,793    $ 17,117,393        18,000       $   4,500


                                                               FS-7
<PAGE>

                                                    ACCUMULATED OTHER
                                                      COMPREHENSIVE              ACCUMULATED
                                                      INCOME (LOSS)                DEFICIT                TOTAL
- ---------------------------------------------------------------------------------------------------------------------


Balances, May 31, 2002                               $         (20,237)         $ (16,188,577)          $ 1,210,706

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

Exercise of stock options                                            --                    --                    --

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

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

Common stock subscribed for services
    rendered                                                         --                    --                    --

Net loss                                                             --              (265,613)             (265,613)
- --------------------------------------------------------------------------------------------------------------------

Balances, May 31, 2003                               $          (9,657)          $(16,454,190)          $ 1,099,839

                                                        (Continued)



                                                          FS-8
<PAGE>


                                             BIOMERICA, INC. AND SUBSIDIARIES

                                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED

                                                    COMMON STOCK             ADDITIONAL           COMMON STOCK
                                                                              PAID-IN              SUBSCRIBED
                                               SHARES          AMOUNT         CAPITAL        SHARES          AMOUNT
- -----------------------------------------------------------------------------------------------------------------------

Issuance of subscribed shares                     18,000          1,440           3,060        (18,000)        (4,500)

Private placement                                202,000         16,160          34,340             --             --

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

Exercise of stock options                         10,000            800           1,200             --             --

Compensation expense in connection
   with options and warrants granted                  --             --          81,731             --             --

Change in minority interest related
to sale of stock at subsidiary                                                 (112,719)

Net loss                                              --             --              --             --             --
- -----------------------------------------------------------------------------------------------------------------------

Balances, May 31, 2004                         5,752,431   $    460,193    $ 17,125,005             --     $       --
========================================================================================================================


                                                               FS-9
<PAGE>




                                                    ACCUMULATED OTHER
                                                      COMPREHENSIVE           ACCUMULATED
                                                      INCOME (LOSS)             DEFICIT                   TOTAL
- ------------------------------------------------------------------------------------------------------------------

Issuance of subscribed shares                                    --                   --                     --

Private placement                                                --                   --                 50,500

Change in unrealized gain (loss) on
    available-for-sale securities                            28,123                   --                 28,123

Exercise of stock options                                        --                   --                  2,000

Compensation expense in connection
   with options and warrants granted                             --                   --                 81,731

Sales of stock at subsidiary                                                                           (112,719)

Net loss                                                         --             (223,201)              (223,201)
- ------------------------------------------------------------------------------------------------------------------

Balances, May 31, 2004                               $       18,466         $(16,677,391)            $  926,273
==================================================================================================================

         SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND
            ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                     FS-10
</TABLE>

<PAGE>
<TABLE>

                              BIOMERICA, INC. AND SUBSIDIARIES

                            CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED MAY 31,                                            2004          2003
- --------------------------------------------------------------------------------------------

<S>                                                                  <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss from continuing operations                               $(299,050)   $(223,867)
   Adjustments to reconcile net loss to net cash
      (used in) provided by continuing operating
      activities:
      Depreciation and amortization                                    144,160      116,547
      Provision for losses on accounts receivable                       52,357       78,772
      Write-off of intangibles                                              --       10,000
      Gain on sales of available for sale securities                   (30,853)          --
      Warrants and options issued                                       81,731       34,288
      Common stock issued or subscribed for services rendered
         for the consolidated subsidiaries                              33,750
      Common stock issued or subscribed for services rendered               --       69,878
      Minority interest in net income of consolidated subsidiaries      26,014       49,024
      Changes in current liabilities and assets
        Accounts receivable                                             93,596     (237,664)
        Inventories                                                    (17,911)     261,080
        Prepaid expenses and other                                      20,927      (54,384)
        Other receivables and assets                                    (5,421)          --
        Accounts payable and other accrued liabilities                (297,355)     373,944
        Accrued compensation                                           123,023       34,918
- --------------------------------------------------------------------------------------------

Net cash (used in) provided by operating activities                    (75,032)     512,536
- --------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
    Sales of available-for-sale securities                              45,967           --
    Purchases of property and equipment                               (436,089)    (231,685)
    Increase in intangible assets                                           --       (7,600)
- --------------------------------------------------------------------------------------------

Net cash (used in) investing activities                               (390,122)    (239,285)
- --------------------------------------------------------------------------------------------

                                         (Continued)


                                           FS-11

<PAGE>

                              BIOMERICA, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE YEARS ENDED MAY 31,                                            2004         2003
- -------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Net decrease under line of credit borrowings                          (426)     (65,243)
   Increase (decrease) of shareholder debt                              3,768      (61,450)
   Change in minority interests                                       (32,507)      12,145
   Exercise of stock options                                            2,000           --
   Sale of common stock, net of offering expenses                      50,500       40,000
   Consolidated subsidiaries sale of common stock                     270,000           --
- -------------------------------------------------------------------------------------------


Net cash provided by (used in) financing activities                   293,335      (74,548)
- -------------------------------------------------------------------------------------------

Net cash provided by (used in) discontinued operations                   (974)      (2,813)

Net change in cash and cash equivalents                              (172,793)     195,890

CASH AND CASH EQUIVALENTS, beginning of year                          525,167      329,277
- -------------------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS, end of year                              $ 352,374    $ 525,167
===========================================================================================

SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION
   CASH PAID DURING THE YEAR FOR:
      Interest                                                      $  19,200    $   3,635
===========================================================================================

      Income taxes                                                  $   1,823    $   2,219
===========================================================================================

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
   AND FINANCING ACTIVITIES
   Change in unrealized holding gain (loss) on
      available-for-sale securities                                 $  28,123    $  10,580
===========================================================================================

      Change in minority interest due to subsidiary sale of stock   ($112,719)   $      --
===========================================================================================


              SEE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND
                 ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                           FS-12
</TABLE>

<PAGE>
insert

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003



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) expired on September 13, 2003 and
         was not renewed. The unpaid principal and interest was converted into a
         note payable bearing interest at 8% and payable September 1, 2004.

         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
         12). ReadyScript and Allergy Immuno Technologies, Inc. were
         contributors to the Company's losses in prior fiscal years. In fiscal
         years 2004 and 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. Management believes that cash
         flows from operations coupled with reduced costs and anticipated
         increased sales should be sufficient to enable the Company to fund
         operations for at least the next twelve months.

         The Company will continue to have limited cash resources. Although the
         Company's management recognizes the imminent need to secure additional
         financing or increase sales, 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 or increase sales could
         have a material adverse effect on the Company and if sales were to
         decrease, could 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, 2004
         and 2003 (see Note 3) include the accounts of Biomerica, Inc.
         ("Biomerica"), Lancer Orthodontics, Inc. ("Lancer") and ReadyScript,
         Inc. (as discontinued operations). All significant intercompany
         accounts and transactions have been eliminated in consolidation.

                                     FS-13
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


         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.

         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, 2004.

         CONCENTRATION OF CREDIT RISK

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

         The Company provides credit in the normal course of business to
         customers throughout the United States and foreign markets. The
         Company's sales are not materially dependent on a single customer or a
         small group of customers. The Company performs ongoing credit
         evaluations of its customers. The Company does not obtain collateral
         with which to secure its accounts receivable. The Company maintains
         reserves for potential credit losses based upon the Company's
         historical experience related to credit losses. At May 31, 2004, one
         customer accounted for 10.4% of gross accounts receivable. At May 31,
         2003, two customers accounted for 13% and 11% of gross accounts
         receivable. No one customer accounted for 10% or more of revenues for
         the years ended May 31, 2004 and 2003.

         At May 31, 2004, one company accounted for 10.3% of accounts payable.
         At May 31, 2003, one company accounted for 27% of accounts payable. No
         company accounted for more than 10% of purchases for the years ended
         May 31, 2004 and 2003.

         GEOGRAPHIC CONCENTRATION

         Approximately $1,659,000 of Lancer's gross inventory, $113,000 of
         Lancer's property and equipment, net of accumulated depreciation and
         amortization, $152,000 of Biomerica's gross inventory and $13,500 of
         Biomerica's property and equipment, net of accumulated depreciation and
         amortization, is located at Lancer's wholly owned subsidiary in Mexico
         (Note 9).

         CASH EQUIVALENTS

         Cash and cash equivalents consists of demand deposits and money market
         accounts 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 2004 totaled $45,967. 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 $28,123 and $10,580 for the years ended May 31, 2004 and 2003,
         respectively.

                                     FS-14
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


         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 approximate the following:

         MAY 31,                                                         2004
         -----------------------------------------------------------------------

         Raw materials                                              $   619,000
         Work in progress                                               353,000
         Finished products                                            1,918,000
         Inventory reserve                                             (217,000)
         -----------------------------------------------------------------------
         Long-term                                                       20,000
         -----------------------------------------------------------------------
                                                                    $ 2,693,000
         =======================================================================

         Approximately $1,659,000 of Lancer's gross inventory and $113,000 of
         Biomerica's gross inventory is located at its manufacturing facility in
         Mexico as of May 31, 2004.

         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.

         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 15 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 $106,272 and $62,540 for the years ended May 31, 2004 and 2003,
         respectively. At May 31, 2004, approximately $126,500 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, 2004.

         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, 2004 AND 2003


         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 $37,888
         and $54,007 for the years ended May 31, 2004 and 2003, respectively
         (see Note 4).

         The Company assesses the recoverability of these intangible assets by
         determining whether the amortization of the asset's balance over its
         remaining life can be recovered through projected undiscounted future
         cash flows. The amount of impairment, if any, is measured based on fair
         value and charged to operations in the period in which the impairment
         is determined by management. During the year ended May 31, 2003,
         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 which is reflected in cost of
         sales in the accompanying statement of operations for the year ended
         May 31,2003.

         RISKS AND UNCERTAINTIES

         LICENSES - Certain of Lancer'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.

         Lancer has entered into various license and/or royalty agreements
         pursuant to which it has obtained rights to manufacture and market
         certain products. The agreements expire in 2004, 2006, 2007, and 2010.
         Royalty expense of approximately $72,000 is included in cost of sales
         for these agreements. Sales of products manufactured under these
         agreements comprise approximately 12% and 16% of Lancer's total sales
         for the fiscal year ended May 31, 2004 and 2003 respectively.

         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. Royalty
         income of approximately $71,300 and $54,700 is netted from cost of
         sales for these agreements for the years ended May 31, 2004 and 2003,
         respectively. Income from these agreements is approximately 1% of the
         total revenue recognized for the fiscal year ended May 31, 2004 and
         2003.

         Biomerica has entered into a royalty agreement which continues pursuant
         to which it has obtained rights to manufacture and market certain
         products for the life of the products. Royalty expense of approximately
         $65,000 is included in cost of sales for this agreement. Sales of
         products manufactured under this agreement comprise approximately 2% of
         total sales for the fiscal year ended May 31, 2004.


         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.


                                     FS-16
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


         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.

         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 and Biomerica are required to obtain
         certification in the European community to sell products in those
         countries. The certification requires Lancer and Biomerica to maintain
         certain quality standards. Lancer and Biomerica have been granted
         certification. However, there is no assurance that Lancer or Biomerica
         will be able to retain their certification in the future.


                                     FS-17
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


         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.

         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, 2004 and 2003; risk free interest rates
         ranging from 2.20% to 3.72%; 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
         212.24% to 217.75%.

         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:

                                     FS-18
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


         MAY 31,                                         2004           2003
         -----------------------------------------------------------------------

         Net loss from continuing
             operations, as reported                 $    (299,050)  $ (223,867)
         Plus: Stock-based employee
             compensation expense included
             in reported net loss                           38,515       11,916
         Less: Stock-based employee
             compensation expense
             determined using fair
             value based method                           (150,404)    (182,909)
             -------------------------------------------------------------------

         Net loss from continuing
             operations, pro forma                   $    (410,939)  $ (394,860)
             ===================================================================

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

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


         Net income (loss) from
             discontinued operations,
             as reported                             $      75,849   $  (41,746)
         Plus: Stock-based employee
             compensation expense
             included in reported net
             loss                                               --           --
         Less: Stock-based employee
             compensation expense
             determined using fair
             value based method                                 --           --
             -------------------------------------------------------------------

         Net gain (loss) from discontinued
             operations, pro forma                   $      75,849   $  (41,746)
             ===================================================================

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

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

         MINORITY INTEREST

         Minority interest represents the minority shareholders' proportionate
         share of the equity of Lancer. At May 31, 2004, Biomerica owned 25.0%
         of Lancer and 88.9% of ReadyScript (see Notes 3 and 12). ReadyScript's
         results of operations are reported under discontinued operations.

                                     FS-19
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY, 31 2004 AND 2003


         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.

         RESEARCH AND DEVELOPMENT

         Research and development expenses are expensed as incurred. The Company
         expensed approximately $274,000 and $263,000 of research and
         development expenses during the years ended May 31, 2004 and 2003,
         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 $52,100 and $16,931 for the years ended May 31, 2004 and
         2003, respectively.

         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 are
         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.

                                     FS-20
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


         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,
                                                     ---------------------------
                                                         2004            2003
         -----------------------------------------------------------------------

         Numerator:
              Loss from continuing operations        $    (299,050)  $ (223,867)
              Gain (loss) from discontinued
                   operations                               75,849      (41,746)
         -----------------------------------------------------------------------

         Numerator for basic and diluted net
              loss per common share                  $    (223,201)  $ (265,613)
         =======================================================================

         Denominator for basic net loss per
              common share                               5,739,993    5,304,432
         Effect of dilutive securities:
              Options and warrants                              --           --
         -----------------------------------------------------------------------

         Denominator for diluted net loss per
              common share                               5,739,993    5,304,432
         =======================================================================

         Basic net loss per common share:
              Loss from continuing operations        $       (0.05)  $    (0.04)
              Gain (loss) from discontinued
                   operations                                 0.01        (0.01)
         -----------------------------------------------------------------------

         Basic net loss per common share             $       (0.04)  $    (0.05)
         =======================================================================

         Diluted net loss per common share:
              Loss from continuing operations        $       (0.05)  $    (0.04)
              Gain (loss) from discontinued
                   operations                                 0.01        (0.01)
         -----------------------------------------------------------------------

         Diluted net loss per common share           $       (0.04)  $    (0.05)
         =======================================================================

         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, 2004 and 2003 there were a total of 3,657,637 and
         3,425,386, respectively, potential anti-dilutive shares of common
         stock.

         SEGMENT REPORTING

         The FASB has issued SFAS No. 131 "DISCLOSURES ABOUT SEGMENTS OF AN
         ENTERPRISE AND RELATED INFORMATION". 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 9.

                                     FS-21
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                       YEARS ENDED MAY 31, 2004 AND 2003


         REPORTING COMPREHENSIVE INCOME

         In June 1997, the FASB issued SFAS No. 130, "REPORTING COMPREHENSIVE
         INCOME." This statement establishes standards for reporting the
         components of comprehensive income (loss) and requires that all items
         that are required to be recognized under accounting standards as
         components of comprehensive income (loss) be included in a financial
         statement that is displayed with the same prominence as other financial
         statements. Comprehensive income (loss) includes net income (loss) as
         well as certain items that are reported directly within a separate
         component of stockholders' equity.

         RECENT ACCOUNTING PRONOUNCEMENTS


         In October 2001, the FASB issued 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 Jun   e1,2002.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 FASB issued 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.

         In June 2002, the FASB issued 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 adoption of
         this statement did not have a material effect on the Company's
         consolidated financial position or results of operations.

                                     FS-22
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


         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, the FASB issued FASB Interpretation No. 46,
         "Consolidation of Variable Interest Entities". In December 2003, FIN 46
         was replaced by FASB Interpretation No. 46R, "Consolidation of Variable
         Interest Entities." FIN 46R clarifies some of the provisions of FIN 46
         and exempts certain entities from its requirements. FIN 46R was
         effective at the end of the first interim period ending March 15, 2004.
         Entities that have adopted FIN 46 prior to this date can continue to
         apply provisions of FIN 46 until the effective date of FIN 46R or early
         election of FIN 46R. This interpretation clarifies the application of
         Accounting Research Bulletin No. 51, "Consolidated Financial
         Statements," relating to consolidation of certain entities. FIN No. 46
         requires 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 or results of operations.

         In April 2003, the FASB issued 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. The adoption of this statement did not have a
         significant effect on the Company's consolidated financial position or
         results of operations.

         In May 2003, the FASB issued SFAS 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 adoption of this statement did not have a material
         effect on the Company's consolidated financial position or results of
         operations.

                                     FS-23
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


3. CONSOLIDATED SUBSIDIARIES

         Lancer is engaged in the design, manufacture and distribution of
         orthodontic products. Biomerica's direct ownership percentage of Lancer
         is 25.0% and its direct and indirect (via agreements with certain
         shareholders) voting control over Lancer is greater than 50% as of May
         31, 2004.

          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 12). The net assets and operating
         results of ReadyScript are included in the accompanying consolidated
         financial statements as discontinued operations and are held for sale.

         Operating results for Lancer and ReadyScript (as discussed) in the
         aggregate for the years ended May 31, 2004 and 2003, which are included
         in the consolidated operating results of the Company, are as follows:

                                                         2004           2003
         -----------------------------------------------------------------------

         Net sales                                   $ 6,024,009    $ 5,887,898
         Cost of sales                                 4,127,590      4,143,999
         -----------------------------------------------------------------------
               Gross profit                            1,896,419      1,743,899
         -----------------------------------------------------------------------

         Operating expenses:
             Selling, general and administrative       1,815,383      1,620,002
             Research and development                    116,104        107,370
         -----------------------------------------------------------------------

               Total operating expenses                1,931,487      1,727,372
         -----------------------------------------------------------------------

         Other income (expense):
             Interest expense, net                        (1,885)        (3,459)
             Other income, net                            66,927         59,526
         -----------------------------------------------------------------------

               Total other income                         65,042         56,067

         Income (loss) from continuing
             operations before income taxes               29,974         72,592

         Income tax expense                                1,023          1,419
         -----------------------------------------------------------------------

         Net income (loss) from continuing
             operations                                   28,951         71,175

         Discontinued operations of
             ReadyScript:
             Income (loss) from discontinued
               operations, net                            75,849        (41,746)
         -----------------------------------------------------------------------

         Net income (loss)                           $   104,800    $   (29,429)
         =======================================================================


4. INTANGIBLE ASSETS

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


                                     FS-24
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


         MAY 31,                                                         2004
         -----------------------------------------------------------------------
         Marketing and distribution rights                           $  442,750
         Patents and other intangibles                                   34,500
         -----------------------------------------------------------------------

         Less accumulated amortization                                 (445,363)
         -----------------------------------------------------------------------

                                                                     $   31,887
         =======================================================================

         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
         2004 and 2003, Lancer recorded amortization expense of $24,900 related
         to repurchased sales territories.

         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 2004 and 2003 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 years ended May 31, 2004 and 2003.

         During the year ended May 31, 2003, 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, which is reflected in cost of sales in the accompanying
         statement of operations for the year ended May 31, 2003. Amortization
         expense related to these licenses which is included in the accompanying
         consolidated statements of operations amounted to $2,442 for the year
         ended May 31, 2003. During the year ended May 31, 2004, management
         determined that none of the Company's intangible assets were impaired.

5. LINE OF CREDIT

         During fiscal 2004, Lancer obtained a new line of credit with Cuyamaca
         Bank, which expires January 8, 2005. Borrowings are made at prime plus
         2.0% (6.0% at May 31, 2004) and are for borrowing up to $400,000 which
         is limited to 80% of accounts receivable less than 90 days old. The
         outstanding balance at May 31, 2004 was $0 and the unused portion
         available at May 31, 2004 is approximately $340,000. Lancer requested
         that Cuyamaca Bank reserve $60,000 of Lancer's available credit as a
         guarantee of credit with a European supplier.

         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 balance sheet net worth of $2,700,000 and that a zero
         outstanding balance be maintained for 30 consecutive days during the
         term. The agreement 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, 2004.

         Lancer also had a term loan for $100,000 with Cuyamaca Bank that was
         paid off in May 2004. This loan required monthly payments of
         approximately $2,300 (principal and interest) at an interest rate of
         prime plus 2% (6% at May 31, 2004).

                                     FS-25
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


         The following summarizes information on short-term borrowings for the
         year ended May 31, 2004:

         MAY 31,                                                          2004
         -----------------------------------------------------------------------

         Average month end balance                                   $   32,348
         Maximum balance outstanding at any month end                $  100,000
         Weighted average interest rate (computed by dividing
             interest expense by average monthly balance)                5.89 %
         Interest rate at year end                                       6.00 %
         =======================================================================

6. RELATED PARTY TRANSACTIONS

         NOTES PAYABLE -SHAREHOLDER

         Biomerica, Inc. entered into an agreement for a line of credit
         agreement on September 12, 2000 with a shareholder whereby the
         shareholder would 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 expired September 13,
         2003. In March 2004 the Company signed a note payable for the principal
         and interest due at that time of $313,318 and agreed to a forbearance
         of any payments for the length of the agreement. A warrant for 40,000
         shares of restricted common stock exercisable at a price of $.51 per
         share was awarded as compensation for the forbearance. The note payable
         is secured by all the Company's assets except for the Lancer common
         stock owned by Biomerica. The note is due September 1, 2004. There was
         $313,318 of outstanding principal and $5,356 of interest payable under
         this note payable at May 31, 2004 (also see Note 7). The Company is
         currently negotiating with the shareholder to extend the maturity of
         the note payable.

         During 2004 and 2003, the Company incurred approximately $25,438 and
         $29,466, respectively, in interest expense related to the shareholder
         line of credit and note payable.

         During 2004 and 2003, a shareholder advanced the Company $4,000 and
         $10,000, respectively. During June 2003 the $10,000 advance was repaid
         in the form of Company common stock at the price of $.25 per share.
         Interest for the fiscal year ended May 31, 2004 was $283. At May 31,
         2004, $1,555 was owed in interest payable on the two loans.

         RENT EXPENSE

         Biomerica, Inc. leases facilities from a company owned, in part, by a
         shareholder of the Company. Rent expense of approximately $150,000 and
         $165,000 was incurred during 2004 and 2003, respectively for this
         lease. A further expense of approximately $7,000 has been included in
         accounts payable representing late fees and interest payable on
         outstanding rent. Rent payable at May 31, 2004 was approximately
         $119,000 and has been included in accounts payable in the consolidated
         balance sheet.

         ACCRUED COMPENSATION

         Two officers, who are also shareholders of the Company agreed to defer
         payment of a portion of their salaries. At May 31, 2004 approximately
         $177,100 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 10.

                                     FS-26
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


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.

         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 to 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.

         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.

         During 2004, the Company granted 210,000 and 32,000 warrants to
         employees and non-employees, respectively to purchase restricted shares
         of the Company's stock. Of the warrants granted, 202,000 were granted
         to investors in the private placement and 40,000 were granted as
         compensation related to the shareholder promissory note. The purchase
         price of the warrants ranges from $0.25 to $0.51. Management recorded
         $47,442 and $0, respectively during the year ended May 31, 2004 of
         expense related to the granting of warrants to employees and
         non-employees. These warrants were not granted through one of the
         employee stock option plans.

                                     FS-27
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


         Activity as to stock options and warrants granted are as follows:

                                                                        WEIGHTED
                                            NUMBER                      AVERAGE
                                           OF STOCK        PRICE RANGE  EXERCISE
                                            OPTIONS         PER SHARE     PRICE
         -----------------------------------------------------------------------

         Options and warrants out-
             standing at May 31, 2002      3,212,270       $ .42-$3.00     $2.53
         Options or warrants granted         443,500       $ .20-$.30      $ .25
         Options canceled or expired        (103,000)      $ .50-$1.91     $1.83
         -----------------------------------------------------------------------


         Options and warrants out-
             standing at May 31, 2003      3,552,770       $ .20 - $3.00   $2.26
         Options or warrants granted         242,000       $ .25 - $.51    $ .29
         Options exercised                   (10,000)      $ .20           $ .20
         Options canceled or expired        (127,133)      $ .20 - $1.38   $ .85
         -----------------------------------------------------------------------

         Options and warrants out-
             standing at May 31, 2004      3,657,637       $ .20-$3.00     $2.17
         =======================================================================


         The weighted average fair value of options and warrants granted during
         2004 and 2003 was $0.43 and $0.45 respectively.

         The following summarizes information about all of the Company's stock
         options and warrants outstanding at May 31, 2004. These options and
         warrants comprise of those granted under the 1991, 1995 and 1999 plan
         and those granted outside of these plans.

<TABLE>
<CAPTION>
                                       WEIGHTED
                                       AVERAGE
                                       REMAINING   WEIGHTED     NUMBER      WEIGHTED
           RANGE OF        NUMBER     CONTRACTUAL  AVERAGE    EXERCISABLE    AVERAGE
           EXERCISE     OUTSTANDING    LIFE IN     EXERCISE    AT MAY 31,   EXERCISE
            PRICES      MAY 31, 2004    YEARS       PRICE        2004         PRICE
         ----------------------------------------------------------------------------
         <S>              <C>            <C>       <C>         <C>            <C>
         $ .20 - $.90     1,089,328      3.37      $   .40       999,498      $  .41
         $ 1.09 - $1.90     220,309      1.20      $  1.50       218,309      $ 1.51
         $ 2.62 - $3.00   2,348,000      4.68      $  2.97     2,348,000      $ 2.97
</TABLE>

         STOCK ACTIVITY


         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 had not been issued and
         were accordingly have been classified as common stock subscribed. These
         shares were issued during 2004, and have accordingly been transferred
         to common stock issued and outstanding.

         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.

                                     FS-28
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


         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 were 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.

         During 2004, the Company sold 202,000 shares of common stock at a
         selling price of $0.25 per share. Proceeds to the Company were $50,500.
         Warrants to purchase 202,000 shares of the Company's restricted common
         stock at an exercise price of $0.25 were also granted as part of the
         private placement.

         During 2004 the Company issued 10,000 shares of its common stock as the
         result of an exercise of options granted in prior years. Proceeds to
         the Company were $2,000.

         SUBSIDIARY SALE OF STOCK

         During the year ended May 31, 2004 the Company recognized a reduction
         in its additional paid capital in the amount of $112,719 resulting from
         a decrease in its ownership percentage of Lancer as a result of
         Lancer's sale of common stock. The Company has treated this reduction
         in its equity of the subsidiary as an equity transaction in the
         accompanying consolidated statement of stockholder's equity.

         SUBSIDIARY OPTIONS, WARRANTS AND STOCK ACTIVITY

         During fiscal 2003, Lancer issued 37,595 shares of its common stock
         valued at $8,271 to Biomerica for certain management and consulting
         services rendered in fiscal 2002. These shares were classified at May
         31, 2002 as common stock subscribed on Lancer's balance sheet.

         During fiscal 2003, Lancer issued 25,000 shares of its common stock
         valued at $8,750 to its Chief Executive Officer for services rendered
         in fiscal 2002. These shares were classified at May 31, 2002 as common
         stock subscribed on Lancer's balance sheet.

         During fiscal 2004, Lancer issued 91,346 shares of its common stock
         valued at $29,000 to its Chief Executive Officer for services rendered
         from January 2002 to December 2003. At May 31, 2003, 69,471 of these
         shares were reported as subscribed stock on Lancer's balance sheet.

         During fiscal 2004, Lancer agreed to issue 13,541 shares of its common
         stock to the Chairman Of the Board of Lancer for services rendered from
         January 2002 to December 2003. At May 31, 2003, 69,471 of these shares
         were reported as subscribed stock on Lancer's balance sheet.

         During fiscal 2004, Lancer agreed to issue 13,541 shares of its common
         stock to the Chairman of the Board of Lancer for services rendered from
         January 2004 to May 2004 and 31,250 shares of common stock to the Chief
         Executive Officer for services rendered per agreement. At May 31, 2004,
         these shares were reported as subscribed stock on Lancer's balance
         sheet.

         The Lancer Board of Directors approved a private offering of common
         stock, effective March 23, 2004, and ending April 12, 2004. The
         offering, to officers, board members, and key employees resulted in the
         sale of 450,000 new shares at $0.60 per share with total proceeds
         received of $270,000. In addition, one warrant exercisable for each
         share purchased (450,000 warrants) was issued at $0.85 per share. These
         warrants shall be exercisable until April 12, 2009.

         During fiscal 2003, Lancer granted 70,000 options to purchase shares of
         the Lancer's common stock at an exercise price of $0.26 to certain
         employees of Lancer 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.

                                     FS-29
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


         During fiscal 2003, Lancer granted 40,000 options to purchase shares of
         the Lancer's common stock at an exercise price of $0.28 to an employee
         of Lancer 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 fiscal 2003, Lancer granted 30,000 options to purchase shares of
         the Lancer's common stock at an exercise price of $0.28 to certain
         employees of Lancer 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 fiscal 2004, Lancer granted its Chief Executive Officer 75,000
         stock options to purchase shares of Lancer's common stock at an
         exercise price of $0.43. The options vest over three years and have a
         term of five years. Management assigned a value of $0 to the options.

         During fiscal 2004, Lancer granted its directors 52,500 options to
         purchase shares of Lancer's common stock at an exercise price of $0.43.
         The options vest over two years and have a term of five years.
         Management assigned a value of $0 to the options.

         During fiscal 2004, Lancer granted 120,000 options to purchase shares
         of the Lancer's common stock at an exercise price of $0.43 per share
         pursuant to terms of the employment agreement between Lancer and Dan
         Castner, Vice President of Sales and Marketing at Lancer. The options
         vest over four years and have a term of five years. Management assigned
         a value of $0 to the options.

         During fiscal 2004, Lancer granted 40,000 stock options to purchase
         shares of Lancer's common stock at an exercise price of $0.57 to an
         employee of Lancer for services rendered. The options vest over four
         years and have a term of five years. Management assigned a value of $0
         to these options.

         During fiscal 2004, Lancer granted 17,500 stock options to purchase
         shares of Lancer's common stock at an exercise price of $.60 to a new
         member of the board of directors. The options vest over two years and
         have a term of five years. Management assigned a value of $0 with
         respect to the options.

         During fiscal 2004, Lancer granted 8,000 stock options to purchase
         shares of Lancer's common stock at an exercise price of $0.50 to an
         employee of Lancer for services rendered. The options vest over 3 years
         beginning June 30, 2004 and have a term of five years. Management
         assigned a value of $0 to the options.

         During fiscal 2004, Lancer issued 450,000 warrants to officers,
         directors and key employees who purchased 450,000 shares of the
         Company's common stock in a private placement. The warrants have an
         exercise price of $0.85 and have a term of five years.

         There were 1,097,500 options and warrants outstanding and exercisable
         (at a weighted average price of $.60) to acquire Lancer common stock at
         May 31, 2004.


8. INCOME TAXES

         Income tax expense from continuing operations for the years ended May
         31, 2004 and 2003 consists of the following current provisions:

         MAY 31,                                              2004       2003
         -----------------------------------------------------------------------

         U.S. Federal                                      $     --    $     --

         State and local                                      1,823       2,219
         -----------------------------------------------------------------------

                                                           $  1,823    $  2,219
         =======================================================================

                                     FS-30
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


         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,                                             2004         2003
         -----------------------------------------------------------------------

         Computed "expected" tax benefit                  $ (68,286)  $ (77,577)
         Increase (reduction) in income taxes
             resulting from:
             Meals and entertainment                          3,966       3,958
             Change in valuation allowance                  (14,099)    (20,127)
             Equity in earnings of affiliates
               not subject to taxation because
               of dividends- received deduction
               for tax purposes                              78,419      93,746
             State income taxes                               1,823       2,219
         -----------------------------------------------------------------------

                                                          $   1,823   $   2,219
         =======================================================================

         The tax effect of temporary differences that give rise to significant
         portions of liabilities are presented below.

         MAY 31,                                                          2004
         -----------------------------------------------------------------------

         Deferred tax assets (liabilities):
            Accounts receivable, principally
              due to allowance for doubtful
              accounts and sales returns                            $    60,703
            Inventories, principally due to
              additional costs inventoried for
              tax purposes pursuant to the Tax
              Reform Act of 1986 and
              allowance for inventory
              obsolescence                                              137,150
            Compensated absences and
              deferred payroll, principally due
              to accrual for financial reporting
              purposes                                                  165,729
            Net operating loss
              Carryforwards                                           2,405,862
            Tax credit carryforwards                                    137,010
            Accumulated Depreciation of Property
              and Equipment                                              (7,448)
            Marketing rights, principally due to
              Amortization                                               (4,000)



         Less valuation allowance                                    (2,895,006)

         Net deferred tax asset (liability)                         $        --
         =======================================================================

         The Company has provided a valuation allowance for all of its deferred
         tax assets as of May 31, 2004. 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-31
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


         As of May 31, 2004, Biomerica had net tax operating loss carryforwards
         of approximately $4,607,000 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, 2004, Biomerica has net
         operating tax loss carryforwards of approximately $1,289,000 available
         to offset future state income tax liabilities, which expire through
         2012.

         As of May 31, 2004, Lancer had net tax operating loss carryforwards of
         approximately $1,997,000 and business tax credits of approximately
         $63,000 available to offset future Federal tax liabilities. The Federal
         carryforwards expire in varying amounts through 2021. As of May 31,
         2004, 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 2013.


         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 suspended 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.


9. BUSINESS SEGMENTS

         Reportable business segments are identified by product line and for the
         years ended May 31, 2004 and 2003 are as follows:

                                                       2004            2003
         -----------------------------------------------------------------------

         Domestic sales:
             Orthodontic products                   $  3,119,000   $  3,144,000
         =======================================================================

             Medical diagnostic products            $  1,160,000   $  1,466,000
         =======================================================================

         Foreign sales:
             Orthodontic products                   $  2,905,000   $  2,744,000
         =======================================================================

         Medical diagnostic products                $  1,985,000   $  1,706,000
         =======================================================================

         Net sales:
         Orthodontic products                       $  6,024,000   $  5,888,000
         Medical diagnostic products                   3,145,000      3,172,000
         -----------------------------------------------------------------------

         Total                                      $  9,169,000   $  9,060,000
         =======================================================================

         Operating profit (loss):
             Orthodontic products                   $    (36,000)  $     17,000
             Medical diagnostic products                (280,000)      (227,000)
         -----------------------------------------------------------------------

         Total                                      $   (316,000)  $   (210,000)
         =======================================================================

                                     FS-32
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


         Operating gain (loss) from discontinued segment:
             ReadyScript                                    75,849      (41,746)
         -----------------------------------------------------------------------
         Total                                          $   75,849   $  (41,746)
         =======================================================================

         Domestic long-lived assets:
             Orthodontic products                       $  453,000   $  241,000
             Medical diagnostic products                   158,000      179,000
         -----------------------------------------------------------------------

         Total                                          $  611,000   $  420,000
         =======================================================================

         Foreign long-lived assets:
             Orthodontic products                       $  113,000   $   18,000
             Medical diagnostic products                    13,500       19,000
         -----------------------------------------------------------------------

         Total                                          $  126,500   $   37,000
         =======================================================================

         Total assets:
             Orthodontic products                       $4,089,000   $3,751,000
             Medical diagnostic products                 1,479,000    1,797,000
         -----------------------------------------------------------------------

         Total                                          $5,568,000   $5,548,000
         =======================================================================

         Depreciation and amortization expense:
             Orthodontic products                       $   76,000   $   79,000
             Medical diagnostic products                    68,000       38,000
         -----------------------------------------------------------------------

         Total                                          $  144,000   $  117,000
         =======================================================================

         Capital expenditures:
             Orthodontic products                       $  394,000   $  198,000
             Medical diagnostic products                    42,000       34,000
         -----------------------------------------------------------------------

         Total                                          $  436,000   $  232,000
         =======================================================================

         The net sales as reflected above consist of sales to unaffiliated
         customers only as there were no significant intersegment sales during
         fiscal years 2004 and 2003. No customer accounted for more than 10% of
         net sales during fiscal years 2004 and 2003.

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

                                                           2004          2003
         -----------------------------------------------------------------------

         Net sales:
             United States                             $4,279,000   $ 4,610,000
             Europe                                     2,711,000     2,393,000
             South America                                428,000       460,000
             Middle East                                  311,000       321,000
             Asia                                         207,000       228,000
             Oceania                                      518,000       452,000
             Other foreign                                715,000       596,000
         -----------------------------------------------------------------------

         Total net sales                               $9,169,000   $ 9,060,000
         =======================================================================

         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.

                                     FS-33
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


10. 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 one of whom is an
         officer and director. During fiscal 2004 the Company consolidated some
         of its operations and the landlords agreed to take back the space no
         longer needed by the Company and to reduce the rent accordingly. The
         landlords also agreed not to institute the 3% increase as required in
         the lease. The currently monthly rent is $12,940. 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 $0.25 for payment of
         $15,000 in accrued rent. 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
         $150,000 and $165,000 during the years ended May 31, 2004 and 2003,
         respectively.

         Biomerica has subleased a portion of its facility under a
         non-cancelable operating lease which expired May 16, 2003 and is
         currently month-to-month. The Company recorded base rental income of
         $18,020 and $18,062 during the years ended May 31, 2004 and 2003,
         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 each of the years ended May 31, 2004 and 2003.

         Lancer leases its primary facility under a non-cancelable operating
         lease expiring April 30, 2009, which requires monthly rental payments
         that increase annually, from $6,688 per month in 2004 to $7,527 per
         month in 2009. 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 $20,264 at May 31, 2004, and is included
         in accounts payable in the accompanying consolidated balance sheet.
         Total rental expense for this facility for each of the years ended May
         31, 2004 and 2003 was approximately $75,000 and $69,000, respectively.

         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 feet, 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 lease requires 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 rental expense for this facility for the years ended May 31, 2004
         and 2003 was approximately $103,000 and $76,000, respectively.

         The Lancer Orthodontics de Mexico lease also requires an additional
         refundable security deposit of $26,550, Lancer Orthodontics, Inc. paid
         half and Biomerica, Inc. the other half. This is in addition to the
         $31,146 refundable security deposit paid in fiscal year 2003. At May
         31, 2004 , other assets on the consolidated balance sheet includes
         approximately $44,000 , of security deposit paid by Lancer on the
         Mexico location.

         Lancer entered into a non-cancelable operating lease for a copier in
         February 2003 which expires February 2006, which requires monthly
         rentals of $214. Total expense for the copier was approximately $3,000
         and $2,600 during the year ended May 31, 2004 and May 31, 2003,
         respectively.

         Lancer entered into a non-cancelable operating lease for a postage
         machine in July 2003 that expires in September 2008 and requires
         monthly payments of $208. Total expense for the postage machine was
         approximately $2,500 in the year ended May 31, 2004.

         A sub-lease agreement for approximately 459 square feet of Lancer's
         main facility was entered into in April 2003, effective through
         November 2003, and extended in December 2003 through November 2004. The
         leased space is to be used for a machine shop and requires monthly
         payments of $344. Rental income for the years ended May 31, 2004 and
         2003 was $4,128 and $344, respectively.

                                     FS-34
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


         Lancer entered into a lease for a phone system in July 2003 that
         expires in June 2008 and requires monthly payments of $887. Total
         expense for the phone system was approximately $9,000 in the year ended
         May 31, 2004.

         The future annual minimum payments, net of subleases income, are as
         follows:

         YEARS ENDING MAY 31,                                          Amount
         -----------------------------------------------------------------------
         2005                                                       $   382,000
         2006                                                           293,000
         2007                                                           230,000
         2008                                                           228,000
         2009                                                           191,000
         -----------------------------------------------------------------------

         Minimum lease payments, net                                $ 1,324,000
         =======================================================================

         MANUFACTURING AGREEMENT

         In May 1990, the Lancer entered into a manufacturing subcontractor
         agreement (the "Manufacturing Agreement"), whereby the subcontractor
         agreed to provide manufacturing services to Lancer through its
         affiliated entities located in Mexicali, B.C., Mexico. Effective April
         1, 1996, Lancer leased the Mexicali facility under a separate
         arrangement, as discussed above under Leases. Since October 2000, the
         manufacturing agreement was operated on a month-to-month basis. During
         fiscal 2002, the 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 new lease was negotiated
         in the name of Lancer de Mexico, effective April 1, 2001, for the
         16,000 square foot facility already in use for the Mexican operations.
         Mexican utilities 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. Should the Lancer discontinue operations in Mexico,
         it is responsible for the accumulated employee seniority obligation as
         prescribed by Mexican law. At May 31, 2004, this obligation was
         approximately $397,000. Such obligation is contingent in nature and
         accordingly has not been accrued in the accompanying consolidated
         balance sheet.

         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.

         In January 2001, ReadyScript, Inc., entered into negotiations with
         PacifiCare Health Systems, Inc. and its wholly owned subsidiary,
         RxConnect Acquisition Corporation, for a transaction that would have
         resulted in the sale of substantially all of ReadyScript's assets or
         stock to PacifiCare or PacifiCare controlled entities. The transaction
         was seen as desirable for ReadyScript due to financing and cash flow

                                     FS-35
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


         concerns that threatened ReadyScript's ability to operate as a going
         concern. As part of the negotiations, the parties developed a term
         sheet and entered into a confidentiality and consulting agreement in
         connection with the proposed transaction. In March 2001, PacifiCare and
         RxConnect terminated negotiations and refused to close the proposed
         transaction. In April 2001, ReadyScript ceased doing business and filed
         suit against PacifiCare and Rx Connect in Orange County California
         Superior Court alleging breach of the confidentiality and consulting
         agreements, misappropriation of trade secrets, unfair competition,
         fraud and other related claims. The court ordered the case to
         arbitration and in March 2004, the parties reached a confidential
         settlement agreement. After paying attorney's fees, all remaining
         proceeds will be distributed to former ReadyScript employees who were
         owed unpaid wages.

         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-36
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


11. 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, 2004, and the condensed
         unconsolidated statements of operations and cash flows for the years
         ended May 31, 2004 and 2003 have been provided. No cash dividends were
         paid by the consolidated subsidiaries (see Note 3) during the years
         ended May 31, 2004 and 2003.

                     CONDENSED UNCONSOLIDATED BALANCE SHEET

         MAY 31,                                                       2004
         -----------------------------------------------------------------------
                                     ASSETS

         CURRENT ASSETS:
               CASH                                                $     48,229
               AVAILABLE-FOR-SALE SECURITIES                             26,120
               ACCOUNTS RECEIVABLE, NET                                 344,089
               INVENTORIES                                              825,313
               NOTES RECEIVABLE                                           3,819
               PREPAID EXPENSES AND OTHER                                51,761
         -----------------------------------------------------------------------

         TOTAL CURRENT ASSETS                                         1,299,331

         INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED
               SUBSIDIARY, RESTRICTED                                   861,054
         INVENTORY, NON-CURRENT                                          20,000
         PROPERTY AND EQUIPMENT, NET                                    150,434
         INTANGIBLE ASSETS                                               21,512
         -----------------------------------------------------------------------

                                                                   $  2,352,331
         =======================================================================

                      LIABILITIES AND SHAREHOLDERS' EQUITY

         CURRENT LIABILITIES:
               ACCOUNTS PAYABLE AND ACCRUED LIABILITIES            $    480,670
               ACCRUED COMPENSATION                                     339,775
               CURRENT PORTION OF NOTES PAYABLE-SHAREHOLDER             317,318
         -----------------------------------------------------------------------

         TOTAL CURRENT LIABILITIES                                    1,137,763
         -----------------------------------------------------------------------

         EQUITY IN LOSSES OF UNCONSOLIDATED SUBSIDIARIES,
               NET OF ADVANCES, UNRESTRICTED                            288,295
         -----------------------------------------------------------------------

         SHAREHOLDERS' EQUITY:
               COMMON STOCK                                             460,193
               ADDITIONAL PAID-IN CAPITAL                            17,125,005
               ACCUMULATED OTHER COMPREHENSIVE LOSS                      18,466
               ACCUMULATED DEFICIT                                  (16,677,391)
         -----------------------------------------------------------------------

         TOTAL SHAREHOLDERS' EQUITY                                     926,273
         -----------------------------------------------------------------------

                                                                   $  2,352,331
         =======================================================================

                                     FS-37
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


                 CONDENSED UNCONSOLIDATED STATEMENT OF OPERATIONS

         MAY 31,                                         2004          2003
         -----------------------------------------------------------------------

         NET SALES                                   $ 3,144,824    $ 3,172,040
         COST OF SALES                                 2,159,327      2,017,486
         -----------------------------------------------------------------------

         GROSS PROFIT                                    985,497      1,154,554
         -----------------------------------------------------------------------

         OPERATING EXPENSES:
         SELLING, GENERAL AND ADMINISTRATIVE           1,143,190      1,225,491
         RESEARCH AND DEVELOPMENT                        157,877        155,471
         -----------------------------------------------------------------------

         TOTAL OPERATING EXPENSES                      1,301,067      1,380,962
         -----------------------------------------------------------------------

             OPERATING LOSS                             (315,570)      (226,408)

             OTHER INCOME (EXPENSE)                       14,383        (18,808)
         -----------------------------------------------------------------------

         LOSS FROM OPERATIONS BEFORE INTEREST
             IN NET INCOME OF CONSOLIDATED
             SUBSIDIARIES AND INCOME TAXES              (301,187)      (245,216)

         INTEREST IN NET INCOME OF
             CONSOLIDATED SUBSIDIARIES                    (2,937)        22,149

         INTEREST IN NET LOSS OF CONSOLIDATED
             SUBSIDIARIES - DISCONTINUED
             OPERATIONS                                  (75,849)       (41,746)

         LOSS FROM OPERATIONS BEFORE INCOME
         TAXES                                          (222,401)      (264,813)

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

         NET LOSS                                    $  (223,201)   $  (265,613)
         =======================================================================

                                     FS-38
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003


         CONDENSED UNCONSOLIDATED STATEMENT OF CASH FLOWS

         FOR THE YEARS ENDED MAY 31,                        2004         2003
         -----------------------------------------------------------------------

         CASH FLOWS FROM OPERATING ACTIVITIES:
             NET LOSS                                    $(223,201)   $(265,613)
             ADJUSTMENTS TO RECONCILE NET
               INCOME TO NET CASH USED IN
               OPERATING ACTIVITIES:
               DEPRECIATION AND AMORTIZATION                67,708       38,230
               PROVISION FOR LOSSES ON
                 ACCOUNTS RECEIVABLE                        57,357       21,861
               REALIZED GAIN ON SALE OF
                 AVAILABLE-FOR-SALE SECURITIES             (30,853)          --
               LOSS OF SUBSIDIARIES                        (78,786)      38,932
             OPTIONS AND WARRANTS ISSUED                    81,731       34,899
             COMMON STOCK ISSUED OR
                 SUBSCRIBED FOR SERVICES RENDERED               --       69,267
               INCREASE IN INVESTMENT IN AND
                 ADVANCES TO CONSOLIDATED
                 SUBSIDIARIES                                   --       (8,829)
               WRITE-OFF OF INTANGIBLES                         --       10,000
               NET CHANGE IN OTHER CURRENT
                 ASSETS AND CURRENT LIABILITIES            101,708      (65,701)
         -----------------------------------------------------------------------

         NET CASH USED IN OPERATING ACTIVITIES             (24,336)    (126,954)
         -----------------------------------------------------------------------

         CASH FLOWS FROM INVESTING ACTIVITIES:
             SALES OF AVAILABLE-FOR-SALE SECURITIES         45,967           --
             INCREASE IN INTANGIBLE ASSETS                      --       (7,602)
             PURCHASE OF PROPERTY AND EQUIPMENT            (42,030)     (30,926)
         -----------------------------------------------------------------------

         NET CASH PROVIDED BY (USED IN)
             INVESTING ACTIVITIES                            3,937      (38,528)
         -----------------------------------------------------------------------

         CASH FLOWS FROM FINANCING ACTIVITIES:
             NET INCREASE IN SHAREHOLDER LOANS               3,768      (61,450)
             EXERCISE OF STOCK OPTIONS                       2,000           --
             SALE OF COMMON STOCK, NET OF
             OFFERING EXPENSES                              50,500       40,000
             INCREASE IN NOTES RECEIVABLE                   (1,400)          --
         -----------------------------------------------------------------------

         NET CASH PROVIDED BY (USED IN)
             FINANCING ACTIVITIES                           54,868      (21,450)
         -----------------------------------------------------------------------

         NET CHANGE IN CASH AND CASH EQUIVALENTS            34,469     (186,932)

         CASH AND CASH EQUIVALENTS AT
             BEGINNING OF YEAR                              13,760      200,692
         -----------------------------------------------------------------------

         CASH AND CASH EQUIVALENTS AT END OF YEAR        $  48,229    $  13,760
         =======================================================================

                                     FS-39
<PAGE>

                        BIOMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        YEARS ENDED MAY 31, 2004 AND 2003

         SUPPLEMENTAL DISCLOSURE OF CASH FLOW
             INFORMATION -
             CASH PAID DURING THE YEAR FOR:
               INTEREST                                  $  19,200     $     --
               INCOME TAXES                              $     800     $    800

         SUPPLEMENTAL SCHEDULE OF NON-CASH
             INVESTING AND FINANCING ACTIVITIES
             CHANGE IN UNREALIZED HOLDING GAIN
               ON AVAILABLE-FOR-SALE SECURITIES          $  28,123     $ 10,580
         =======================================================================

               CHANGE IN MINORITY INTEREST DUE
               TO SUBSIDIARY SALE OF STOCK               $(112,719)    $     --
         =======================================================================


12. DISCONTINUED OPERATIONS

         The following summarizes the net liabilities of the discontinued
         operations, ReadyScript, as of May 31, 2004 and the results of its
         operations for each of the years in the two-year period ended May 31,
         2004.

         Balance sheet items:

         MAY 31,                                         2004
         --------------------------------------------------------

         Assets:
              Prepaid expenses and other               $  52,351
              Equipment                                       --
         --------------------------------------------------------
                                                          52,351
         Less liabilities:
              Accrued liabilities                        340,647
         --------------------------------------------------------

         Net liabilities                               $ 288,296
         ========================================================


         Results of its operations items:

         YEARS ENDED MAY 31,                             2004            2003
         -----------------------------------------------------------------------

         Legal settlements and related party
         debt forgiveness                              $ 102,500      $      --

         Cost and expenses:
              Cost of Sales                                   --             --
              General and administrative                 (26,651)       (41,746)
              Research and development                        --             --
         -----------------------------------------------------------------------

         Total costs                                     (26,651)       (41,746)
         -----------------------------------------------------------------------

         Gain (loss) from operations                   $  75,849      $ (41,746)
         =======================================================================

                                     FS-40

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