Edgar Filing: BIOMERICA INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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
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BIOMERICA, INC.
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(Small Business Issuer in its Charter)

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

1533 MONROVIA AVENUE, NEWPORT BEACH, CA 92663
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(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)
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NONE OTC-Bulletin Board

Securities registered under Section 12(g) of the Exchange Act:
(Title of each class)
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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]

PART I*

ITEM 1. DESCRIPTION OF BUSINESS
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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.

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.

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.

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.

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:

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.

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.

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%
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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.

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

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.

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

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:

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

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

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:

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

Total 928,828 $1.02 783,123*

* 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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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:

"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.

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

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.

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).

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).

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.

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:

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)
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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.

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
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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